Aggregate Demand

-Aggregate Demand- shows the amount of Real GDP thats public, private and foreign sector collectively desire price level.

- The relationship between price level and the level of Real GDP is more inverse.

Downward Slope:

- Real GDP Balance effect:

  -When price level is high, households and businesses cannot afford to purchase as much output 

  -When the price level is low, households and businesses cannot afford to purchase more output

Interest Rate Effect:

 - higher price level increases the interest rate tends to discourage investments

 - lower price level decreases the interest rate tends to encourage investments

Foreign Purchase Effect:

 -higher price level increases the demand for relatively cheaper imports

 -lower price level increases the foreign demand for relatively cheaper U.S exports

Shifts A.D.

- C, Ig, G, Xn

- multiplier effect that produces a greater change in the 4 components

- increase in AD = AD ->

- decreases in AD = AD <-

Consumption:

-consumer wealth

*more wealth = more spending (<-)

* less wealth = less spending (->)

-consumer expectations

*positive expectations = more spending (->)

*negative expectations = less spending (<-)

-households indebtedness

*less debt = more spending (->)

*more debt = less spending (<-)

-taxes

*less taxes = more spending (->)

*more taxes = less spending (<-)

Determinants of SRAS 
-input prices
-productivity
-legal institutional environment

Domestic Resource Price 
-wages
-cost capital
-raw materials

Foreign
-strong $ = lower
-weak$ = higher 

Market Power
-monopolies and cartels that controls resources control money
*increase in resource prices = SRAS <-
*decrease in resource $ = SRAS ->
-Productivity = Total output
                         Total input
-more productivity = lower unit productivity cost = SRAS ->
-less productivity = higher unit productivity cost = SRAS <-

Taxes and Subsidies
-taxes ($ to government) on business increase per unit production cost = SRAS <-
-subsidies ($ to government) to business reduce per unit production cost = SRAS ->

Government Regulation
-gov't regulation creates a cost of compliance = SRAS <-
-deregulation reduces compliance cost = SRAS ->

Unemployment

Unemployment: % of people that don't have jobs but they're in the labor force.
In Labor Force- have to be employed + unemployed

No labor force:
Kids
Military
Mentally insane
Prison
Stay at home moms and dads
Full time students
Retirees
Discouraged workers= job lookers with no job

Employed: 16 years or older with job
Unemployed: 16 years or older with no job & actively looking for a job for 2 weeks

Unemployment rate: # of unemployment x 100
                                          Labor force (# or unemployed + # of employed)

Types of Unemployment:
1. Seasonal
2. Frictional
3. Structual
4. Cyclical

Full employment: (Natural rate of unemployment) = 4-5%
Okun's Law: for every 1% of unemployment above the NRU causes a 2% decline in Real GDP.

Inflation

Cost Push: higher production cost which increases prices, usually result of supply shock. Increases cost force producers increase prices.
Demand Pull: too many dollars chasing few goods. Demand pulls prices, therefore you create a shortage and an overheated economy with excessive spending.
Political panic: Depression or recession.
How inflation helps:
Hurts
- lenders (loan money at fixed rate)
- people with fixed income
- people with fixed wages

Helps
Debtors

GDP

GDP: Gross Domestic Product: total value of all final goods and services produced within a country's borders within a given year.

GNP: Gross National Product- total value of all final goods and services produced by American in a given year. (opposite G.D.P)

GDP:
-all production on income earned in the U.S
INCLUDED:
-final goods/services
-income earned
-interest payments on corp. bonds
-currents production of final goods
-unsold outputs (business inventions)
EXCLUDED:
-intermediate goods ex: tire of a car
- transfer payments:
  -S.S
  -unemployment compensation
  - scholarship
  - no cell of stocks/bonds
  -used or second hand goods
  - nonmarket transaction
  -babysitting
  - illegal drugs
  -prostitution
  - personal crops
  - self repair

GDP= C+Ig+G+Xn
GDP= W+R+I+P
Budget= Transfer payments+Gov. Purchase Goods/Services
Budget= (+deficit) (- surplus)
Trade= Exports-imports
            (+surplus) (-deficit)

Nominal GDP- value of output produced in current prices.
Real GDP- value of output produced in constant or base year prices.
Nominal GDP- can increase from year -year, if either output or price increases (inflation).

Nominal GDP= P x Q
Real GDP can increase if output increases ONLY! (economic growth)
Real GDP= P x Q

GDP Deflator:
Nominal GDP x 100 = GDP Deflator
 Real GDP
*Base year will always be 100
- years after base year, GDP deflator will be greater than 100
-years before base year, GDP deflator will be less than 100

Consumer Price Index:
* Cost market basket in a given year x 100
   Cost market basket in a base year
- measures the cost of the market basket of goods of a typical urban american family
* Real GDP is adjusted for inflation
Inflation- general rise of price level
Deflation- fall of price level
Rate of inflation: CPI2-CPI1 x 100
                                CPI1