Monday, February 22, 2010

AP Economics: 23 February 2010

Prayer
Current Events


Jobless Claims, Inflation Jump as Economy Wobbles. Cf. http://www.cnbc.com/id/35457298

The number of U.S. workers filing new applications for unemployment insurance unexpectedly surged last week, while producer prices increased sharply in January, raising potential hurdles for the economic recovery.

AP

Initial claims for state unemployment benefits increased 31,000 to 473,000, the Labor Department said on Thursday. That compared to market expectations for 430,000.

Another report from the department showed prices paid at the farm and factory gate rose a faster than expected 1.4 percent from December after a 0.4 percent gain in December, as higher gasoline prices and unusually cold temperatures helped boost energy costs.

"When you have PPI moving up and still no progress in the jobs situation, that doesn't bode well for continued improvement in equity prices," said Alan Lancz, president at Alan B. Lancz & Associates in Toledo, Ohio.

Last week was the survey week for the employment report for February, which is scheduled for release in early March.

The labor market, hardest hit by the worst recession in seven decades, has lagged the economic recovery that started in the second half of 2009. The economy has lost 8.4 million jobs since the start of the downturn in December 2007.

The PPI report may give investors, who keeping a wary eye on inflation following massive efforts by the Federal Reserve to pull the economy out of its worst slump since the Great Depression of the 1930s, something to worry about.

"The bottom line is that the Fed is going to have some decisions to make at its next meeting, since it seems inflation is now back on the table," said Lancz.

Fed officials, keeping an eye on how quickly the recovering economy absorbs the excess slack that built up during the recession, have said they are likely to keep interest rates extraordinarily low for "an extended period."

About three-fourths of the increase in PPI last month was due to a 5.1 percent jump in prices for energy goods, the department said. Energy costs were pushed up by a spike in prices for gasoline, liquefied petroleum and home heating oil.

Strong energy prices overshadowed a slowdown in the food prices, which rose 0.4 percent after increasing 1.3 percent in December.

Stripping out the volatile food and energy costs, core producer prices rose a faster than expected 0.3 percent last month after being flat in December. The core index had been forecast to rise 0.1 percent in January.

The department on Friday will release its consumer price report for January. Headline CPI is seen rising 0.3 percent from December and core CPI gaining 0.1 percent, according to a Reuters survey.

"It does present some upside risks to our call for only modest gains in CPI and also points to some possible upward price pressures in the pipeline," said Millan Mulraine, an economics strategist at TD Securities in Toronto.

In the claims report, the four-week moving average of new claims, which irons out week-to-week volatility, fell 1,500 to 467,500, the Labor Department said. The number of people still receiving for benefits after an initial week of aid was unchanged at 4.56 million in the week ended Feb. 6.

This measure has held below the 5 million mark for eight straight weeks and analysts believe it is starting to reflect an improvement in the labor market rather than people merely dropping off rolls because they have exhausted their benefits.

Aggregate Demand and Supply Ch. 19

Chapter Overview

If you chose not to cover the Keynesian model you can still move seamlessly into this chapter; it even presents the spending multiplier in the context of the AS/AD model. The Great Depression is covered (as also in the previous chapter on the Keynesian model) and the chapter also discusses cost-push and demand-pull inflation. Of particular note is the extensive coverage given for the aggregate supply curve; the slope of the curve is explicitly related to the time period under consideration (this is an excellent treatment of why the aggregate supply curve can have different slopes). If you have covered the Keynesian model and wish to relate it to the AS/AD model, an Appendix to the chapter illustrates how the AD curve is derived from AE.

Determinants of Aggregate Demand, p. 502
Consumer Spending, p. 503
Investment, p. 503 (Marginal Efficiency of Capital--Classical, or, Accelerator Theory--Keynes), 5:37 

A look at these two theories that attempt to explain what factors influence the decision to invest by firms: it contrasts Classical and Keynesian theories.

