Demand-pull inflation under Johnson

WEBVTT
Kind: captions
Language: en

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Male voice: What I want
to do in this video

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is a little bit of 1960's
U.S. economic history

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and then just see if our Aggregate Demand

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Aggregate Supply model
fits the description

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of what actually happened. One could argue

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you don't need the ADAS model
to describe what happened,

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but we should at least
make sure that it does

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describe what happened. If we go to 1960,

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this is the very end of the
Eisenhower administration.

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Eisenhower was a Republican
in office. The only

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reason why I give his party
affiliation is because

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if the economy is weak,
and in 1960 the economy

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was weak and one can always debate whether

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it was due to the government or whether

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it was due to just the
natural fluctuations

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in the economy, but in
general, when the economy

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is weak, it tends to go against the party

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that is in power. In 1960, the Republicans

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were in power. There was
a recession. One could

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argue that was a major
reason why the Democratic

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candidate in the 1960
election was able to win,

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John F. Kennedy. In
1961, JFK is inaugurated.

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He becomes President of the United States.

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One of his top goals is
to try to turn around

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this economy. He does
it with what can best

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be described as Keynesian
policies, and we'll

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talk more about that in future videos.

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In fact, I should probably devote many

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videos to Keynesian policies.
It's the general idea

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that the government might
be able to turn around

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a recession by sparking demand. The way

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that it would spark demand is try to put

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more money in people's pockets, or even

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in businesses' pockets. It would do that

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through some combination of increased

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government spending,
maybe somehow giving money

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to the poor, some types
of transfer programs,

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and tax cuts for people and for businesses

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so that they have more money to spend.

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These policies get implemented and over

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John F. Kennedy's term
you do have GDP begins

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to turn back around,
unemployment, I'll just write

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employment goes up, and
inflation stays low.

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Inflation is low.

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These are all of the things
that you want in an economy.

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Unfortunately, this is just
kind of a sad human event,

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in 1963, John F. Kennedy,
you probably know,

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is assassinated. Then his Vice President,

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Lyndon Baines Johnson, that
is LBJ right over there,

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Lyndon Baines Johnson becomes President.

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LBJ becomes President.
A little bit of trivia:

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He's tied for the tallest
President in U.S. history,

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tied with Abraham Lincoln at 6'4".

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He inherits a very, very
good economy; almost,

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one could argue, a perfect economy.

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If Keynesian policies were
really to be practiced

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here to their full idea, in theory, once

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the economy started to
get a little bit really

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overheated and really
approaching its potential,

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in maybe 1964-1965, the
government maybe should have

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started to pull back a
little bit on its spending

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so that the economy
doesn't get overheated.

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But Lyndon Baines Johnson did not do this.

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He kept things going,
and in fact he added more

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fuel to the fire. One
could argue that some of it

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was driven by geopolitics.
A major factor was

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right over here, the
Vietnam War, which was

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escalated in a major way
under LBJ's administration.

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JFK was already dabbling
in Vietnam, but it

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became a really major
war for the United States

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under Lyndon Baines Johnson.

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So some combination of
Vietnam, and he had a huge

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number of social programs,
increased government

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spending, to try to ease
inequality in the U.S. as well,

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so social programs. One could
call it guns and butter.

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Social programs to try to ease inequality.

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The net effect of this
is government spending

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even though the economy
was already red hot,

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it was already at its potential, he wanted

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to increase government spending even more,

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so he kind of took it
beyond its potential.

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He made it overheat a
little bit and what happens

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in 1966 and onwards is
that you have inflation

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starting to grow at a
fairly uncomfortable rate.

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Inflation starts to grow dramatically.

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Just to get a sense of
it, when I keep saying

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that the economy was at
its potential and maybe

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he might have taken a
little bit of his pedal

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off the gas, or his foot off of the pedal,

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I should say, is as we
get into the beginning

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of his administration,
1964-1965, unemployment

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is in the 4-5% range.
Inflation is in the 1-2% range.

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GDP is growing at a very healthy rate.

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Despite that, and maybe he could argue

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maybe his hand was forced
by geopolitical events

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especially on military
funding, the government

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continues to even spend more
money, stimulates things

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even more because that
money goes to soldiers'

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salaries, it goes to
companies that provide,

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I guess that make napalm
or make boats or make

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whatever else. All of
these government programs

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inject even more dollars into the economy,

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and so you ended up with
inflation. The economy

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was already operating at close to capacity

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and it made it go maybe even beyond its

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natural capacity. Let's see whether our

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ADAS model would make, would
allow for this to happen,

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or would describe this,
or would predict this

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given what was going on. Let's draw ...

