Slide Show #6

1. Slide Show #6 AGEC 430 Macroeconomics of Agriculture Spring 2010

2. Handout #7

4. Suppose I invert a drinking glass and a long neck bottle. Both containing the same amount of beer. Which container will empty first? How is the measurement of capacity utilization useful to macroeconomic policy makers?

5. Concept of Capacity Utilization at Market Level Price S1 Engineering capacity

6. Concept of Capacity Utilization at Market Level Price S1 D1 P1 Economic capacity Engineering capacity

7. Concept of Capacity Utilization at Market Level Price S2 S1 Suppose an event occurs such as a shortage of rail cars to ship harvested grain to ports overseas, bottlenecking exports. This shifts the supply curve to the left. D1 P1 Actual supply Economic capacity Engineering capacity

8. Concept of Capacity Utilization at Market Level Price S2 S1 D1 Raises spot market price from P1 to P2. P2 P1 Actual supply Economic capacity Engineering capacity

9. Concept of Capacity Utilization at Market Level Price S2 S1 The lack of rail cars would cause a bottleneck in this market. D1 P2 P1 Actual supply Economic capacity Engineering capacity Bottleneck

10. Handout #8

11. Graph of the Keynesian cross. The 45 degree ray out of the origin signifies points where aggregate demand equals aggregate supply.

12. Graph of the Keynesian cross. The 45 degree ray out of the origin signifies points where aggregate demand equals aggregate supply. Effects of an increase in interest rates will lower the aggregate product market equilibrium.

13. This is a repeat of the bottom graph on the previous page where aggregate demand fell as interest rates rose.

14. This is a repeat of the bottom graph on the previous page where aggregate demand fell as interest rates rose. The aggregate demand shifted to the left. But since output fell as well, the aggregate supply curve shifted to the left, leaving the general price level unchanged.

15. AD AS If the supply curve had not shifted but was fixed in the short run (classical range), then the general price level in the economy would fall from P to P1. P P1

16. Early classical economists argued that supply is fixed in the short run. This is true of the economy’s YPOT potential output. Also referred to as the Keynesian range

17. YFE = natural rate of full employment of capital and labor YE = planned spending YPOT = maximum potential output Inflationary gap = YE > YFE Recessionary gap = YE < YFE

18. General Price Level (CPI) AS AD PE Gross Domestic Product YPOT YFE=YE The goal of macroeconomic policy is to achieve aggregate product market equilibrium where the gap between YFE and YE is zero, or where the economy is operating at a natural rate of full employment.

19. Handout #9

21. Today’s recession The economy is showing signs of recovery but still experiencing negative growth.

24. The index of leading economic indicators typically signals the direction of change in macroeconomic activity 6-9 months later? Why is this important?

25. Known as the Phillips curve. Shows the short run tradeoff between inflation and the unemployment rate.

26. Where would you prefer the economy to operate?

27. The graph to the left shows the importance of productivity in the economy. This was a major consideration in the policies of President Reagan.

28. Productivity measured here as output per worker rose dramatically during the 1990s as a result, in part, of the information technology boom. This resulted a growing economy with low inflation.

31. Relative Importance Weights in the CPI Food and beverages 15.757 Food 14.629 Food at home 8.156 Food away from home 6.474 Alcoholic beverages 1.127 Housing 43.421 Apparel 3.691 Transportation 15.314 Medical care 6.390 Recreation 5.741 Education and communication 6.301 Other goods and services 3.386 Total 100.00 As od December 2008, urban Consumers spent 14.628 percent of their budget on food. Do you see where the farm business sector plays into the CPI?

33. Rate of Inflation in Recent Recessions 1973-75 recession 1981-82 recession 1981-82 recession Current recession The price deflator used to measure real GDP is the broadest measure of the general price level and inflation in the economy.

37. Unemployment Rate in Recent Recessions Current recession 1981-82 recession 1973-75 recession We reached 10.5 percent in the 1981-82 recession. We may well equal or exceed that level in the current recession.