Government Spending and Net Exports, p. 504
Checkpoint: Aggregate Demand, p. 505
Aggregate Supply, p. 505
Depression Period (Horizontal), p. 505
Short Run (Upward Sloping), p. 506
Long Run (Vertical), p. 506

Aggregate Supply in the Short and Long Run: 6:19


Determinants of Aggregate Supply, p. 507
Input Prices, p. 507
Productivity, p. 507
Taxes, p. 508
Market Power of Firms, p. 508
Expectations, p. 508
Checkpoint: Aggregate Supply, p. 509
Macroeconomic Equilibrium, p. 509
The Spending Multiplier, p. 510
Using AS/AD: The Great Depression, p. 511
Using AS/AD: Demand-Pull Inflation, p. 512
Using AS/AD: Cost-Push Inflation, p. 514

Cost-push inflation, 1:16


Deflation and cost push inflation explained by Ellen Hodgson Brown, 3:05


Checkpoint: Macroeconomic Equilibrium, p. 515
Ideas for Capturing Your Classroom Audience
■ (If you did not cover Chapter 18 and therefore the Great Depression, use this
idea.) Make it visual! While students have likely heard about the Great
Depression, most will probably not know how bad things were. Numerous sites
exist on the Web with photos of bread lines and other scenes typical of the time.
This will help make the economic devastation more vivid for students.
■ Illustrate changes in the macroeconomy over time, particularly after the oil price shock of the mid-1970s. Visit the Flashback Economy Web site at
http://www.1970sflashback.com/1970/Economy.asp to illustrate changes in the
price of a gallon of regular gasoline as well as the inflation and unemployment
rates through the 1970s and 1980s.
■ Look at real and nominal gasoline prices over time using the graph on this page
from the Web site of the Energy Information Administration of the U.S.
Department of Energy. The graph is found at: http://www.fueleconomy.gov/feg
/gasprices/FAQ.shtml.

Chapter Checkpoints
Aggregate Demand, p. 505
Question: Consumer spending is related to disposable personal income (personal
income minus taxes). Describe how changing tax rates would affect consumption
and aggregate demand.

The point is to check that students can: apply their knowledge of the determinants
of aggregate demand to help evaluate the effect of changing taxes (the key link is
taxes to income to spending).
Aggregate Supply, p. 509
Question: In Europe nearly two-thirds of wages are covered by union collective bargaining agreements; wage rates are determined (or fixed) for a given time period, typically 2 to 4 years. In the United States only about one-sixth of wages are covered. Unemployment rates in Germany, France, and Italy are typically double that (8–12%) of those in the United States (4–6%). Do higher unemployment rates in Germany, France, and Italy mean that their aggregate supply curves are flatter than ours in the United States?

The point is to check that students can: synthesize their knowledge of the effect of collective bargaining on wages (making them, in Keynesian terms, “stickier”) and how this affects the slope of aggregate supply.
Macroeconomic Equilibrium, p. 515
Question: Between 2004 and 2006, the price of petroleum products in the United
States more than doubled and gasoline and diesel fuel peaked at roughly $3.00 a gallon.
Describe the impact of this price increase on aggregate supply. How might it
affect employment, unemployment, and the price level? Would the impact depend
on whether consumers and business thought the price increase was permanent?