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That right over there is my price axis.

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This right over here is my real GDP axis.

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Let me scroll down a little bit.

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This right over here is real GDP.

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If we go into the 1964-1965 timeframe,

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you could say that the U.S. is performing

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at its potential GDP. When I talk about

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its potential GDP, I'm
saying that on the long run,

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assuming that people aren't overworked,

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assuming that factories
are getting their proper

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maintenance, they're not being run so hard

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that they start cracking at the seams,

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this is how much that
the U.S. can produce.

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If theory, if everyone worked even harder

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and didn't sleep and
were doing things in an

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unsustainable way, they might even be able

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to produce more. One could view this as

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a theoretical maximum. When
we talk about potential

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we're not talking about that short term

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theoretical maximum, we're talking about

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the maximum GDP that
an economy can produce,

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I guess you could say, in a healthy way,

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or over the long run, assuming that people

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aren't overworked and that the factories

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aren't overworked in
some way, shape or form.

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This could be our situation
maybe in 1964-1965.

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Let's draw this right over
here is the level of prices.

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We just want to see if, in general, we get

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this type of thing
happening from our model.

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This is our aggregate
supply in the long run.

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Our aggregate supply in
the short run we know

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might look something like this.

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That's aggregate supply in the short run.

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Then from our model we will assume ...

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Let me draw that a little
bit neater so it intersects

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a little bit better. This right over here

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is aggregate ... let
me draw it a little bit

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better than that with the slope ...

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This is our aggregate
supply in the short run.

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Aggregate supply in the short run.

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Let's draw our aggregate demand.

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I'll do that in this green color.

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Aggregate demand might
look something like that.

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That is our aggregate demand.

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This is 1964-1965. Here
we are, the economy's

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humming along at its potential.

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Now more gas is thrown on the flame.

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Government accelerates
its spending; not just

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to turn on the economy;
now because of Vietnam

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and all of these social
programs. What's going to happen?

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That money's ending up
in company and people's

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pockets, they're going to demand more.

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It's going to shift the
demand curve to the right.

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At any given price, they're
going to demand more.

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Aggregate demand is going
to shift to the right.

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Maybe it goes, it shifts
to the right, and maybe

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it goes someplace right over there.

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What is the new short term equilibrium?

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Aggregate demand is
intersecting aggregate supply

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right over here. Right
over there, and as we see,

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the equilibrium level
of prices on this model

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now has gone up. Our
productivity, we're now

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producing above potential.
We're overheating a little bit.

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Actually, if you look at
the data in 1966-1967,

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unemployment did become ridiculously low.

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It even got in kind of the
three point something percent

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for a little while.
Many people would argue

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that even now that is
an unnaturally low level

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of unemployment; that people and factories

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are really operating at, maybe beyond

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full capacity, or beyond a
sustainable full capacity.

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But, we see from this model what you think

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would happen actually does happen.

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Prices would go up. Right over there.

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Then on the long run, you
really wouldn't be able

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to sustain this level of producing above

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your potential, and
over the long run things

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would settle back right
over here, and all you're

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left with, really, is the inflation.


Short run aggregate supply

WEBVTT
Kind: captions
Language: en

00:00:00.262 --> 00:00:02.358
In the last two videos, we've been slowly

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building up our aggregate
demand-aggregate supply

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model and the whole point of us doing this

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is so that we can give

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an explanation of why we have these

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short run economic cycles
and we don't just have

00:00:14.667 --> 00:00:17.535
this nice steady march
of economic growth due to

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population increases and
productivity improvement.

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It's important to
realize and it's probably

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important to realize this
for all of what we study

00:00:25.074 --> 00:00:27.653
in micro and macro economics
that this is really

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just a model.

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In order for to use
these models, we have to

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make huge, huge
simplifications and you really

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should always view these models with a

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critical eye.

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This is just one way to view it.

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You might not agree with it.

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You might think it's
an over simplification.

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You might want to modify it in some way.

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It's very important that
you just view it only

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as a model and the reason
why we do that is so

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that we can start to
describe very, very, very

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complicated things with
fairly simple graphs

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and mathematics so that
we can get our brain

00:00:58.749 --> 00:01:01.132
around something as
complicated as the economy.

