Key Concepts of Macroeconomics Unit 3

Hey, how you doing, Econ Students? This is Jacob Clifford. It's time for the Macroeconomics Unit 3 summary video. As you know, I already made a bunch of videos on YouTube covering these topics, but this video is about getting it back in your brain and helping you practice. So right now, pause the video, make sure you've downloaded and printed out the unit study guide that goes with this video. Now, I'm focusing on the AP economics curriculum, but if you're a college student or you're taking the CLEP exam, whatever you're doing, this is all the same stuff. This is introductory macroeconomics. We'll start off by talking about aggregate demand, and I'll talk about the multiplier effect and the idea of the spending and the tax multiplier. Then we'll do short-run aggregate supply, long-run aggregate supply. put them together, and then talk about how to shift those curves. Then I'm going to talk about when there's no policy, when there's a long-run self-adjustment. Then we'll talk about fiscal policy. It ended off with the automatic stabilizers. And there's one more thing. Please remember that the Ultimate Review Packet is sold with a per-student license. So if you're a teacher, please don't show this video to your students and use my study guides, unless, of course, you got licenses. And if you bought my Ultimate Review Packet, please don't share or upload any of the study guides or the practice sheets. I really appreciate it. This is how I make a living. Okay, enough of that. Let's jump into it. It's time for Macroeconomics. Macroeconomics. Unit three. So you already probably learned about aggregate demand in class or with my other video that's on YouTube. So let's start by looking at the three questions in the study guide. I want you to pause the video, fill out those three questions. If you can do that, you understand aggregate demand. Remember, the aggregate demand curve is just the demand for everything. Instead of looking at price, we're looking at price level, and the quantity is real GDP. But like a market demand curve, it's downward sloping, and there's three reasons. The real wealth effect, the interest rate effect, and the exchange rate effect. These all explain why there's a negative relationship between price level and the real GDP. The price level goes up, people can't buy as much as they did before, their assets have less value, so they're gonna buy less. If the price level goes up, interest rates also go up and so people- People are going to borrow less and spend less. And if the price level goes up, other people in other countries are going to buy less of our products. And of course, the aggregate demand curve can shift and increases to the right, decreases to the left. And the four components are the shifters, consumer spending, investment, business spending, government spending, and net exports. Now we're going to practice shifting the aggregate demand later, but for now, let's go talk about the multipliers. This is the only math heavy part inside this unit. Remember the multiplier effect is the idea that initial change in spending causes a bigger change in spending. in the economy. That's because one person's spending becomes somebody else's income. That person saves a portion and spends the rest. The rest they spend becomes somebody else's income. They save some and spend the rest. Multiplier effect. And the key to it is knowing how much people save and spend of new income. How much they save is the marginal propensity to save. How much they spend is the marginal propensity to consume. And the equation for the simple spending multiplier is one over the marginal propensity to save. In addition to the spending multiplier, there's also something else. called the tax multiplier, which is just basically one less than the spending multiplier. So if the spending multiplier is four, then the tax multiplier would only be three because there's one less round of spending because people save a portion of a tax cut. Now, I know I can cover that pretty quick, but in the end, it's not the definitions that matter. What matters is to be able to do the calculation. So right now, look at the study guide and fill out that box. Each one of these is telling you what component changed, how much was the change, what's the marginal penalty to consume, and what's the total change in spending. This is all about using... the multipliers. Now, if you can fill that out, then you understand how to calculate it and you get it. But if you're having a hard time, I made a special video that's only in the ultimate review packet that practices the multipliers. You're definitely going to want to watch that exclusive practice video because it's going to give you several examples and verify you understand how to close gaps and use the multipliers. But right now, go back to the study guide and answer the six questions under topic 3.2. Okay, now we're back to graphing. In 3.3, we're talking about the short run aggregate supply. And just like a market supply curve, it's upwards. showing you a direct relationship between price level and real GDP. But remember, this is the short-run aggregate supply. When price level goes up, producers have an incentive to produce more. When price level goes down, producers are going to produce less in the short run. In the short run, wages and resource prices don't change. In the long run, wages and resource prices are going to adjust. And as you know, the short-run aggregate supply can shift and increases to the right, decreases to the left, and anything that affects a lot of producers is going to shift the curve. So if there's a change in the price or availability of key resources, that could shift the curve, or government actions like taxes and subsidies, or productivity that changes the amount that we can produce in the short run. Now, another thing that can shift this curve is expectations of inflation. If people expect inflation to go up, the short-run aggregate supply curve will shift to the left because wages and contracts will all increase. If I'm a worker and I think prices are going to go up, then I'm going to go to my boss and I'm going to demand a raise, and that's going to increase the cost to those firms, that's going to shift the aggregate supply curve. End. the short run. In the long run, it's a different story. That's topic 3.4. As you know, there's no relationship between priceable and real GDP in the long run. Doesn't matter what's going to happen in the short run. Eventually, we'll be right back here in the... long run. And that output represents the full employment output that we're going to produce at the natural rate of unemployment. And this curve can shift if we have better technology and we can produce more stuff in the long run, but I'll talk more about that later. For now, jump in the study guide and answer all the questions for topic 3. 