The point is to check that students can: understand how changes in the price of oil affect the economy. It might be useful to point out that the initial effect is a decrease in aggregate supply against an unchanging aggregate demand.
Chapter Appendix, p. 521
Deriving the Aggregate Demand Curve
The Appendix illustrates how the aggregate demand curve can be derived from the
aggregate expenditures model by changing the price level (thus changing the position of the AE line) and finding the new equilibrium level of Y. These points are then translated onto a second set of axes to show the aggregate demand curve.
Examples Used in the End-of-Chapter Questions
Question 13 refers to consumer confidence. Chapter 18 introduced students to the
Conference Board’s monthly survey of 5,000 households called the Consumer
Confidence Index. To learn more about the Index visit the Conference Board’s Web
site at: http://www.conference-board.org/economics/consumerConfidence.cfm.
Many analysts and policymakers also track the index published by Reuters in conjunction with the University of Michigan. See sites like Bloomberg.com for recent releases, or view previous press releases at: https://customers.reuters.com/community/university/default.aspx.
For Further Analysis
The Best of Times and the Worst of Times? Using the AS/AD Model to Explain
the 1970s and the 1990s
This example can be used as an in-class small group exercise or as an individual inclass exercise. It is designed to complement the text’s material by employing the graphical analysis of the AS/AD model to illustrate stagflation and the low inflation–low unemployment that characterized the 1990s. For simplicity the handout uses only short-run analysis, but it is not difficult to incorporate a discussion of whether or not the long-run aggregate supply curve shifts.
Web-Based Exercise
The Effect of Oil in the 1990s; Not Like the 1970s
This example can be used as a small group exercise or as an individual exercise.
The exercise provides an opportunity for students to read research from a Federal
Reserve Bank’s research department and apply it to what they have learned in the
chapter. This serves a subtle purpose of introducing the Federal Reserve System in
advance of its coverage in later chapters. You may also decide to have students read recent articles about oil prices and about whether or not there is still concern about stagflation in order to make this a more extensive assignment.
The Effect of Oil in the 1990s; Not Like the 1970s
Visit the Web site of the Federal Reserve Bank of San Francisco (http://www.
frbsf.org/) to read an article from its Economic Letter (2005-31; November 18, 2005) titled “Why Hasn’t the Jump in Oil Prices Led to a Recession?” The authors (John Fernald and Bharat Trehan) compare the effect of oil prices in the 1970s and in the 1990s. Summarize the main points of the article. This is still a topic very much in the news. (The article reinforces the text material
about the importance of disposable income and about whether price increases are
seen as permanent or temporary. It also makes mention of monetary policy,
which might be a good “promo” for material to come.)
Tips from a Colleague
Perhaps the hardest part of this chapter is the explanation why the aggregate
demand curve has a downward slope, as students are quick to relate it to demand
curves for individual goods. You may want to recall the material about biases in the CPI due to consumers switching among goods when prices change to reinforce the
substitutions that occur when we look at aggregate demand.
Resources

Web of Debt, The Shocking Truth About Our Money System

Author Ellen Hodgson Brown talks about her book, how money is created by the banks using an illusion and how we can fix the coming economic meltdown.


Email HW to gmsmith@shanahan.org

1. Consider for Wednesday's Quiz: the Ch. 16 Short Answer Quiz Prep Page. Cf. http://shanawiki.wikispaces.com/AP+Economics+Ch.+16+Short+Answer+Quiz++Prep+Page

2. Be sure to study for a subsequent Ch. 16 Test, TBA.

3. Be sure to review Ch. 17 (we will have Quizzes and a Test on Ch. 17, TBA).

4. I designed this part of the assignment as a review of the older material for the Test; you do not need to re-write the answers as part of the HW: Ch. 16 Questions and Problems, #5-10.

5. Ch. 19, check your answer to the Chapter Checkpoint Questions, p. 520.

6. This material, in contrast to the older material, is new and you should answer in writing as part of your HW: Ch. 19, Questions and Problems, pp. 517-518, #5-10.

WH II Honors: 22 February 2010

Prayer:
Current Events:

"The FBI has opened an investigation into allegations that a Pennsylvania school official remotely monitored a student at home, a law enforcement official with knowledge of the case told CNN on Saturday. The official, who asked not to be identified, said the FBI became involved in the case after a family filed a lawsuit against the Lower Merion School District, located outside of Philadelphia, Pennsylvania. The family accused an assistant principal at Harriton High School of watching their son through his laptop's webcam while he was at home and unaware he was being watched. The family also says the school official used a photo taken on a laptop as the basis for disciplining the student." - CNN

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

The 4th Amendment


Test Ch. 14 on Wednesday. Review the Ch. 14 Test Prep Page on Shanawiki.

Chapter 15 East Asia Under Challenge 1800-1914

Imperialism in China

For: Audio Guided Tour
Visit: PHSchool.com
Web Code: nap-2451

Cf. http://www.phschool.com/atschool/dsp_swf.cfm?pathname=/atschool/worldhistory/audio_guided_tours/&filename=WH07A00774.swf&w=760&h=460
Opening the Door to China

Meanwhile, the Western powers and nearby Japan moved rapidly ahead. Japan began to modernize after 1868. It then joined the Western imperialists in the competition for a global empire.