00:01:01.132 --> 00:01:03.747
Something that has hundreds
of millions of actors,

00:01:03.747 --> 00:01:06.080
each of them with tens
of billions of neurons

00:01:06.080 --> 00:01:08.809
in their brain and doing
all sorts of crazy things.

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We're able to distill
it down to simple lines

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and curves and equations.

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Now in the last video,
we looked a little bit at

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the long run aggregate supply.

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Aggregate supply in the long run.

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In the ADAS model, we
assumed that in the long run,

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the real productivity
of the economy really

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doesn't depend on price,
that price is really just

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a numeric thing and in
the long run, people will

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just adjust to producing
or the economy will

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just adjust to producing
what it's capable of

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comfortably producing.

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Now there's one thing
I want to stress here.

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This is not the maximum
productivity of the economy.

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You could view this as the natural;

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let me put it this way.

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You could view this as the,
so this right over here,

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you could view it as the natural output.

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Natural, the natural real
output of the economy.

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When I say natural, it means that there's

00:02:02.739 --> 00:02:04.631
always going to be some
inefficiencies in the

00:02:04.631 --> 00:02:07.555
economy; people are going
to be switching jobs.

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They might have to retrain.

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There's always going to
be turnover in things.

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Some people pass away
in a job and then they

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have to hire other people.

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There's some normal or natural rate of

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unemployment.

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In most economies, people aren't working

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night and day.

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They want to take some time off.

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They want to be able to rest.

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Because of other
interventions, there aren't

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perfect efficiencies in
the economy as a whole.

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This is just a natural
healthy level of output.

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There is some theoretical level of output.

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I'll draw that here.

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This is maybe some
theoretical level of output

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that you could maybe
view as maximum output.

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Maybe I'll draw it right over here.

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This right over here
might be maximum output.

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Maximum, given the population and the

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technology that the population has,

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this is some type of
theoretical thing and it

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would be very hard to actually quantify.

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People were just working all out.

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They weren't taking vacations.

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They weren't sleeping properly.

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Every person was working in the place that

00:03:11.663 --> 00:03:14.151
they could be the most
productive, then maybe

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you would have some
output over here which is

00:03:16.737 --> 00:03:19.071
kind of impossible to achieve.

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This is something below
that, kind of a nice

00:03:20.811 --> 00:03:24.532
healthy level of output for the economy.

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Now what we're going to
talk about in this video

00:03:26.482 --> 00:03:29.817
is aggregate supply in
the short run and what

00:03:29.817 --> 00:03:32.340
we're going to see is
for this model to work,

00:03:32.340 --> 00:03:34.943
for the aggregate
demand-aggregate supply model

00:03:34.943 --> 00:03:37.611
to work, we have to
assume an upward sloping

00:03:37.611 --> 00:03:41.151
aggregate supply curve in the short run.

00:03:41.151 --> 00:03:43.266
It might look something like this.

00:03:43.266 --> 00:03:46.946
It might look something
like this and obviously,

00:03:46.946 --> 00:03:49.879
it would; actually let me do it this way.

00:03:49.879 --> 00:03:52.802
Let's assume that this
is our current level of

00:03:52.802 --> 00:03:55.629
prices are sitting right over here.

00:03:55.629 --> 00:03:58.430
This is our long run aggregate supply.

00:03:58.430 --> 00:04:00.000
It's not depending on
prices; it's just a natural

00:04:00.000 --> 00:04:01.884
level of output, but in
the short run it might

00:04:01.884 --> 00:04:03.475
look something like this.

00:04:03.475 --> 00:04:04.802
I'll do it in pink.

00:04:04.802 --> 00:04:08.632
In the short run, it might
look something like this.

00:04:08.632 --> 00:04:11.739
As I'm toting it up
because obviously we can

00:04:11.739 --> 00:04:14.557
never get past that
optimal, so what's going on

00:04:14.557 --> 00:04:17.882
here, what's going on in this curve -

00:04:17.882 --> 00:04:19.960
I drew a dotted line because
it's easier for me to

00:04:19.960 --> 00:04:22.541
draw something as a
dotted line when I draw

00:04:22.541 --> 00:04:24.936
it as a straight curve.
My hand always shakes too

00:04:24.936 --> 00:04:28.669
much - so this is the
aggregate supply in the

00:04:28.669 --> 00:04:30.010
short run.