3.3 and 3.4. Okay, here we go. In topic 3.5, we're putting aggregate demand and aggregate supply together. And as you know, there's three places an economy can be. So right now, pause this video, go to the study guide and draw each one of them. Negative output gap, full employment, and a positive output. I guarantee that your teacher or professor is going to have you draw these graphs in a macro class. Negative output gap, full employment, and a positive output gap. Now, the AP test is move away from the terms recessionary gap and inflationary gap. Instead, they're using the terms negative output gap and positive output gap. So if your textbook or your teacher has been using those terms, make sure you understand what they both are. And keep in mind that a recessionary gap doesn't necessarily mean that we're in a recession. And sometimes you can have a recessionary gap, but there's actually inflation when there's stagflation. And that's... That's what topic six is all about, shifting these curves. Keep in mind, there's only four things that can happen. Aggregate demand can increase, aggregate demand can decrease, short-run ag supply can increase, or short-run ag supply can decrease. And there's some terms here that your teacher or professor are definitely gonna use. A negative supply shock is when we run out of some sort of key resource, we don't have enough electricity or oil, the aggregate supply curve will shift to the left. causing stagflation remember this is the idea that price level is up and quantity went down so we have high unemployment and inflation it's like the worst case scenario a positive supply shock is we have more of a key resource so the short night supply would increase price level would go down and we produce more output and you have to understand the idea of cost push and demand pull inflation cost push is what we saw earlier supply shifting to the left higher inflation because we're producing less stuff and demand pull that's demand increasing means we're having higher price level because people are buying more stuff and be careful because many teachers and professors are tricky they'll say what happened to employment or what happened to unemployment so i have to read carefully i'm just trying to show you that the quantity of the real gdp down here is the opposite of unemployment so if we're producing more stuff unemployment is falling if we're producing less stuff unemployment is going up right now it's time for you to practice so go to the study guide and answer the five questions that require to use the graph for topic 3.6 and when you're done doing that define those key terms in question six through eleven okay here we go now we're moving on on to topic 3.7, the whole idea that the economy self-adjusts. Now, you've probably already watched the video where I cover this in detail, so let's again start with you practicing using the study guide before I talk about it. So right now, pause this video and answer questions one, two, and three under topic 3.7. Remember, when we're talking about long-run adjustments, it is not demand that's changing, it's the short-run agri-supply because wages and resource prices adjust. When we have a negative output gap and unemployment is really high, eventually, in the long run, if wages are flexible, Wages will go down. Resource prices will go down. Shorted ag supply will shift to the right, increase, putting us back at full employment. And if there's a positive output gap, unemployment is really low, inflation is high, so wages and resource prices will eventually go up. Shorted ag supply will shift to the left, putting us back at... full employment. Notice in both cases the government isn't doing anything. There's no policy here. It does it automatically. It self-adjusts. And remember when there's more spending the economy is going to go right back to where it was before eventually in the long run unless that spending is on something that's going to cause more economic growth. So if there's more investment spending on capital goods or government spending on education that improves human capital, that could actually shift the long-run supply curve in the long run and will actually produce more than we ever did before. So here we go, topic 3.8. Now the government is going to get involved. in the economy. There's two types of fiscal policy, expansionary and contractionary. Right now in the study guide, answer questions one and two under topic 3.8. Fiscal policy is when the government manipulates the economy by changing government spending, taxes, or transfer payments. By the way, transfer payments are like welfare. It's like the stimulus check they give directly to individuals. So for example, if we have a negative output gap, the government can come in, increase government spending, or cut taxes, or give more transfer payments to people, and that would increase aggregate demand. Again, they're doing this because they don't want to wait for the... economy to self-adjust and fix itself. Instead, they're taking an active role in having expansionary fiscal policy to close the gap. And if we have a positive output gap, the government can use contractionary fiscal policy to fight inflation by decreasing government spending and increasing taxes. Now, one of the key skills you're going to have to do is put together fiscal policy in this topic with what you learned in topic 3.2 with the multipliers. Your teacher is going to give you a scenario or a graph that says, here's the gap, here's the margin of pension to consume, close the gap with fiscal policy, which is exactly what you have to do inside the... the study guide, answer questions four through 11 in topic 3.8. Again, I made an exclusive multiplier practice video in the ultimate review packet. If you need more help, if you feel like you're not getting it, watch that video. I'll go through it step-by-step and go over all the answers. Here we go. Last topic in this unit, topic 3.9, we're talking about the automatic stabilizers. In topic 3.8, we talked about the government getting involved in the economy, and that's called discretionary fiscal policy. It's new laws designed to speed up or slow down the economy. Here, we're talking about laws that are already on the books, the automatic stable. stabilizers. This is non-discretionary fiscal policy. There's two examples that you definitely need to know. The first one is like unemployment and welfare. If the economy starts to go down, then people are going to need that. That's going to increase transfer payments and government spending. And again, it's not a new law. It's something that's already in the books. And if the economy starts to go up, there's going to be less welfare, less unemployment, and that's going to decrease government spending and transfers. Another example is the progressive income tax system with tax brackets. So when the economy is doing great, that means people are going to pay higher taxes because they're moving up in higher tax brackets. When the economy starts to go down and there's a recession, then people's incomes fall and they pay less taxes because they're going down to the lower tax bracket. So right now, answer questions one through three on topic 3.9 in the study guide. Now, if you're watching this video properly and filling out a study guide, you understand unit three. Or at the very least, you understand what you don't know about unit three. So you can go back to YouTube and watch the videos that cover those specific topics. If you think you're getting it, you're ready to move on, watch the multiplier's practice video that's in the ultimate review packet and try the practice sheet and the multiplier. multiple choice questions. Overall, this unit's about 3.5 out of five in terms of difficulty. So it's really not that hard, but it's gonna be a huge chunk of your final exam or the AP exam, so you have to be able to draw the graphs and do those calculations. The next unit, unit four, is a little trickier, so make sure you understand this stuff really well so you're ready to move on. Thanks for watching. Until next time.