In 1894, Japanese pressure on China led to the Sino-Japanese War. It ended in disaster for China, with Japan gaining the island of Taiwan.

Carving Spheres of Influence

The crushing defeat revealed China’s weakness. Western powers moved swiftly to carve out spheres of influence along the Chinese coast. The British took the Chang River valley. The French acquired the territory near their colony of Indochina. Germany and Russia gained territory in northern China.

The United States, a longtime trader with the Chinese, did not take part in the carving up of China. It feared that European powers might shut out American merchants. A few years later, in 1899, it called for a policy to keep Chinese trade open to everyone on an equal basis. The imperial powers accepted the idea of an Open Door Policy, as it came to be called. No one, however, consulted the Chinese.

Reading Check

Analyzing

Why did the United States want an Open Door policy in China?

The Boxer Rebellion

Anti-foreign feeling finally exploded in the Boxer Uprising. In 1899, a group of Chinese had formed a secret society, the Righteous Harmonious Fists. Westerners watching them train in the martial arts dubbed them Boxers. Their goal was to drive out the “foreign devils” who were polluting the land with their un-Chinese ways, strange buildings, machines, and telegraph lines.

In 1900, the Boxers attacked foreigners across China. In response, the Western powers and Japan organized a multinational force. This force crushed the Boxers and rescued foreigners besieged in Beijing. The empress Ci Xi (tsih shih) had at first supported the Boxers but reversed her policy as they retreated.

Reading Check

Explaining

How did the Boxers get their name?
Section 2 Revolution in China

The Fall of the Qing

The Rise of Sun Yat-sen

Although the Boxer Uprising failed, the flames of Chinese nationalism spread. Reformers wanted to strengthen China’s government. By the early 1900s, they had introduced a constitutional monarchy. Some reformers called for a republic.

A passionate spokesman for a Chinese republic was Sun Yixian (soon yee shyahn), also known as Sun Yat-sen. In the early 1900s, he organized the Revolutionary Alliance to rebuild China on “Three Principles of the People.” The first principle was nationalism, or freeing China from foreign domination. The second was democracy, or representative government. The third was livelihood, or economic security for all Chinese.

The Revolution of 1911

When Ci Xi (tsih shih) died in 1908 and a two-year-old boy inherited the throne, China slipped into chaos.

The Last Emperor - Trailer

In 1911, uprisings in the provinces swiftly spread. Peasants, students, local warlords, and even court politicians helped topple the Qing dynasty.

In December 1911, Sun Yixian (Sun Yat-sen) was named president of the new Chinese republic. The republic faced overwhelming problems and was almost constantly at war with itself or foreign invaders.

Reading Check

Evaluating

What changes did the Revolution of 1911 actually produce in China?

An Era of Civil War

Reading Check

Explaining

Why were there rebellions in China after General Yuan Shigai became president?

Chinese Society in Transition

Reading Check

Evaluating

How did the arrival of Westerners affect China?

China's Changing Culture

Reading Check

Describing

What effects did Western culture have on China?

Section 3 Rise of Modern Japan

Examine samurai objects
Take a tour of the Japanese city of Edo

Interactive tour of Osaka Castle

Zoom in on a painting of the siege of the castle

Find out more about Hideyoshi.

Timeline of Japanese history
This is the trailer for what is acclaimed as one of the greatest films ever made, Akira Kurosawa's Seven Samurai. Warning: Language, do not view if you are offended by a bit more than PG-13 language.



Kurosawa's film was the inspiration for a classic Western: "The Magnificent 7" (1960), 3:10.

Film trailer for this classic Western starring Yul Brynner, Steve McQueen, James Coburn, Robert Vaughn, Charles Bronson, Horst Buchholz, Brad Dexter and Eli Wallach.


These scenes from a History Channel documentary provides basic information on Japanese history and culture, particularly the importance of bushido, 7:21.

An End to Isolation

Reading Check

Identifying

What benefits did the Treaty of Kanagawa grant the United States?

Resistance to the New Order

Reading Check

Identifying

What events led to the collapse of the shogunate system in Japan?

The Meiji Restoration

Transformation of Japanese Politics

Meiji Economics

Building a Modern Social Structure

Daily Life and Women's Rights

Reading Check

Explaining

How was Japan's government structured under the Meiji constitution?

