UNIT+3+National+Income+and+Price+Determination

__APE UNIT 3.__

__National Income and Price Determination (10–15%)__

__Textbook Chapter 27,28__ A. Aggregate demand 1. Determinants of aggregate demand 2. Multiplier and crowding-out effects B. Aggregate supply 1. Short-run and long run analyses 2. Sticky versus flexible wages and prices 3. Determinants of aggregate supply C. Macroeconomic equilibrium 1. Real output and price level 2. Short and long run 3. Actual versus full-employment output 4. Economic fluctuations


 * IN CLASS ASSIGNMENT **
 * YOUR COMMENTS 1 PAGE BULLETS **
 * http://www.businessinsider.com/charts-that-should-get-obama-reelected-2012-10?op=1 **

__**ESSENTIAL WEBSITES**__ http://www.youtube.com/watch?v=5D06HqwsVtM http://www.youtube.com/watch?v=L7ptmu6eZ1U 1)http://welkerswikinomics.com/downloads/Unit%203.3%20Macroeconomic%20Models.pdf 2) http://apecon.us/aggregatesupplykeynesianclassical2.swf 3) http://www.reffonomics.com/TRB/NationalAccounting/nationalaccounting3.swf 4) http://www.reffonomics.com/lonablefundsgraph12.swf 5) http://apecon.us/aggregatesupplykeynesianclassical2.swf 6) INTERACTIVE GRAPH http://www.whitenova.com/thinkEconomics/adas.html 7) INTERACTIVE GRAPH http://www.whitenova.com/thinkEconomics/simul.html 8) GOOD LESSON http://www.youtube.com/watch?v=RemyT7upOMI 9) GRAPHS http://www.youtube.com/watch?v=uQwdMI37y5c 11) multipilier  Following up now that I've had time to really read the articles... the first article I linked,  __[]__ <__[]__>, contends that that money multiplier doesn't exist. Not just now, but also in the 90's. The large and medium banks have access to funding outside the banking system, so the reserve requirement does not bear any correlation to the money supply or amount of loans made. The paper isn't arguing leakage: it's arguing that the multiplier isn't there. The second article, __[]__ <__[]__>, points out the shortcomings of monetary policy, including the failure of the multiplier to materialize. Changing interest rates is a blunt instrument, as when it's changed to prevent overheating or sluggishness in one set of markets, it can have adverse effects on markets not experiencing those stresses. His position is that regulation would be more effective in smoothing out the swings. 10) current graph of USA economy  http://www.washingtonpost.com/wp-srv/business/the-output-gap/index.html  11)STAGFLATION GRAPH http://welkerswikinomics.com/blog/2008/02/25/stagflation-a-blast-from-the-past-could-mean-trouble-for-us-economy/ http://www.answers.com/topic/stagflation **DEFINITION -Stagflation** is a term referring to transitional periods when the economy is simultaneously experiencing the twin evils of Inflation and high Unemployment, a condition many economists as late as the 1950s considered a typical of the U.S. economy. Stagflation occurs when the economy is moving from an inflationary period (increasing prices, but low unemployment) to a recessionary one (decreasing or stagnant prices and increasing unemployment). It is caused by an overheated economy. In periods of moderate inflation, the usual reaction of business is to increase production to capture the benefits of the higher prices. But if the economy becomes overheated so that price increases are unusually large and are the result of increases in wages and/or the costs of machinery, credit, or natural resources, the reaction of business firms is to produce less and charge higher prices.

The term first came into use in the mid-1970s, when inflation soared to 12 percent and the unemployment rate nearly doubled to 9 percent. This inflation was the result of the quadrupling of oil prices by the Organization of Petroleum Exporting Countries (OPEC), increases in the price of raw materials, and the lifting of Vietnam-era government-imposed Price and Wage Controls. At the same time, the economy went into recession. In 1979 the high inflation rate was sent spiraling upward when OPEC doubled petroleum prices after the Iranian revolution. President Jimmy Carter established the Council on Wage and Price Stability, which sought voluntary cooperation from workers and manufacturers to hold down wage and price increases. The council could not control OPEC, however, and repeated oil-price hikes thwarted the council's efforts. Years of continued inflation and high unemployment was one of the factors that undermined the Carter presidency and Democratic Party proposals for welfare reform, national health insurance, and reform of labor law. In 1980, after years of double-digit inflation the Federal Reserve Board (Fed), under Paul Volcker, prodded banks to raise interest rates to record levels of more than 20 percent to induce a recession and break the inflation cycle. Subsequently the Fed pursued a monetary policy designed to head off significant increases in inflation, but in 1994–1995, seven Fed increases in short-term interest rates failed to moderate economic growth. This led to speculation that in a global economy, domestic monetary policy may not be as effective in controlling stagflation as previously thought.