Now, I'm focusing on the AP economics curriculum, but if you're a college student or you're taking the CLEP exam, whatever you're doing, this is all the same stuff. This is introductory macroeconomics. We'll start off by talking about aggregate demand, and I'll talk about the multiplier effect and the idea of the spending and the tax multiplier.

Then we'll do short-run aggregate supply, long-run aggregate supply. put them together, and then talk about how to shift those curves. Then I'm going to talk about when there's no policy, when there's a long-run self-adjustment.

Then we'll talk about fiscal policy. It ended off with the automatic stabilizers. And there's one more thing.

Please remember that the Ultimate Review Packet is sold with a per-student license. So if you're a teacher, please don't show this video to your students and use my study guides, unless, of course, you got licenses. And if you bought my Ultimate Review Packet, please don't share or upload any of the study guides or the practice sheets.

I really appreciate it. This is how I make a living. Okay, enough of that.

Let's jump into it. It's time for Macroeconomics. Macroeconomics. Unit three. So you already probably learned about aggregate demand in class or with my other video that's on YouTube.

So let's start by looking at the three questions in the study guide. I want you to pause the video, fill out those three questions. If you can do that, you understand aggregate demand. Remember, the aggregate demand curve is just the demand for everything. Instead of looking at price, we're looking at price level, and the quantity is real GDP.

But like a market demand curve, it's downward sloping, and there's three reasons. The real wealth effect, the interest rate effect, and the exchange rate effect. These all explain why there's a negative relationship between price level and the real GDP. The price level goes up, people can't buy as much as they did before, their assets have less value, so they're gonna buy less.

If the price level goes up, interest rates also go up and so people- People are going to borrow less and spend less. And if the price level goes up, other people in other countries are going to buy less of our products. And of course, the aggregate demand curve can shift and increases to the right, decreases to the left.

And the four components are the shifters, consumer spending, investment, business spending, government spending, and net exports. Now we're going to practice shifting the aggregate demand later, but for now, let's go talk about the multipliers. This is the only math heavy part inside this unit.

Remember the multiplier effect is the idea that initial change in spending causes a bigger change in spending. in the economy. That's because one person's spending becomes somebody else's income. That person saves a portion and spends the rest.