Joining the Imperialist Nations

Beginnings of Expansion

War with Russia

U.S. Relations

Reading Check

Explaining

Why did Japan turn itself into an imperialist power?

Culture in an Era of Transition

Reading Check

Describing

What effect did Japanese culture have on other nations?




Ch. 14 Resources

Take a virtual tour of the Forbidden City.

Fascinating facts about the Forbidden City.

Timeline of China's dynasties.

Timeline of Chinese dynasties.
Interactive time line of 20th century China
Examine samurai objects
Take a tour of the Japanese city of Edo

Interactive tour of Osaka Castle

Zoom in on a painting of the siege of the castle

Find out more about Hideyoshi.

Timeline of Japanese history
The Clash, performing their song, "The Magnificent Seven," live on the Tom Synder Show 1981; this is the first public performance of the song, 5:00.

"The Magnificent Seven" is a song and single by the English punk rock band The Clash. It was the third single from their fourth album Sandinista!. It reached number 34 on the UK singles chart.

The song was inspired by raps by old school hip hop acts from New York City, like the Sugarhill Gang and Grandmaster Flash & The Furious Five. Rap was still a new and emerging music genre at the time and the band, especially Mick Jones, was very impressed with it, so much so that Jones took to carrying a boombox around and got the nickname 'Whack Attack'. The song was recorded in April 1980 at Electric Lady Studios in New York City, built around a bass loop played by Norman Watt-Roy of the Blockheads. Joe Strummer wrote the words on the spot, a technique that was also used to create Sandinista!'s other rap track, "Lightning Strikes (Not Once But Twice)". "The Magnificent Seven" represents the first attempt by a rock band to write and perform original rap music, and one of the earliest examples of hip hop records with political and social content. It is the first major white rap record, predating the recording of Blondie's "Rapture" by six months.

The song is viewed as a critique of excessive consumption which includes a nod to the inexpensive goods produced in Asia.

Thematically, "The Magnificent Seven" is somewhat similar to the punkier "Career Opportunities", in that it takes the drudgery of the working life as its starting point. Unlike "Career Opportunities", however, in stream of consciousness fashion it also deals with consumerism, popular media, historical figures, and addresses these subjects with great exuberance and humor. The first verses of "The Magnificent Seven" follow a nameless worker (narrated in the second person) as he wakes up and goes to work, not for personal advancement but to buy his girlfriend consumer goods:

Working for a rise to better my station / Take my baby to sophistication / She's seen the ads, she thinks it's nice / Better work hard, I seen the price

The nameless worker then goes off for a cheeseburger lunch-break, and the lyrics devolve into a blur of fleeting images from television, movies and advertising:

Italian mobster shoots a lobster / Seafood restaurant gets out of hand / A car in the fridge or a fridge in the car? / Like cowboys do in TV land!

Finally, the song takes historical figures, including Karl Marx, Friedrich Engels, Martin Luther King, Mahatma Gandhi, Richard Nixon and Socrates, and places them in modern America, before asking sarcastically whether "Plato the Greek" or Rin Tin Tin is more famous to the masses.

An exclaimed "newsflash" near the end of the song, "Vacuum Cleaner Sucks Up Budgie!", was in fact a headline in the News of the World newspaper at the time of the song's mixing in England, according to Joe Strummer.

Gimme Honda, Gimme Sony
So cheap and real phony
Hong Kong dollars and Indian cents
English pounds and Eskimo pence. . . .
Karlo Marx and Friedrich Engels
Came to the checkout at the 7-11
Marx was skint - but he had sense
Engels lent him the necessary pence

What have we got? Yeh-o, magnificence!!

Luther King and Mahatma Gandhi
Went to the park to check on the game
But they was murdered by the other team
Who went on to win 50-nil
You can be true, you can be false
You be given the same reward
Socrates and Milhous Nixon
Both went the same way - through the kitchen
Plato the Greek or Rin Tin Tin
Who's more famous to the billion millions?
News Flash: Vacuum Cleaner Sucks Up Budgie
Lyrics reproduced here for educational purposes only; copyright remains in the hands of the copyright holder.