00:04:30.010 --> 00:04:32.038
We'll see we need it to
be upward sloping for

00:04:32.038 --> 00:04:36.066
this model to provide
a basis of explanation

00:04:36.066 --> 00:04:39.019
for economic cycles
and there's a couple of

00:04:39.019 --> 00:04:41.134
explanations or a couple
of, you could really

00:04:41.134 --> 00:04:43.807
view them as theories,
for why we can justify

00:04:43.807 --> 00:04:47.392
an upward sloping aggregate supply curve.

00:04:47.392 --> 00:04:49.073
The one way to think
about it and before I even

00:04:49.073 --> 00:04:51.269
justify why it could be
upward sloping, what an

00:04:51.269 --> 00:04:52.943
upward sloping curve is
saying is look, this is

00:04:52.943 --> 00:04:57.174
just when people are nicely
... They're producing

00:04:57.174 --> 00:04:58.474
at their natural rate.

00:04:58.474 --> 00:05:00.209
There's going to be
some unemployment in the

00:05:00.209 --> 00:05:02.542
economy at this level right over here.

00:05:02.542 --> 00:05:05.138
For whatever reason, this
upward curve is saying

00:05:05.138 --> 00:05:10.141
if prices go up, if prices go up, then the

00:05:10.141 --> 00:05:12.877
economy as a whole is
going to produce beyond

00:05:12.877 --> 00:05:14.212
that natural rate.

00:05:14.212 --> 00:05:18.204
Maybe it's going to bring
in people from other

00:05:18.204 --> 00:05:19.802
parts or I guess you
could say it's going to

00:05:19.802 --> 00:05:21.871
suck people in to the
labor pool who might not

00:05:21.871 --> 00:05:23.540
have been in the labor
pool to work a little

00:05:23.540 --> 00:05:24.469
bit harder.

00:05:24.469 --> 00:05:26.207
Maybe they feel they can
do a little bit better now.

00:05:26.207 --> 00:05:29.212
It might convince factories
to run a little bit

00:05:29.212 --> 00:05:30.135
longer.

00:05:30.135 --> 00:05:32.934
It might convince people
to take fewer vacations.

00:05:32.934 --> 00:05:36.137
The opposite might be
true if prices go down.

00:05:36.137 --> 00:05:37.956
An upward sloping curve
is saying that if prices,

00:05:37.956 --> 00:05:40.602
aggregate prices - Now
this isn't just prices

00:05:40.602 --> 00:05:43.060
in one good or service
- if aggregate price is

00:05:43.060 --> 00:05:45.370
going down, it's saying
in the economy as a whole

00:05:45.370 --> 00:05:48.136
people might be incented
to work a little bit less.

00:05:48.136 --> 00:05:50.820
People might drop out of the labor pool.

00:05:50.820 --> 00:05:53.166
In the short run, remember
this is all in the

00:05:53.166 --> 00:05:55.294
short run, they might drop
out of the labor pool.

00:05:55.294 --> 00:05:56.960
They might not run
their factories all out.

00:05:56.960 --> 00:05:59.544
They might take more
vacations, whatever else.

00:05:59.544 --> 00:06:01.879
Now let's think about what our plausible

00:06:01.879 --> 00:06:05.073
justifications for an
upward sloping aggregate

00:06:05.073 --> 00:06:06.999
supply curve.

00:06:06.999 --> 00:06:09.331
The first one is often
called the misperception

00:06:09.331 --> 00:06:13.246
theory; let me write it in white.

00:06:13.246 --> 00:06:19.740
It's the misperception
theory and it kind of makes

00:06:19.740 --> 00:06:21.534
sense to me that if the
aggregate; let's think

00:06:21.534 --> 00:06:23.709
about a situation where
the aggregate prices are

00:06:23.709 --> 00:06:24.962
going up.

00:06:24.962 --> 00:06:26.674
Aggregate prices are going up.

00:06:26.674 --> 00:06:28.545
If I'm an individual
actor there, maybe I run

00:06:28.545 --> 00:06:31.735
a firm of some kind, I
might not notice immediately

00:06:31.735 --> 00:06:34.134
that it's aggregate
prices that are going up.

00:06:34.134 --> 00:06:36.473
I might just think that
prices for my goods or

00:06:36.473 --> 00:06:37.871
services are going up.

00:06:37.871 --> 00:06:39.795
I might think that it's actually a micro

00:06:39.795 --> 00:06:42.039
economic phenomenon going on.

00:06:42.039 --> 00:06:45.287
I'm misperceiving it
as a micro phenomenon.