The rest they spend becomes somebody else's income. They save some and spend the rest. Multiplier effect.

And the key to it is knowing how much people save and spend of new income. How much they save is the marginal propensity to save. How much they spend is the marginal propensity to consume. And the equation for the simple spending multiplier is one over the marginal propensity to save.

In addition to the spending multiplier, there's also something else. called the tax multiplier, which is just basically one less than the spending multiplier. So if the spending multiplier is four, then the tax multiplier would only be three because there's one less round of spending because people save a portion of a tax cut. Now, I know I can cover that pretty quick, but in the end, it's not the definitions that matter.

What matters is to be able to do the calculation. So right now, look at the study guide and fill out that box. Each one of these is telling you what component changed, how much was the change, what's the marginal penalty to consume, and what's the total change in spending. This is all about using...

the multipliers. Now, if you can fill that out, then you understand how to calculate it and you get it. But if you're having a hard time, I made a special video that's only in the ultimate review packet that practices the multipliers.

You're definitely going to want to watch that exclusive practice video because it's going to give you several examples and verify you understand how to close gaps and use the multipliers. But right now, go back to the study guide and answer the six questions under topic 3.2. Okay, now we're back to graphing.

In 3.3, we're talking about the short run aggregate supply. And just like a market supply curve, it's upwards. showing you a direct relationship between price level and real GDP. But remember, this is the short-run aggregate supply. When price level goes up, producers have an incentive to produce more.

When price level goes down, producers are going to produce less in the short run. In the short run, wages and resource prices don't change. In the long run, wages and resource prices are going to adjust.

And as you know, the short-run aggregate supply can shift and increases to the right, decreases to the left, and anything that affects a lot of producers is going to shift the curve. So if there's a change in the price or availability of key resources, that could shift the curve, or government actions like taxes and subsidies, or productivity that changes the amount that we can produce in the short run. Now, another thing that can shift this curve is expectations of inflation. If people expect inflation to go up, the short-run aggregate supply curve will shift to the left because wages and contracts will all increase.

If I'm a worker and I think prices are going to go up, then I'm going to go to my boss and I'm going to demand a raise, and that's going to increase the cost to those firms, that's going to shift the aggregate supply curve. End. the short run.

In the long run, it's a different story. That's topic 3.4. As you know, there's no relationship between priceable and real GDP in the long run.

Doesn't matter what's going to happen in the short run. Eventually, we'll be right back here in the... long run. And that output represents the full employment output that we're going to produce at the natural rate of unemployment. And this curve can shift if we have better technology and we can produce more stuff in the long run, but I'll talk more about that later.

For now, jump in the study guide and answer all the questions for topic 3. 3.3 and 3.4. Okay, here we go. In topic 3.5, we're putting aggregate demand and aggregate supply together.

And as you know, there's three places an economy can be. So right now, pause this video, go to the study guide and draw each one of them. Negative output gap, full employment, and a positive output. I guarantee that your teacher or professor is going to have you draw these graphs in a macro class.

Negative output gap, full employment, and a positive output gap. Now, the AP test is move away from the terms recessionary gap and inflationary gap. Instead, they're using the terms negative output gap and positive output gap. So if your textbook or your teacher has been using those terms, make sure you understand what they both are. And keep in mind that a recessionary gap doesn't necessarily mean that we're in a recession.

And sometimes you can have a recessionary gap, but there's actually inflation when there's stagflation. And that's... That's what topic six is all about, shifting these curves. Keep in mind, there's only four things that can happen.

Aggregate demand can increase, aggregate demand can decrease, short-run ag supply can increase, or short-run ag supply can decrease. And there's some terms here that your teacher or professor are definitely gonna use. A negative supply shock is when we run out of some sort of key resource, we don't have enough electricity or oil, the aggregate supply curve will shift to the left. causing stagflation remember this is the idea that price level is up and quantity went down so we have high unemployment and inflation it's like the worst case scenario a positive supply shock is we have more of a key resource so the short night supply would increase price level would go down and we produce more output and you have to understand the idea of cost push and demand pull inflation cost push is what we saw earlier supply shifting to the left higher inflation because we're producing less stuff and demand pull that's demand increasing means we're having higher price level because people are buying more stuff and be careful because many teachers and professors are tricky they'll say what happened to employment or what happened to unemployment so i have to read carefully i'm just trying to show you that the quantity of the real gdp down here is the opposite of unemployment so if we're producing more stuff unemployment is falling if we're producing less stuff unemployment is going up right now it's time for you to practice so go to the study guide and answer the five questions that require to use the graph for topic 3.6 and when you're done doing that define those key terms in question six through eleven okay here we go now we're moving on on to topic 3.7, the whole idea that the economy self-adjusts. Now, you've probably already watched the video where I cover this in detail, so let's again start with you practicing using the study guide before I talk about it.