HW email to gmsmith@shanahan.org

1. Monday: p. 452, Questions, #4-6, 8-9.

2. Test Ch. 14 on Wednesday. Review the Ch. 14 Test Prep Page on Shanawiki.

AP Economics: 22 February 2010

Prayer
Current Events


Jobless Claims, Inflation Jump as Economy Wobbles. Cf. http://www.cnbc.com/id/35457298

The number of U.S. workers filing new applications for unemployment insurance unexpectedly surged last week, while producer prices increased sharply in January, raising potential hurdles for the economic recovery.

AP

Initial claims for state unemployment benefits increased 31,000 to 473,000, the Labor Department said on Thursday. That compared to market expectations for 430,000.

Another report from the department showed prices paid at the farm and factory gate rose a faster than expected 1.4 percent from December after a 0.4 percent gain in December, as higher gasoline prices and unusually cold temperatures helped boost energy costs.

"When you have PPI moving up and still no progress in the jobs situation, that doesn't bode well for continued improvement in equity prices," said Alan Lancz, president at Alan B. Lancz & Associates in Toledo, Ohio.

Last week was the survey week for the employment report for February, which is scheduled for release in early March.

The labor market, hardest hit by the worst recession in seven decades, has lagged the economic recovery that started in the second half of 2009. The economy has lost 8.4 million jobs since the start of the downturn in December 2007.

The PPI report may give investors, who keeping a wary eye on inflation following massive efforts by the Federal Reserve to pull the economy out of its worst slump since the Great Depression of the 1930s, something to worry about.

"The bottom line is that the Fed is going to have some decisions to make at its next meeting, since it seems inflation is now back on the table," said Lancz.

Fed officials, keeping an eye on how quickly the recovering economy absorbs the excess slack that built up during the recession, have said they are likely to keep interest rates extraordinarily low for "an extended period."

About three-fourths of the increase in PPI last month was due to a 5.1 percent jump in prices for energy goods, the department said. Energy costs were pushed up by a spike in prices for gasoline, liquefied petroleum and home heating oil.

Strong energy prices overshadowed a slowdown in the food prices, which rose 0.4 percent after increasing 1.3 percent in December.

Stripping out the volatile food and energy costs, core producer prices rose a faster than expected 0.3 percent last month after being flat in December. The core index had been forecast to rise 0.1 percent in January.

The department on Friday will release its consumer price report for January. Headline CPI is seen rising 0.3 percent from December and core CPI gaining 0.1 percent, according to a Reuters survey.

"It does present some upside risks to our call for only modest gains in CPI and also points to some possible upward price pressures in the pipeline," said Millan Mulraine, an economics strategist at TD Securities in Toronto.

In the claims report, the four-week moving average of new claims, which irons out week-to-week volatility, fell 1,500 to 467,500, the Labor Department said. The number of people still receiving for benefits after an initial week of aid was unchanged at 4.56 million in the week ended Feb. 6.

This measure has held below the 5 million mark for eight straight weeks and analysts believe it is starting to reflect an improvement in the labor market rather than people merely dropping off rolls because they have exhausted their benefits.

Aggregate Demand and Supply Ch. 19

Chapter Overview

If you chose not to cover the Keynesian model you can still move seamlessly into this chapter; it even presents the spending multiplier in the context of the AS/AD model. The Great Depression is covered (as also in the previous chapter on the Keynesian model) and the chapter also discusses cost-push and demand-pull inflation. Of particular note is the extensive coverage given for the aggregate supply curve; the slope of the curve is explicitly related to the time period under consideration (this is an excellent treatment of why the aggregate supply curve can have different slopes). If you have covered the Keynesian model and wish to relate it to the AS/AD model, an Appendix to the chapter illustrates how the AD curve is derived from AE.

Chapter Outline
Aggregate Demand, p. 501, 7:42

This video is the first in a set of four explaining the Hicks-Hansel model of Keynes' theory of Aggregate Demand, specifically the IS-LM interpretation. This model is very important to short run macroeconomics and attempts to explain shifts in the aggregate demand curve.

These topics are usually taught in an intermediate Macroeconomics class, and these videos are intended as a visual aid to further your understanding of the models.