12) AS & AD http://welkerswikinomics.com/blog/category/adas-model/

__**HOMEWORK**__ http://128.241.192.223/uploads/APMacroUnits34.pdf

look at these http://www.youtube.com/watch?v=L7ptmu6eZ1U http://www.youtube.com/watch?v=RemyT7upOMI http://www.youtube.com/watch?v=2fmfNNwBpik&feature=related

** KEY IDEAS Unit 3: Aggregate Demand and Aggregate Supply:  Fluctuations in Outputs and Prices ** **-Aggregate demand (AD) and aggregate supply (AS) curves look and operate much like the supply and demand curves used in microeconomics. However, these macroeconomic AD and AS curves depict different things, and they change for different reasons than microeconomic demand and supply curves. AD and AS curves can be used to illustrate changes in real output and the price level of an economy.** **-The downward sloping aggregate demand curve is explained by the wealth effect, the income effect, and the foreign purchases effect.** **-The aggregate supply curve is divided into three ranges: the horizontal or Keynesian range, the upward sloping or intermediate range, and the vertical or classical range.** **-Changes in the price level and output are illustrated by shifts and movements along the aggregate demand and supply curves.** **-Shifts in the aggregate demand can change the level of output and the price level or both. The determinants of AD include changes in consumer spending, investment spending, government spending, and net export spending.** **-Shifts in aggregate supply can also change the level of output and the price level. Determinants of AS include changes in input prices, productivity, the legal institutional environment, and the quantity of available resources.** **-Changes in outputs can also be illustrated by the Keynesian expenditure-output mode. This model differs from the AD/AS model because in the Keynesian model the price level is assumed to be constant. The Keynesian model has fixed prices.** **-The AD/AS model can be reconciled with the Keynesian expenditure-output model. In the Keynesian (horizontal) range of the AS curve, both models are identical. The models differ in the intermediate and vertical range of the AS curve.** **-Autonomous spending is the part of AD that is independent of the current rate of economic activity.** **-Induced spending is that part of AD that depends upon the current rate of economic activity.** **-The multiplier is a number that influences the relationship of changes in autonomous spending to changes in real GDP.** **-The formula for calculating the multiplier is: M=1/MPS or M=1/1-MPC** **-The multiplier results from subsequent rounds of induced spending that occur when autonomous spending changes.** **-Keynesian economists believe the equilibrium levels of GDP can occur at less than or more than the full-employment level of GDP. Classical economists believe that long-run equilibrium can occur only at full employment.** **-Fiscal policy consists of government actions that may increase or decrease aggregate demand. These actions involve changes in government spending and taxing.** **-The government uses an expansionary fiscal policy to try to increase or decrease aggregate demand. These actions involve changes in government spending and taxing.** **-The government uses a contractionary fiscal policy to try to decrease aggregate demand during a period of inflation. The government may increase taxes, decrease spending, or do a combination of the two.** **Discretionary fiscal policy means the federal government must take deliberate action or pass a new law changing taxes or spending. The automatic or built-in stabilizers change government spending or taxes without new laws being passed or deliberate action being taken.** **-The balanced budget multiplier indicates that equal increases or decreases in taxes and government spending increase or decrease equilibrium GDP by an amount equal to that increase or decrease.** **-Stagflation can be explained by a decrease in aggregate supply.**

LECTURE 1 AGGREGATE DEMAND (AD)

