Welcome back: your final

term at school ..

whats in store this term?

38 hours of teaching
left.
5 topics still to cover
3 assessments
1 project
1 mock exam

whats in store this term?

We need to revise and prepare for
the final exam
SO we have to be more focused
than we have ever been
STOP preventing others from
learning and succeeding
STOP wasting time
STOP accepting anything less than
our best

Last assessment from Term 2

vOverall we did OK
vMultiple choice was disappointing with no
one doing well: it pulled most peoples
marks down and in some cases affected
your overall grade
vWe will need to revise this topic and look
again at the multiple choice questions: Ive
marked the correct answers on your
answer sheet for you
vOverall short answers we done well and
most people wrote a strong answer to the
long question worth 6 marks

Holiday homework & Economic Journals

vCollecting homework in today: no excuses.
vEconomic journals: been loads of economic
news over the holidays so no excuse for not
being up to date
vWill schedule time to see you individually re
holiday home, journals and notes in Week 2.
vTime to make sure notes are up to date and you
have real examples:
YOU CANNOT REVISE FOR THE MOCK OR
FINAL EXAM IN THE LAST 2 DAYS
..CERTAINLY NOT IF YOU WANT TO
ACHIEVE YOUR VERY BEST MARK.

Economics Nerd Update J

Super sized calendar

Economic Nerd App
Update from conference: core education
New link ups

Lets get started.

What can you remember about the AE
Model?
What are the key principles?
Why is the consumption function so
important?
What is the importance of the 45 degree
line and where is the equilibrium?
What is MPC and MPS and how do you
calculate it?
What is the multiplier and how does it
work?

AE Model
Is this is a good model?
Why?
What are the pros and cons?

This weeks practice question

Explain how the surge in mining investment
in Western Australia would affect the
Australian economy. Use an appropriate
model to support your answer. (20 marks)
DUE MONDAY J

End Week 3 will be handing our WACE exam
from 2015 as practice questions J

THE AGGREGATE DEMAND AND

SUPPLY MODEL
An alternative to Keynes who believed AE was
dependent on the consumption function explaining
the relationship between spending and level of
economic activity
Keynes ONLY looks at the impact of spending on
output. He does not:
- look at impact on expenditure of price changes
(inflation)
- only focuses on demand side: ignores supply
side so variables affecting labour force, capital
stock, level of technology are not included in the
model
So some economists argue the AD/AS Model is
more realistic

THE AGGREGATE DEMAND AND

SUPPLY MODEL (AD/AS model)
Aggregate demand:
= total amount spending in the economy
= similar to AE in our previous model with one
significant difference: we now include effect of
changes in price level on total spending in the
economy
= relationship between price level and
quantity of real GDP demanded by HH (C),
firms (I), government (G) and overseas (NX)
Curve slopes downward: negative or inverse
relationship between price and level of AD

AGGREGATE DEMAND
Remember AD is very different from
demand in micro economics!
The two demand curves look similar but
are two completely different models so be
careful not to confuse them!
Demand curves in micro represent
demand for an individual good or service

Explaining the inverse relationship

Income effect
Inflation reduces purchasing power
If inflation is 10% then $100 today can buy
you more than it will tomorrow
As price levels increase purchasing power
of your income decreases so consumption
also decreases..

Explaining the inverse

relationship
vInterest rate effect
vInflation affects interest rates
vIf prices rise HH and firms need more funds to
purchase goods and services
vCan be achieved via withdrawing money from
banks, borrowing or selling financial assets:
increases the demand for money
vIncrease in demand for money in turn drives
interest rates up, and increases cost of borrowing:
disincentivises spending
vSo interest effect drives up the cost of borrowing
which in turn reduces AD as it has a negative
impact on consumption spending and investment

Explaining the inverse

relationship
Open Economy Effect
If our domestic price level rises relative to
other countries, domestic goods and services
become less competitive in those countries:
result is a reduction in demand for exports
Rise in domestic prices mean we will buy
more goods and services from foreign
companies: result is an increase in demand
for imports
Overall impact is that net exports will fall

AGGREGATE DEMAND
Note a change in the price level results in a movement
along the AD curve
A change in any one of the elements of AE (C, I, G, net
exports) will bring about a shift of the entire aggregate
demand curve.
Are you really concentrating on this topic and taking
detailed notes?