So right now, pause this video and answer questions one, two, and three under topic 3.7. Remember, when we're talking about long-run adjustments, it is not demand that's changing, it's the short-run agri-supply because wages and resource prices adjust. When we have a negative output gap and unemployment is really high, eventually, in the long run, if wages are flexible, Wages will go down.

Resource prices will go down. Shorted ag supply will shift to the right, increase, putting us back at full employment. And if there's a positive output gap, unemployment is really low, inflation is high, so wages and resource prices will eventually go up. Shorted ag supply will shift to the left, putting us back at...

full employment. Notice in both cases the government isn't doing anything. There's no policy here.

It does it automatically. It self-adjusts. And remember when there's more spending the economy is going to go right back to where it was before eventually in the long run unless that spending is on something that's going to cause more economic growth.

So if there's more investment spending on capital goods or government spending on education that improves human capital, that could actually shift the long-run supply curve in the long run and will actually produce more than we ever did before. So here we go, topic 3.8. Now the government is going to get involved. in the economy. There's two types of fiscal policy, expansionary and contractionary.

Right now in the study guide, answer questions one and two under topic 3.8. Fiscal policy is when the government manipulates the economy by changing government spending, taxes, or transfer payments. By the way, transfer payments are like welfare. It's like the stimulus check they give directly to individuals. So for example, if we have a negative output gap, the government can come in, increase government spending, or cut taxes, or give more transfer payments to people, and that would increase aggregate demand.

Again, they're doing this because they don't want to wait for the... economy to self-adjust and fix itself. Instead, they're taking an active role in having expansionary fiscal policy to close the gap. And if we have a positive output gap, the government can use contractionary fiscal policy to fight inflation by decreasing government spending and increasing taxes. Now, one of the key skills you're going to have to do is put together fiscal policy in this topic with what you learned in topic 3.2 with the multipliers.

Your teacher is going to give you a scenario or a graph that says, here's the gap, here's the margin of pension to consume, close the gap with fiscal policy, which is exactly what you have to do inside the... the study guide, answer questions four through 11 in topic 3.8. Again, I made an exclusive multiplier practice video in the ultimate review packet. If you need more help, if you feel like you're not getting it, watch that video. I'll go through it step-by-step and go over all the answers.

Here we go. Last topic in this unit, topic 3.9, we're talking about the automatic stabilizers. In topic 3.8, we talked about the government getting involved in the economy, and that's called discretionary fiscal policy. It's new laws designed to speed up or slow down the economy.

Here, we're talking about laws that are already on the books, the automatic stable. stabilizers. This is non-discretionary fiscal policy. There's two examples that you definitely need to know.

The first one is like unemployment and welfare. If the economy starts to go down, then people are going to need that. That's going to increase transfer payments and government spending.

And again, it's not a new law. It's something that's already in the books. And if the economy starts to go up, there's going to be less welfare, less unemployment, and that's going to decrease government spending and transfers.

Another example is the progressive income tax system with tax brackets. So when the economy is doing great, that means people are going to pay higher taxes because they're moving up in higher tax brackets. When the economy starts to go down and there's a recession, then people's incomes fall and they pay less taxes because they're going down to the lower tax bracket. So right now, answer questions one through three on topic 3.9 in the study guide.

Now, if you're watching this video properly and filling out a study guide, you understand unit three. Or at the very least, you understand what you don't know about unit three. So you can go back to YouTube and watch the videos that cover those specific topics. If you think you're getting it, you're ready to move on, watch the multiplier's practice video that's in the ultimate review packet and try the practice sheet and the multiplier.

multiple choice questions. Overall, this unit's about 3.5 out of five in terms of difficulty. So it's really not that hard, but it's gonna be a huge chunk of your final exam or the AP exam, so you have to be able to draw the graphs and do those calculations.

The next unit, unit four, is a little trickier, so make sure you understand this stuff really well so you're ready to move on. Thanks for watching. Until next time.

Transcript for:Key Concepts of Macroeconomics Unit 3

Transcript for:
Key Concepts of Macroeconomics Unit 3