1) AGGREGATE DEMAND SHOWS RELATIONSHIP BETWEEN AGGREGATE PRICE LEVEL AND THE QUANTITY/AGGREGATE OUTPUT DEMANDED BY HOUSEHOLDS, FIRMS, GOV’T, WORLD. 2) GDP FORMULA C+I+G+X-M 3) AGGREGATE DEMAND CURVE SLOPES DOWNWARD. THAT MEANS THERE IS A NEGATIVE (INVERSE) RELATIONSHIP BETWEEN OUTPUT AND PRICE LEVEL. 4) CHANGES IN THE COMPOSITION OF GOODS AND SERVICES IN CONSUMER SPENDING AREN’T RELEVENT TO THE AGGREGATE DEMAND CURVE. 5) AGGREGATE PRICE LEVEL CHANGED BY A) WEALTH EFFECT – AS AGGREGATE PRICE RISES, PURCHASING POWER FALLS B) INTEREST RATE EFFECT – AS DEMAND FOR MONEY INCREASES, THE INTEREST RATE INCREASES 6) PEOPLE AND FIRMS HOLD ON TO $ - ­ IN AGGREGATE PRICE LEVEL = ¯ IN PURCHASING POWER = ¯ IN FUNDS AVAILABLE = ­ IN INTEREST RATES = ¯ IN INVESTMENT SPENDING = ¯ IN CONSUMER SPENDING = ­ IN AGGREGATE PRICE LEVEL = ¯ IN INVESTMENT AND CONSUMPTION 7) SHIFTS IN THE AGGREGATE DEMAND CURVE - A RIGHTWARD MOVEMENT REPRESENTS AN INCREASE  - A LEFTWARD MOVEMENT REPRESENTS A DECREASE  8) FACTORS THAT WOULD SHIFT THE AGGREGATE DEMAND CURVE - CHANGES IN EXPECTATIONS - CHANGES IN WEALTH - CHANGES IN THE STOCK OF PHYSICAL CAPITAL 9) GOVERNMENT POLICIES AND AGGREGATE DEMAND - MONETARY POLICY = SUPPLY OF MONEY AND INTEREST RATES E.G. AS AGGREGATE PRICE INCREASES INTEREST RATES INCREASE

** LECTURE 2 AGGREGATE DEMAND (AD) ** ** Aggregate demand ** shows the total (or aggregate) demand for final goods and services at a range of price levels for final output during a stated period of time. Aggregate demand is commonly drawn as a line on a graph with total output on the horizontal axis and the price level on the vertical axis. An aggregate demand curve slopes downward; that is, a higher price level for outputs leads to a reduction in the quantity of aggregate demand.

** Agregate demand ** for an economy is divided into the following components: consumption, investment, government and net exports (exports minus imports). Changes in any of these components will cause the aggregate demand curve to change. For example, a surge in business confidence can lead to a larger quantity of investment at every price level for output and thus an increase in aggregate demand. The government can use macroeconomic policy to increase or decrease aggregate demand. Expansionary fiscal or monetary policy will increase aggregate demand, while contractionary fiscal or monetary policy will decrease aggregate demand. D DETERMINEMENTS OF AD  1)…………………………………………...............................................................  2)……………………………………………………………........................................  3)…………………………………………….................................................................  4)……………………………………………............................................................  5)……………………………………………………....................................................  Tip TIP #1Students often confuse the aggregate demand curve with the demand curve they studied in microeconomics. The curves look similar. However, the aggregate demand curve shows the relationship of the price level and the aggregate quantity demanded of the economy (GDP). The relationship in an aggregate demand curve is inverse or downward sloping like a demand curve for a single good or service, but for different reasons. The downward sloping aggregate demand curve is explained by the wealth effect, the income effect and the foreign purchases effect. Ti TIP#2 Aggregate demand consists of consumer spending (C), investment spending (I), government spending (G) and net export spending (NX). Total aggregate demand is GDP. When C, I, G or NX increases, GDP increases. When C, I, G or NX decreases, GDP decreases. A quick activity is to give the students events and have them identify the effects on C, I, G or NX and then on the total aggregate demand or GDP. T TIP#3 Students often confuse investment spending in aggregate demand with purchases of stocks and bonds. Investment in stocks and bonds is financial investment. Economic investment involves spending to buy capital goods such as new factories or equipment. Economic investment affects both aggregate demand and aggregate supply. It increases aggregate demand since firms buy capital goods from other firms. It increases aggregate supply by providing firms better tools to produce more efficiently.