AGGREGATE DEMAND
SHIFTS IN THE AD CURVE
If the price level changes we move along the AD
curve (movement). On the other hand the whole AD
curve could shift. This could be caused by:
A change in interest rates
Changes in tax levels by government
Expectations and confidence levels
1.What will a shift outwards mean?
2.What could cause the AD curve to shift left?
3.Draw and explain with an example what could
cause AD to shift left and right (see fig 10.2 p204)

Hello Friday!
Today we are going to learn about aggregate
supply
Two schools of thought:
Neo classical
Keynesian
(handout)
Which one do you think we use most frequently?

AGGREGATE SUPPLY
The AS curve shows the level of real
domestic output that will be produced at each
price level. The AS curve is upward sloping.
= relationship between total production of
goods and services and general price level
There are two types of AS curves what are
they?
Why does one AS slope upwards?
Why are you talking when you need to be
listening?

AGGREGATE SUPPLY
Short run AS curve (SRAS)
- Shows the impact of an increase in total
production (GDP) on the inflation rate
- Positive slope
- As level of economic activity increases,
price level increases
- Rising production requires increases in
labour and capital: most important is cost of
labour (wages)
- As economic activity increases wages rise
causing general price level to rise as well
- Figure 10.3 (page 205)

AGGREGATE SUPPLY
Long run AS curve (LRAS)
- Shows the economys potential level of real GDP when ALL
resources are fully employed
- Shows economys full employment level of output (the
natural rate of unemployment = 5% in Australian economy)
- Vertical: representing maximum level of output at a
particular point in time: level of real GDP DOES NOT
change as price changes
- To shift economy needs to grow and resources increase:
output increases through improvements in technology,
capital stock increases, labour force increases (roughly
3.5% per year)
- Figure 10.3 (page 205)
- Come on hurry up35 hours and counting..

AGGREGATE SUPPLY CURVE

SHIFTS IN SHORT RUN AS
1.Draw and explain what causes the
SRAS to shift.
(ensure you show one increase and one
decrease!)
SHIFTS IN LONG RUN AS
1.What may cause LRAS to shift?
2.Why is it likely to increase over time?
3.Draw a diagram showing this.

Welcome to Week 2 J

What is the economic news?

Did you add to your journals?
Homework did you complete it?
Budget assignment
Today conEnue learning about AS
New pracEce quesEon for Week 2 J

THREE STAGES IN THE AS CURVE

Read page 207
- This combines the SRAS and LRAS
- Write a paragraph in your OWN words to
explain this and include a diagram
You have 8 minutes to do this
Come on, come on.
Im going to select one volunteer to explain
how we combine the SRAS and the LRAS..

MACROECONOMIC EQUILIBRIUM
The intersection of the 3 curves, AD,
SRAS and LRAS describes
macroeconomic equilibrium.
1.Draw this situation.
2.Describe what is happening in the
economy at this point.

MACROECONOMIC EQUILIBRIUM
Economy said to be in short run equilibrium
when AD intersects with SRAS
Represents economys ACTUAL level of
production
Economy said to be in long run equilibrium
when all THREE curves intersect
At this point ACTUAL GDP = POTENTIAL
GDP, short run equilibrium coincides with
long run equilibrium
At this point economy is at its natural rate of
unemployment with a low rate of inflation
(page 208 figure 10.5)

Multiplier Essay

Explain the Keynesian AE model

Draw and label diagrams correctly
Explain MPC and MPS
Explain and calculate the mulEplier aect
Apply the model to a real situaEon

Exam Practice Week 2

Heres your essay question, due in
Monday Week 3.
Using the Keynesian expenditure
model, describe the concept of
macro equilibrium and explain how
changes in investment and savings
can alter the level of equilibrium.
(20 marks)

MACROECONOMIC EQUILIBRIUM
Does an economy ALWAYS operate at a
long run equilibrium?
Why?

