Problems for Lecture 14

 

 Using the Model to Predict, Using Supply and Demand to Describe

Note on Mansfield Chpt 4: AD and AS Curves:

The graph of the AS/AD curves is not a working model (i.e. theory) of the economy - i.e. a model or theory that can be used to predict the output, income, and level of employment as does the C+I+G model. Nevertheless, it is a useful descriptive, or pedagogical device for bringing the price level into the analysis. As such, this is a less important chapter that Mansfield Chpt 3 or Nellis Chpt 4. In fact, Nellis doesn't even use the AS/AD graph until his chapter on Supply Side economics.

Having said this, within Mansfield's Chpt 4, section 1 is the most important section because it very clearly (more than most books) shows the connections between C+I+G and the AD curve. You will want to know the conventional thinking as to why the AS curve has the shape it does (section 2). Section 3 on shifts of AD is the diagram Mansfield uses to explain business cycles (Chpt 5) and government fiscal policy (Chpt 6), although these two topics could be done in a more informative way with C+I+G and AS/AD drawn below as I will do in class. Section 5 on AS shifts will be used later when we look at Supply Side economics. Section 6 on the long-run supply curve and equilibrium is the foundation of today's New Classical economics (and Monetarists to some extent), which I will look as we go along over the remainder of the quarter.

Be sure to download Nellis Chapter 4

Assignment:

Mansfield, chpt 3, p 41, #1

Use the following data table rather than the one in the question.

“Suppose the sum of intended Investment, Government spending, and net exports increases from 140 to 160 billion.”

 

Disposable Income

Consumption Expenditure

400

300

500

375

600

450

700

525

800

600

900

675

Mansfield, chpt 4: No problems due for this lecture on AS/AD. However, there are problems assigned for the next lecture that uses this model. I will spend some time in class discussing the AS/AD model as part of the Using Economic Theory class next time.