**FISChttp:****www.sparknotes.com/economics/**

[|**http://www.whitenova.com/thinkEconomics/index.html2) AGGREGATE SUPPLY**]

** __LECTURE 3 AGGREGATE SUPPLY__ **

** Aggregate supply ** shows the total (or aggregate) production of final goods and services available at a range of price levels for final output during a stated period of time. Aggregate supply is commonly drawn as a line on a graph with total output on the horizontal axis and the price level on the vertical axis. In the short run, the aggregate supply curve is drawn as upward-sloping; that is, a higher price level for outputs, holding the price of inputs fixed, will cause firms to produce more. In the long run, the aggregate supply curve is typically drawn as vertical; that is, in the long run the prices of outputs and inputs tend to rise together, and so a higher price level for outputs doesn't cause firms to produce more output.

** The aggregate supply ** curve can increase or decrease for several reasons. As an economy expands with higher population or productivity increases, aggregate supply increases; that is, at every given price level for outputs, firms will produce a greater total quantity of goods and services. Higher prices for key inputs such as labor or oil cause aggregate supply to decrease; that is, with higher input prices, firms will produce a lesser quantity of aggregate output for every given price level of outputs. DETERMINEMENTS OF AS; 1)…………………………………………… 2) …………………………………………………………..  3)……………………………………..  4)………………………………………………  5)…………………………………………………….

Tip #1Students often confuse the aggregate supply curve with the supply curve they studied in microeconomics. The curves look similar. However, the aggregate supply curve illustrates changes in the aggregate quantity supplied in the total economy at various price levels. Tip #2In the long run, the level of output or aggregate supply depends on the capital stock, the level of technology and the labor force. In the short run, the level of output or aggregate supply depends on the amount of labor with a given level of capital and technology. Therefore, the short-run aggregate supply curve is upward sloping while the long-run aggregate supply curve is vertical. Tip #3Long-run aggregate supply is important because it represents the maximum output of the economy when resources are fully employed. The development of more resources will increase or shift the long-run aggregate supply curve outward. This is economic growth, and economic growth determines the future standard of living in a country. Increased investment in human and real capital and higher productivity of labor lead to economic growth. Students will vote for candidates who will support policies that encourage or discourage economic growth. Therefore, they should know the effects of different policies on economic growth.

// __**ASSIGNMENTS**__ //

__THIS ASSIGNMENT ( DUE AT THE END OF THE UNIT)__

__National Income and Price Determination__

1. What two things can people do with their after-tax income?

2. What are household spending’s two chief constraints?

3. Consumption that occurs independent of the level of disposable income is called…

4. If the average propensity to consume = 101%, then the average propensity to save =…

5. How are people able to spend more than their disposable income?

6. Decreased wealth, increased debt and decreased expectations have had what effect on household’s propensity to consume and save?

7. How do increased income taxes effect consumption and savings?

8. How do increased sales taxes effect consumption and savings?

9. In which market do savers supply savings and borrowers demand loans?

10. In this market, what is the price paid by borrowers to savers?

11. Besides the private sector who else saves and borrowers in the loanable funds market?

12. Over the last decade both the private and public sector have been borrowing heavily, yet real interest rates have remained low. Using a correctly labeled loanable funds graph, determine how interest rates could remain low despite heavy borrowing.

13. Firms that borrow use the funds in order to __in capital and inventory.__

14. Firms’ investment decisions are influenced by the real interest rate. When interest rates are low firms are (more /less likely) to invest and when interest rates are high firms are (more /less likely) to invest.

15. Illustrate the effect of a government budget deficit on private investment using a graph of the loanable funds market linked to an investment demand curve.

16. If firms expect the rate of return on their investments to decrease, then given a constant interest rate what effect will this new level of expectation have on gross private investment. Demonstate the effect using an investment demand curve.

17. Besides the private sector, who else spends in the economy?

18. As uncertainty has spread through global financial markets over the past year, financial investors both domestic and abroad have fled to the relative safety of United States Treasury securities. What effect does this ‘flight to safety’ have on the international value of the dollar?

19. What effect does the change in the value of the dollar mentioned in question 54 have on US exports to the rest of the world and imports from the rest of the world?

20. Define MPC and MPS

21. If Americans save ¼ of each additional dollar of disposable income earned, then determine the MPC and MPS for the economy.