MACROECONOMIC EQUILIBRIUM
In the case of Australia this would mean:
- Unemployment would be 5%
- Inflation would be 2.5%
- GDP growth would be 3.5%
What is the reality? What are the actual
figures for these measures? What does
it mean?

MACROECONOMIC EQUILIBRIUM
What actually happens in real life?
- Every year 3 curves shift to the right (economic
growth, population increase, labour force
increases, technology improves, capital stock
grows and new resources are found)
- Income increases and therefore AD increases
through increased consumption
- Investment increases as does government
spending
The result? AD and AS may not shift in same
proportion so SRAS is either above or below LRAS

SHORT RUN EQUILIBRIUM

- 2 types:
- CONTRACTIONARY GAP
- EXPANSIONARY GAP
PAGE 210 FIGURE 10.6
Brilliant over to you to explain this with the
use of diagrams on the whiteboarda
detailed explanation please..

CONTRACTIONARY GAP
vEquilibrium level of of real GDP is less
than potential GDP
vHigher levels of cyclical unemployment
(above natural rate)
vInflation low: extra capacity in the
economy

CONTRACTIONARY GAP
vCharacteristics:
vDemand for final goods and services falls =
higher unemployment
vFall in labour force participation rates: people
dont think they will find a job
vFall in profits = fall in business confidence
vReduction in sales of durables and slower rate
growth of consumer expenditure
vFalling share prices = reduced investment
vIncreased government spending on welfare
(unemployment)
vLower IR
vFewer imports and improved CAD

CONTRACTIONARY GAP
vWhat happens?
vSelf correcting mechanism to push
economy into long run equilibrium: wages
fall (as over supply of labour) shifts SRAS
downwards, moving economy back to
potential GDP. AD likely to increase due to
improved HH and business confidence
OR
vGovernment intervention to shift AD to right
(fiscal and monetary policies)

EXPANSIONARY GAP
vAD intersects SRAS to right of LRAS
vEquilibrium level of real GDP is greater
than potential GDP
vUnemployment less than natural rate
vInflation high (competition for limited
resources)

EXPANSIONARY GAP
vCharacteristics:
vLow levels cyclical unemployment : consumer
demand high so firms need to employ labour to
produce goods to meet demand
vRise in labour force participation rates
vRising inflationary pressures (increased
competition)
vIncrease in profits = increased confidence
vIncrease in consumer confidence = increase in
demand for durables
vRising share prices
vReduction in government spending
vHigher IR
vIncreased imports = increase in CAD

EXPANSIONARY GAP
vWhat happens?
vEconomy has self correcting measures:
actual GDP is greater than potential GDP,
wages rise as unemployment less than
natural rate = shifts SRAS to left moves
economy back towards potential GDP.
Prices rise = reduced confidence and AD
decreases
OR
vGovernment intervenes to reduce consumer
spending to shift AD to left (e.g. higher
taxes)

AD/AS and the Business Cycle

The advantage of the AD/AS model it that it can explain
the phases of the business cycle expansions and
contractions and macro problems of UE and inflation.
1.What happens in a recession?
2.What causes a recession?
Demand Shock draw/explain
(for example, decreasing confidence)
Supply Shock draw/explain
(for example increasing oil prices)
YOU HAVE 10 MINUTES TO COMPLETE THIS
EXERCISE: YOU MUST BE READY TO PRESENT TO
THE CLASS J YOU MAY WORK IN PAIRS IF YOU WISH
BUT BOTH OF YOU MUST HAVE DETAILED NOTES

LONG RUN ECONOMIC GROWTH11

Economic growth is indicated by a

rightward shift in LRAS.
EXAMPLE: discovery of new resources i.e.
iron ore.
Can you think of any other examples
relevant to the Australian economy? Think
in particular of the WA economy..