Jeff Robbins April 20, 2011

Macroeconomics
Take Home Test

1.) History of why we are studying this chapter:

For 200 years, the market was efficient, then in the 1920's the market collapsed, which
was known as the Great Depression. The Keynesian Market became the new view of
how the market would operate. “Equilibrium does not mean we are efficient”, we need to
change/ shift the equilibrium point by allowing the government to be involved in the
market. Roosevelt printed money and shifted the economy up, this worked until inflation
was felt and unions were created to fight inflation. The combination of high inflation and
high amount of unemployment had created what is known as a hyperinflation. This
continued until President Reagan reintroduced capitalism, cutting taxes for the rich, and
limiting government involvement.

Time frame:
200: the market was efficient

Supply creates
it's own demand

1920: Keynesian

1950: people started to feel inflation, they went into there savings to pay bills.
1960:Government spending was going up. Unions were created to fight Keynesian
inflation. Before the government would spend money, unions would ask for higher
wages which in turn would create higher inflation.
 Johnson: Medicare-Medicaid = more government spending, unions became stronger.
(Labor union strike – first time)
Nixon: Wage – Price Control
Reagan: Fired Air traffic controllers in union when they asked for a raise. Back to market
economy. Dropped spending (cut welfare) hurt poor people. Lowered corporate taxes
and dividends, cut taxes for rich.

2. Define Aggregate Demand:

Aggregate Demand is the quantity of the (GDP) that C, Ig, G, (X-M) are willing and able
to buy at the prices (CPI).
(picture)
The difference between Keynsian model, without price, and today's Aggregate Demand
Model, it accounts for inflation and price.

3. Explain why Aggregate Demand has a negative slope:

Aggregate Demand has a negative slope:
(picture)
Bonds, which are a piece of paper, Business, Crop, and Government all borrow money
in which they all need to give back. Stocks, which allow you to own part of a company,
are not alway a nesscessary form of getting your money back. Bonds, which are a piece
of paper the the government or corporation sells. As the price of the bonds rises, the
real interest rate decreases. As the price of the bonds falls the real interest rate
increases. Bonds also contain a face value and a maturity date. People do not keep the
bonds for 30 years. They sell it in the bond market causing the price to fluctuate. If
everyone sells their own bonds all at the same time we could and can effect the interest
rate.
Mathematical formulas

4. Explain what causes a shift in the Aggregate Demand:

There are many factor that effect the shifts in the Aggregate Demand
a) Shift in (G)
0. An increase in government spending
1. Cut in taxes
2. An increase in transfer payment

b) Shift in (IG)
3. Cut in corporate taxes
4. Cut in dividend taxes
5. Cut in taxes for the rich
6. Cut in capital gain taxes
7. Bailouts
8. Lower interest rates
9. Technology
10. Expectations
11. Increase in allowance depreciation

c) Shift in (C)
12. Lower interest rate
13. Wealth effect
14. Stimulus package
15. Raise in min wages
16. Expectation.

d) Shift in (X-M)
17. Deprecate currency
18. Tax on imports goods
19. Subsidize exports
20. Import quotas

5. Define Aggregate Supply:

Aggregate Supply is the quantity of (GDP) that Ig (G) are willing and able to produce at
different prices

6. Explain the slope of Aggregate Supply

a) Recession time ( example 1929 and today)

Horizontal line
Increase in government spending will not
bring inflation, during a recession

b) Intermediate

Positive Slope
As Aggregate Demand increases so does the
GDP and the CPI because there is not much
unused resources
 c) Full Employment
CPI
Vertical Lane
When government spends, inflation only.
Otherwise individual saving are consumed

GDP

7. Explain why as the price increases businesses are willing to produce more:
As the price increases businesses are willing to produce more because we have an
increase in revenue, due to the fact that the price is higher and the quantity sold is also
higher.

8. Explain what causes a shift in Aggregate Supply:

There are many factors that effect the Aggregate Supply allowing it to shift, such as
21. Productivity
22. Technology increases
23. Subsidies
24. Cut in cooperation taxes
25. Lower interest rates
26. Increase depreciation allowance
27. Capital Gain Taxes
28. Cut taxes for the rich
29. More resources ( the innovation of Iraq) cheap labor
30. Cut taxes on dividends

9. Define Equilibrium from 1929 - 1950s:

Rosevelt, money was printed and

brought gas.

10. Define Equilibrium from 1950s - 1960s:

As the government spends, it

brings inflation

11. Phillips curve showed an inverse relationship between inflation and

unemployment (more inflation-less unemployment). Phillips argued that the cost
of employment was inflation.
- with inflation there is less employment.

- the cost of having a job during a

recession is inflation.

- Phillips was popular because he

advocated government spending.
12. Define Equilibrium from 1960s - 1970s:

-Price went up, individuals could not pay bills.

Unions collective bargaining.

- the union won, increases wages causes cost

of production to increase. The supply shifts to
the left.

-Phillips curve still applies saving because zero.

13. Explain Hyperinflation curve

-The higher the inflation the higher the

unemployment.

- the Aggregate Demand shifts to the right, union

shifts to the left. The GDP does not change.

-unions anticipate inflation, hyper inflation

eventually higher CPI and unemployment. The
Phillips curve said not true.

14. Define Equilibrium during the Nixon Era:

- Wage & price controls; no one can ask for

huge wages, no one can increase prices.

-evaluating economy grows, nice theory, bye it

does not work. Capitalist system, could not tell
how much to change.

-unions did not like the wage control

15. Define Equilibrium during the Reagan Era:

- When he took office:

0. 9.8% unemployment
1. 20% inflation
2. Saving was Zero

-Reaganomics!
3. Increase taxes for middle class
4. Decease taxes for the rich
5. Cut government spending

Shifted also to the right so jobs would increase.

Cut taxes for businesses
Cut dividend taxes
Cut taxes for rich
Deregulated financial System (government out of private)
Cut Capital Gain tax
Fired union Air traffic controls to percent shift in Aggregate Supply by unions
Increase allowance for depression.