22. Given an MPS of .05, determine the effect of a $4 billion dollar increase in net exports on aggregate spending.

23. Assume that American’s spend $0.90 of every extra dollar of disposable income earned. What impact will a $300 billion tax increase have on aggregate spending?

24. Why is aggregate demand downward sloping?

25. How have increased saving, frozen credit markets, and a strong dollar impacted aggregate demand this year?

26. What distinguishes the short-run from the long-run?

27. What relationship exists between the price level and real gdp in the long run?

28. Why do firms have an incentive to increase output as price level increases in the short run?

29. What three functions must be equal in order for an economy to experience full employment output?

30. When SRAS intersects AD to the left of the LRAS, then the economy’s current equilibrium is (recessionary/inflationary).

31. Assume an economy operating at full employment. Ceteris paribus, an increase in the real interest rate will have what effect on output and price level?

32. Assume an economy in recession. Ceteris paribus, an increase in labor productivity will have what effect on output and price level?

33. Assume an economy operating above full employment. Further assume that input prices are completely flexible. In the absence of any policy changes, what will cause the economy to return to a full-employment equilibrium?

__ASSIGNMENT 1__

__AP ECONOMICS CHAPTER 27 TEXTBOOK__

__AGGREGATE SUPPLY AND AGGREGATE DEMAND.__

__Questions about Aggregate supply =AS__ 1) What is stagflation (pg636) 2) What would be our economic policy to combat the issues of recession and deflation (pg637) 3) What caused the recession of 1979-82? And which direction would this cause the demand curve to shift 4) Define what relationship the aggregate supply curve shows 5) Explain the positive relationship between the short run aggregate price level and the quantity of aggregate output 6) In the short term many of the costs producers face are fixed T/F. 7) Wages are both nominal and “sticky” explain this (pg638) 8) Because many production costs are fixed in the short run, production cost per unit of output doesn’t fall by the same proportion as the fall in the price of output. In the economy, as a whole, when aggregate price level falls 9) What would happen if aggregate price increase 10) Is it possible for there to be shifts of the short term SRAS curve?(pg640) 11) AS decreases when 12) Producers make output decisions based on 13) Because some production costs are fixed in the short term, a change in the aggregate price level leads to a change in producers profit per unit of output and, in turn, leads to a change in aggregate output. What other factors besides aggregate price level effect shifts in the SRAS curve and affect producers profit (pg641) 14) The long run aggregate supply curve (LRAS) shows (pg642) 15) In the LR aggregate price has NO effect on the quantity of aggregate output supplied T/F 16) If all prices (including inputs) where all halved at the same time what would happen to aggregate output? 17) Changes in the aggregate price level do not change the quantity of aggregate output supplied in the LR because……………………………………………………………………………………………………………………….. 18) The LRAS curve is vertical because……………………………………………………………………………………………. …………………………………………………………………………………………………………………………………………………. 19) Explain the term “potential output”………………………………………………………………………………………….... ………………………………………………………………………………………………………………………………………(pg643) 20) In fig 10-4 we can see that the USA LRAS has grown over the years 1989-2004 what would account for this……………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………. 21) The economy almost always produces more or less than potential output. Draw fig 10-5 from the text and answer, “check your understanding10-1questions 1 &2 on pg646.