This video reviews the components of aggregate demand, income, the consumption function and taxes, finding equilibrium in this short run model, and the factors affecting the slope and position of the aggregate demand curve.

These videos are based on the following textbook:

Dornbusch, Fischer, Startz, Atkins and Sparks. (2005). Macroeconomics, 7th Canadian Edition. McGraw-Hill


Why Is the Aggregate Demand Curve Negatively Sloped?, p. 501
The Wealth Effect, p. 502
Impact on Exports, p. 502
Interest Rate Effects, p. 502, there are two examples here,

"How the Fed Changes Interest Rates," 4:06

A lesson on open market operations and how the federal reserve increases and decreases the money supply in order to move interest rates and what this means for traders of the stock, futures, and foreign exchange markets.


The second example concerns "Mortgages and Interest Rates Revised," 2:58


Determinants of Aggregate Demand, p. 502
Consumer Spending, p. 503
Investment, p. 503 (Marginal Efficiency of Capital--Classical, or, Accelerator Theory--Keynes), 5:37 

A look at these two theories that attempt to explain what factors influence the decision to invest by firms: it contrasts Classical and Keynesian theories.

Government Spending and Net Exports, p. 504
Checkpoint: Aggregate Demand, p. 505
Aggregate Supply, p. 505
Depression Period (Horizontal), p. 505
Short Run (Upward Sloping), p. 506
Long Run (Vertical), p. 506

Aggregate Supply in the Short and Long Run: 6:19


Determinants of Aggregate Supply, p. 507
Input Prices, p. 507
Productivity, p. 507
Taxes, p. 508
Market Power of Firms, p. 508
Expectations, p. 508
Checkpoint: Aggregate Supply, p. 509
Macroeconomic Equilibrium, p. 509
The Spending Multiplier, p. 510
Using AS/AD: The Great Depression, p. 511
Using AS/AD: Demand-Pull Inflation, p. 512
Using AS/AD: Cost-Push Inflation, p. 514

Cost-push inflation, 1:16


Deflation and cost push inflation explained by Ellen Hodgson Brown, 3:05


Checkpoint: Macroeconomic Equilibrium, p. 515
Ideas for Capturing Your Classroom Audience
■ (If you did not cover Chapter 18 and therefore the Great Depression, use this
idea.) Make it visual! While students have likely heard about the Great
Depression, most will probably not know how bad things were. Numerous sites
exist on the Web with photos of bread lines and other scenes typical of the time.
This will help make the economic devastation more vivid for students.
■ Illustrate changes in the macroeconomy over time, particularly after the oil price shock of the mid-1970s. Visit the Flashback Economy Web site at
http://www.1970sflashback.com/1970/Economy.asp to illustrate changes in the
price of a gallon of regular gasoline as well as the inflation and unemployment
rates through the 1970s and 1980s.
■ Look at real and nominal gasoline prices over time using the graph on this page
from the Web site of the Energy Information Administration of the U.S.
Department of Energy. The graph is found at: http://www.fueleconomy.gov/feg
/gasprices/FAQ.shtml.

Chapter Checkpoints
Aggregate Demand, p. 505
Question: Consumer spending is related to disposable personal income (personal
income minus taxes). Describe how changing tax rates would affect consumption
and aggregate demand.

The point is to check that students can: apply their knowledge of the determinants
of aggregate demand to help evaluate the effect of changing taxes (the key link is
taxes to income to spending).
Aggregate Supply, p. 509
Question: In Europe nearly two-thirds of wages are covered by union collective bargaining agreements; wage rates are determined (or fixed) for a given time period, typically 2 to 4 years. In the United States only about one-sixth of wages are covered. Unemployment rates in Germany, France, and Italy are typically double that (8–12%) of those in the United States (4–6%). Do higher unemployment rates in Germany, France, and Italy mean that their aggregate supply curves are flatter than ours in the United States?

The point is to check that students can: synthesize their knowledge of the effect of collective bargaining on wages (making them, in Keynesian terms, “stickier”) and how this affects the slope of aggregate supply.
Macroeconomic Equilibrium, p. 515
Question: Between 2004 and 2006, the price of petroleum products in the United
States more than doubled and gasoline and diesel fuel peaked at roughly $3.00 a gallon.
Describe the impact of this price increase on aggregate supply. How might it
affect employment, unemployment, and the price level? Would the impact depend
on whether consumers and business thought the price increase was permanent?

