Econowaugh AP

Wednesday, March 4, 2020

Understanding Classical View Multiple Choice Questions

Understanding AP Classical View

Multiple Choice Questions

1) The clearest example of the Classical View is the Vertical Aggregate Supply Curve

Any change in AD only increases or decreases the PL

No Change in RGDP

We think of the Classical View having a vertical Aggregate Supply curve,
so when AD increase we have an increase in the PL but no change in the RGDP/output.

1995 Exam

(A.) the price level is rising (No change in RGDP)

If Government Spending is increasing and the RGDP (No Change)

then the AS curve must be vertical

therefore

the PL increases but RGDP (no change)

2) You read a Multiple Choice question that starts with the phrase "In the Long-Run".

In the Long-Run implies that we are starting at Long-Run Equilibrium, then something changes such as the FED increasing the Money Supply which increases aggregate demand which increases the Price Level. We are now in an Inflationary Scenario and we must figure out what happens in the Long-Run.

(C.) Real GDP (No change) PL decreases

or
we can think of it like this

In the graph above
recognize that we are moving from LR-Equilibrium into an inflationary scenario

and

with no Monetary or Fiscal Policy actions (In the Long-Run) wages and prices will increase

and

we will return to Long-Run Equilibrium (Full Employment) at a higher price level

therefore

PL increased and RGDP/Output did not change (back to full employment)

Notice the graph above is Inflation
(E.) As wages increase, it shifts the SRAS to the left,

Business prices increase and output returns to full employment (LR-Equilibrium)

at a higher price level (No change in the RGDP)

1990 Exam

Notice the graph above is Recession

(C.) lower resource prices, which will reduce costs and shift

SRAS to the right

Until full-employment is achieved

at a lower price level

Perhaps we should have started with the types of questions tested by the College Board
on the Classical View that involve no graphs
but understandings about the characteristics of the Classical View

From the Classical View Cheat Sheet
found here.

Understand that all of these phrases above clue us into the fact that we are taking the
Classical View

1990 Exam

(D.) Prices and Wages are flexible

1995 Exam

(B.) The economy is self-correcting to full-employment

2000 Exam

(A.) A market economy is self-correcting and thus

will not remain in recession indefinitely

2005 Exam

(C.) Self-correcting market forces stemming from

flexible prices and wages

We could talk about if the College Board starts a question in a Recession

2008 Exam

Less than Full Employment = Recession

(A.) Output increases & the PL falls

Wednesday, January 29, 2020

Interest Rate Sensitivity

Money Demand & Investment Demand

Interest Rate Sensitivity and Money Demand

If people's need (Demand) for money is more sensitive (elastic) to price level changes,, then when the price level increases the Demand for Money curve will shift rightward more,, therefore the Nominal interest rate will increase at a greater rate than if people's need (Demand) for money is less sensitive (inelastic) to price level changes.

Interest Rate Sensitivity and Investment Demand

If people's investment demand is more sensitive (elastic) to interest rates,, then when the interest rates increase investment demand will decrease by a larger amount (think full crowding-out),, if people's investment demand is less sensitive (inelastic) to interest rates,, then when interest rates increase investment demand will decrease by a small amount (think partial crowding-out)

Thursday, January 23, 2020

Journey to thank a thousand people for a morning cup of Joe.

Ted Talk

Author AJ Jacobs embarked on a quest with a deceptively simple idea at its heart: to personally thank every person who helped make his morning cup of coffee. More than one thousand "thank yous" later, Jacobs reflects on the globe-trotting journey that ensued -- and shares the life-altering wisdom he picked up along the way. "I discovered that my coffee would not be possible without hundreds of people I take for granted," Jacobs says.

Specialization
Comparative Advantage
Division of Labor
Invisible Hand

MR University

A simple example of hamburgers being made at home versus at a restaurant can help illuminate the explosion of prosperity since the Industrial Revolution. The story of the division of labor and development of specialized tools is not a new one — Adam Smith began The Wealth of Nations with this concept. Yet it still has tremendous explanatory power about the world we inhabit.

Comparative Advantage - Podcast

https://www.npr.org/transcripts/517076055

Every spring convoys of trucks arrive in the almond orchards of central California. They are carrying bees. Millions of them.

They arrive from all over the country, but especially southern states like Louisiana, and they have to get there at just the right time, when the almond trees start to flower so the bees can pollinate hundreds of acres of almond fields.

But why make the 2,000 mile trek from the South instead of raising bees right in the Central Valley? It comes down to comparative advantage. Louisiana has better conditions for bees. It's warm, green and there are plenty of flowers for the bees. And California has the edge in almond growing.

The journey has it's own set of challenges. Not least of which is, you can't stop during the day or the bees try to escape.

Today on the show, how bees keep our produce sections stocked with fruit.