ASSIGNMENT 2 Grocery bill still high? Blame 'sticky' prices **Christopher Leonard ** Worries over a global recession have pushed the price of oil to its lowest in over a year. Don't expect the same for a bottle of beer, a tube of toothpaste, or a box of cereal. You can blame "sticky" prices. That's what analysts call it when companies slap higher prices on products and keep them there even though the rationale for the price hikes — such as soaring oil prices — is gone. The falling cost of oil could help companies pad their profit margins as they pay less to make and transport goods. But it won't mean a break on the average grocery bill. The price of consumer goods typically lags behind the price of key inputs like oil and wheat, said Chris Lafakis, an economist with Moody's economy.com. "Consumer prices don't change near as fast, because they are set by companies," Lafakis said. "Commodity prices are set every day on an open market." The opposite is also true: Companies hesitate to hike prices because it might push consumers to into the arms of a competitor, or to cheaper alternatives. Meat companies like Tyson Foods Inc., for example, have swallowed losses this year as ingredient costs rose because executives were fearful consumers would abandon their products if prices jumped too fast. Tyson's profit plunged 92 percent in the third quarter and the company said it didn't expect a rebound soon. But once a price hike is in place, it virtually never goes away, Lafakis said. The one factor than can drive prices down is a drastic drop in demand, but few economists expect the global economic downturn to be so severe it would cause widespread deflation, he said. More likely is that inflation will slow or possibly flatten. That was the case last month, when consumer prices were essentially flat, even as oil prices plunged. The core Consumer Price Index, which eliminates food and energy prices, rose 0.1 percent, according to U.S. Labor Department figures. That was only about half the jump economists had expected, but it still lagged far behind the drop in oil prices. Crude oil has plunged more than 53 percent from its record high of $147.27 between July and October. Companies also tend to price their products based on what their competitors are charging and not necessarily on what it costs to make them, said Lars Perner, assistant professor of marketing at the University of Southern California's Marshall School of Business. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">Coca-Cola is more interested in what Pepsi is charging for a six-pack than the cost of its ingredients, such as high fructose corn syrup, he said. Neither Coca-Cola Co. nor Pepsico Inc. would comment on possible price cuts in the future. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">That means consumers are in a fix these days. Prices have been going up broadly across whole categories of products, meaning competitors have been hiking prices in unison. For example, both Anheuser-Busch Cos. Inc. and SABMiller's U.S. unit have been raising the price for beer, with neither one too worried that the price hikes will push customers to their competitor. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">"They may be upset about it, but you really have fairly limited options as a consumer," Perner said. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">For prices to drop, consumers have to hope that companies' competitive juices start flowing again. The drop in oil and ingredient prices is creating a high-stakes game of chicken in the shopping aisle, Perner said. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">If companies keep their prices at current levels, they can reap higher profit margins. But if one company starts cutting prices to lure customers away from competitors, it could start a price war. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">"As soon as the first (company) in a category reduces prices, the others will follow suit. But they're all hoping the other one doesn't" cut prices, Perner said. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">Nobody wants to be first, for reasons made in clear in 1996. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">That's the last time cereal makers broadly reduced prices, prompted by a 20 percent price cut by Post cereal. When competitors were forced to follow suit, it hurt profitability across the sector and reduced sales, according to a recent research note by Deutsche Bank analyst Eric Katzman. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">Kellogg responded to Post's move by slashing prices 19 percent, and the company's profits tumbled 8 percent to $502 million in 1998, and another 33 percent to $338 million in 1999. Kellogg launched the Country Inn Specialties line of higher-end cereals to try and create a niche market, and hiked domestic cereal prices nearly 3 percent in 1998 and later returned to growth. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">"It took many years until profit levels for cereal players returned to the level once enjoyed before Post's actions," Katzman wrote. "With this historical precedent, we highly doubt manufacturers will lower prices on the back of lower agricultural commodities." <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">That's certainly the case with Omaha-based ConAgra Foods Inc., which makes a variety of products from Chef Boyardee soups to Banquet frozen dinners and Orville Redenbacher's popcorn. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">Food makers like ConAgra are hardly out of the woods when it comes to paying more for ingredients and transportation, said spokeswoman Stephanie Childs. ConAgra paid an extra $190 million for inputs last quarter when compared to the same period a year before. The company expects that figure to be smaller during the current quarter — but costs will still be up, Childs said. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">The same is true for General Mills Inc., said Chief Executive Ken Powell. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">General Mills hiked prices this year on products like Cheerios, Pillsbury and Betty Crocker dessert mixes to compensate for the high commodity costs — up 7 percent last year and an expected 9 percent this year. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">Last year net pricing was up 2.5 percent and though commodities are moderating, those prices won't be coming back down because the company expects this new era of inflation to stay. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">"We think we're in for a period of moderate inflation and that's the scenario we've got to be ready for," Powell said. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">Indeed, core wholesale prices rose 0.4 percent in September, about twice what analysts had expected, according to Department of Labor figures. The so-called producer price index reflects what companies must pay for their inputs and goods. When oil and food prices were included in the index, overall wholesale prices fell 0.4 percent. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">There will be a bright spot for consumers this season as retailers offer selected, high-profile discounts to lure hesitant shoppers, said retail consultant George Whalin. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">The motivation to cut prices was reinforced Wednesday when the U.S. Commerce Department reported overall retail sales dropped 1.2 percent in September, about twice the drop expected by analysts. The decline helped heighten fears the economy was headed into a deeper recession than many economists had already been expecting. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">Retailers are expecting one of the most dismal holiday seasons in years, Whalin said, and are promoting big sales, such as Wal-Mart Stores Inc.'s decision to cut the price of 10 hot holiday toys to $10 each. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">But the big promotions don't mean that retail prices will fall across the board, Whalin said. Most retailers ordered their current merchandise three months ago. With their costs locked in, they will keep most prices as high as they can to recoup as much profit as possible from the slower customer traffic. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">"With consumer confidence being shattered, retailers are going to look for ways to continue to be profitable, so I doubt that we are going to see any significant drop in prices in the next three to four months," Whalin said. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">In the same vein, airlines are hesitant to give back any of the several fare increases put into place over the last year, said Bob Harrell, president of Harrell Associates travel consultant agency. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">Overall air fares are up about 15 percent in September compared to the year before, with small price hikes being phased in incrementally over 2008, Harrell said. There could be some easing in price increases this fall, Harrell said, because business travel is expected to drop along with the slowing economy. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">But that doesn't mean fare prices will drop back to levels where they were before the spike in oil prices. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">"They never give (price increases) back if they can avoid it," Harrell said. <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">_ <span style="color: #800080; display: block; font-family: Georgia,serif; font-size: 14pt;">AP Business Writer Emily Fredrix contributed to this report from Milwaukee.