The point is to check that students can: understand how changes in the price of oil affect the economy. It might be useful to point out that the initial effect is a decrease in aggregate supply against an unchanging aggregate demand.
Chapter Appendix, p. 521
Deriving the Aggregate Demand Curve
The Appendix illustrates how the aggregate demand curve can be derived from the
aggregate expenditures model by changing the price level (thus changing the position of the AE line) and finding the new equilibrium level of Y. These points are then translated onto a second set of axes to show the aggregate demand curve.
Examples Used in the End-of-Chapter Questions
Question 13 refers to consumer confidence. Chapter 18 introduced students to the
Conference Board’s monthly survey of 5,000 households called the Consumer
Confidence Index. To learn more about the Index visit the Conference Board’s Web
site at: http://www.conference-board.org/economics/consumerConfidence.cfm.
Many analysts and policymakers also track the index published by Reuters in conjunction with the University of Michigan. See sites like Bloomberg.com for recent releases, or view previous press releases at: https://customers.reuters.com/community/university/default.aspx.
For Further Analysis
The Best of Times and the Worst of Times? Using the AS/AD Model to Explain
the 1970s and the 1990s
This example can be used as an in-class small group exercise or as an individual inclass exercise. It is designed to complement the text’s material by employing the graphical analysis of the AS/AD model to illustrate stagflation and the low inflation–low unemployment that characterized the 1990s. For simplicity the handout uses only short-run analysis, but it is not difficult to incorporate a discussion of whether or not the long-run aggregate supply curve shifts.
Web-Based Exercise
The Effect of Oil in the 1990s; Not Like the 1970s
This example can be used as a small group exercise or as an individual exercise.
The exercise provides an opportunity for students to read research from a Federal
Reserve Bank’s research department and apply it to what they have learned in the
chapter. This serves a subtle purpose of introducing the Federal Reserve System in
advance of its coverage in later chapters. You may also decide to have students read recent articles about oil prices and about whether or not there is still concern about stagflation in order to make this a more extensive assignment.
The Effect of Oil in the 1990s; Not Like the 1970s
Visit the Web site of the Federal Reserve Bank of San Francisco (http://www.
frbsf.org/) to read an article from its Economic Letter (2005-31; November 18, 2005) titled “Why Hasn’t the Jump in Oil Prices Led to a Recession?” The authors (John Fernald and Bharat Trehan) compare the effect of oil prices in the 1970s and in the 1990s. Summarize the main points of the article. This is still a topic very much in the news. (The article reinforces the text material
about the importance of disposable income and about whether price increases are
seen as permanent or temporary. It also makes mention of monetary policy,
which might be a good “promo” for material to come.)
Tips from a Colleague
Perhaps the hardest part of this chapter is the explanation why the aggregate
demand curve has a downward slope, as students are quick to relate it to demand
curves for individual goods. You may want to recall the material about biases in the CPI due to consumers switching among goods when prices change to reinforce the
substitutions that occur when we look at aggregate demand.
Resources

Web of Debt, The Shocking Truth About Our Money System

Author Ellen Hodgson Brown talks about her book, how money is created by the banks using an illusion and how we can fix the coming economic meltdown.


Email HW to gmsmith@shanahan.org

1. Consider for Wednesday's Quiz: the Ch. 16 Short Answer Quiz Prep Page. Cf. http://shanawiki.wikispaces.com/AP+Economics+Ch.+16+Short+Answer+Quiz++Prep+Page

2. Be sure to study for subsequent Ch. 16 Test, TBA.

3. Be sure to review Ch. 17 (we will have Quizzes and a Test on Ch. 17, TBA).

4. I designed this part of the assignment as a review of the older material for the Test; you do not need to re-write the answers as part of the HW: Ch. 16 Questions and Problems, #1-5.

5. This material, in contrast to the older material, is new and you should answer in writing as part of your HW: Ch. 19, Questions and Problems, pp. 517-518, #1-5.