Study: Speculators caused oil price surge
- Oil futures cannot affect the current price of oil because they are future prices, not current supply or demand and not current prices.
- Change in the oil prices had to do with current supply and demand
Oil Prices Dip, OPEC to cut output by 500 kb/d:
- Falling prices cause producers to cut back supply to equalize prices and stop the prices from falling any further
Websites:
BLS.gov
BEA.gov
NewYorkFED.gov
BP.com
BP.com:
- Supply down by 126 kb/d and demand rising by 1 mb/d
- Of course prices are going to go up!
NewYorkFED:
- Rising value of the dollar as compared to the Euro good for exports
*3-5 Test questions on current events*
Ch. 3 Important Stuff:
- Real factors of production, capitol, resources, technology, labor
- Full employment can be maintained because of a flexible economy. As prices rise, demand for labor goes up, money wages go up, increasing labor demand, however employment stays about the same because the real wage is the same...maintaining full employment.
- Stability arising because of flexibility of wages and prices
Interest Rate Determination in the Classical System:
- Increase the money supply, the aggregate demand increases, considering supply is constant in the short run, prices will inflate due to the money supply being increased
- *Figure 4.3 Important* (Interest Rates and Loanable Funds including Gov't Spending)
- Classical Economists said if people just wanted to buy more stuff, or the gov't wanted to buy more stuff the equilibrium interest rate would balance everything
- Consumption is 2/3s of our economic activity
- If consumption goes up, saving falls (Disposable income = consumption and saving)
- Investment will fall just the amount that consumption fell, due to less savings causing interest rates going up and fewer profitable investment opportunities
- Change in gov't spending: Increases in spending can be covered by taxes, borrowing, and creating money
- Creating Money: Increasing the money supply which causes aggregate demand to increase which in turn inflates prices
- Borrowing: Total investment goes up causing interest rates to rise and private investment falls (fewer profitable investment opportunities). Crowding Out: gov't spending crowding out private investment. As interest rates go up, saving goes up and consumption goes down. There is no net affect of gov't spending because of the offsets in private investment and consumption.
- Great Depression lasted so long because the gov't didn't increase spending enough and consumption didn't fall enough and saving didn't rise enough.
Logic of Classical Model:
- *Interest Rates*: consumption, investment, and savings all rely on interest rates
- *Creating Money*: is inflationary because it increases aggregate demand
- **FOR THE TEST, STICK WITH THE LOGIC ABOVE THAT WAS PART OF THE CLASSICAL MODEL**
Gov't Spending Funded by Taxation:
- Disposable income goes down, causing consumption and saving to go down, causing interest rates to go up, causing investment to fall.
- The decrease in consumption and investment offset the increase in gov't spending and aggregate demand is unchanged
Supply-Side Effect of Income Tax:
- Increasing marginal income taxes reduces disposable income (after tax value of the real wage)
- The reduction in the after-tax value of the real wage shifts the labor supply Curve up and to the left
- Taxes go up, taking less money home, labor supply goes down, causing a real affect on production (goes down)
- Falling labor supply shifts the aggregate supply function to the left, reducing equilibrium output
Short/Long Run Effects of Investment:
- Short Run: investment increases, causing interest rates to go up, savings increases and consumption falls, and there is no net change in aggregate demand
- Long Run: capital formation increases aggregate supply and the equilibrium level of production
- Short Run investments are offset by a decline in consumption, where-as in the long run capacity is increased which increases aggregate supply
**Test 1 on Tuesday 9/16**
- Pencil and Eraser, you can write on the exam
- NO CALCULATOR: math questions will be simple
Chapter 1:
- Will require some memorization
- Ballpark unemployment rates of the past and current comparisons
- 50s-60s were considered the golden era, high growth rates and low unemployment rates, low inflation rates
- 70s-80s were bad times, high unemployment, high inflation rates
- Post WWII history
Test will ask comparison questions between the past and today
- What is GDP, what makes up GDP?
- What are the 3 components of Investment?
- 2/3s of GDP is made up of consumption
Chapter 2:
- Real GDP = Nominal GDP / GDP Deflator
- Why do we use Real GDP? So we can compare different years without inflation getting in the way
- Price Indexes: where is inflation and how do we use price indexes to calculate inflation?
- Relationships between GDP and NDP (related by depreciation and taxes)
- Chain weighted GDP to avoid problems with substitution effects of goods over time
- Intermediate goods not counted in GDP because of double counting problem
Chapter 3/4:
- Analytical
- Maintain logical thought of the classical system/economists
- Importance of flexibility of wages, prices, interest rates, and the rigid vertical supply Curve
- Changes in everything else keep aggregate demand stable with flexible interest rates
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