__**ASSIGNMENT 3**__

1) Which side are you on? Look at each situation and determine if the situation will affect aggregate demand or aggregate supply
 * <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A factory producing computers || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">Printing press || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A tractor ||
 * <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A company builds a new factory || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A US company sells a jet to a foreign company || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A US company sells a jet to a foreign company ||
 * <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">Trees || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A corn field || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A women buys a hamburger for her little boy ||
 * <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A corn field || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A coal mine || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">Students purchase tickets for a rock concert ||
 * <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A women buys a new car || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A dentist || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">The govt purchase a new tank ||
 * <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">An inventor || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A farmer buys fertilizer || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A shoe sales person ||
 * <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">A rock star || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">The govt sent a women to the moon || <span style="color: #800080; display: block; font-family: 'Times New Roman',Times,serif; font-size: 110%;">Newlyweds buy a house ||

__**ASSIGNMENT 4**__ Shifting shapes and curves in aggregate demand and supply- increases or decreases?. Look at each situation below and determine if the given situation will increase or decrease aggregate demand or increase or decrease aggregate supply. Fill the in chart provided using the below questions make sure you write in full answer a) People begin buying more food clothing and cars b) The Federal Reserve increases the discount rate to increase other interest rates c) A new investment makes solar energy the least expensive way to heat homes and fuel cars d) The OPEC nations reduce their production of crude oil by 30% e) The money supply increases f) The Federal government reduces military spending by 20% g) The percentage of people aged 62-72 who are employed or looking for jobs increases sharply h) More people begin taking early retirements I) Sales tax in most states are cut 20% j) Private savings increase 10% k) A vast new oil field is discovered under the Great Salt Lake l) Floods destroy 10% of the nation’s corn and soya crops m) Taxes on wages and salaries are increased by 10% n) Education and training levels achieved by most workers increases sharply o) This years fashion industry features suits and dresses made with silk from China and Japan

__**ASSIGNMENT 5**__ ESSAY QUESTION 50 POINTS

** Aggregate Supply/Aggregate Demand Essay **

Starting with an economy that is long run equilibrium and assuming that prices are sticky discuss the following three scenarios. Include a graph for each scenario, an explanation of how the change could have occurred and a fiscal policy recommendation that would move the economy back to full employment and/or price stability.

A. a shift in demand leads to high unemployment

1. Graph illustration 2. Explain what could have caused this shift 3. What fiscal policy solution would restore full employment and/or price stability?

B. a shift in aggregate demand leads to high inflation

1. Graph illustration 2. Explain what could have caused this shift? 3. What fiscal policy solution would restore full employment and/or price stability?

C. a shift in the short run aggregate supply leads to unemployment and inflation

1. Graph illustration 2. What could have caused this shift? 3. What fiscal policy solution would restore full employment and/or price stability?