00:06:45.287 --> 00:06:48.379
That's something that's
going on in my market.

00:06:48.379 --> 00:06:51.409
If I think and this goes
back to the micro economics,

00:06:51.409 --> 00:06:53.936
if I think that prices for
my goods and services are

00:06:53.936 --> 00:06:55.763
going up relative to others and remember

00:06:55.763 --> 00:06:57.003
this is a misperception,

00:06:57.003 --> 00:06:59.165
all prices are going up,
but if I think this is

00:06:59.165 --> 00:07:01.407
happening in the short run then the law of

00:07:01.407 --> 00:07:03.120
supply kicks in.

00:07:03.120 --> 00:07:06.944
Then the law of supply kicks in which is a

00:07:06.944 --> 00:07:09.243
micro economic concept that if I feel that

00:07:09.243 --> 00:07:11.913
real prices - And it's
not real prices. It's

00:07:11.913 --> 00:07:13.337
actually nominal prices
- but if I think my

00:07:13.337 --> 00:07:17.852
relative prices are
increasing, I'm motivated

00:07:17.852 --> 00:07:18.803
to produce more.

00:07:18.803 --> 00:07:21.080
I think I'm going to be more profitable.

00:07:21.080 --> 00:07:22.408
It only takes a little
bit of time for me to

00:07:22.408 --> 00:07:24.797
realize that all my costs are going up,

00:07:24.797 --> 00:07:26.337
what I can purchase
with my profits are all

00:07:26.337 --> 00:07:27.408
going up.

00:07:27.408 --> 00:07:29.492
In real terms, I'm actually
not getting any better

00:07:29.492 --> 00:07:32.756
and then I'll probably
settle in back to my

00:07:32.756 --> 00:07:34.310
regular level of productivity.

00:07:34.310 --> 00:07:37.087
While I think people are
demanding more of Sal's

00:07:37.087 --> 00:07:39.076
sprockets or whatever
I'm seeing, I'll start

00:07:39.076 --> 00:07:40.157
working over time.

00:07:40.157 --> 00:07:43.939
I might want to hire more
people, run the factories

00:07:43.939 --> 00:07:47.736
beyond even a level that
I might defer maintenance

00:07:47.736 --> 00:07:49.913
so that I can run the
factories longer and all

00:07:49.913 --> 00:07:51.823
the rest, but then over
time I'm going to realize

00:07:51.823 --> 00:07:54.202
that I was just misperceiving things.

00:07:54.202 --> 00:07:55.540
Everything has gotten more expensive.

00:07:55.540 --> 00:07:58.210
I'm not making in real
terms an outsized profit

00:07:58.210 --> 00:07:59.141
right now.

00:07:59.141 --> 00:08:04.464
Then my level of productivity
might actually go back.

00:08:04.464 --> 00:08:06.954
When I talk about me,
it's not me by myself

00:08:06.954 --> 00:08:08.705
that's moving this whole economy.

00:08:08.705 --> 00:08:10.343
Remember I'm just talking
about one actor, but this

00:08:10.343 --> 00:08:13.141
might be true of many,
many, many actors in

00:08:13.141 --> 00:08:15.547
acting in aggregate so
as a whole, they might

00:08:15.547 --> 00:08:18.062
want to increase productivity
and then when they

00:08:18.062 --> 00:08:19.871
realize that in real
terms they're actually not

00:08:19.871 --> 00:08:22.379
making any more money and that this isn't

00:08:22.379 --> 00:08:24.820
sustainable, they'll go
back to their natural

00:08:24.820 --> 00:08:26.542
level of output.

00:08:26.542 --> 00:08:28.856
The other theory that you'll read about in

00:08:28.856 --> 00:08:31.460
economic textbooks, another
theory or explanation

00:08:31.460 --> 00:08:33.809
or justification why
we would have an upward

00:08:33.809 --> 00:08:37.685
sloping aggregate supply
curve in the short run

00:08:37.685 --> 00:08:40.913
is sometimes it's called
the sticky wages theory.

00:08:40.913 --> 00:08:42.802
Sticky wages.

00:08:42.802 --> 00:08:47.204
I like to extend it to sticky cost theory.

00:08:47.204 --> 00:08:49.075
Sometimes they'll
articulate a separate one

00:08:49.075 --> 00:08:51.672
called sticky prices,
but in my mind these are

00:08:51.672 --> 00:08:54.538
all very similar, so sticky
wages, sticky costs and

00:08:54.538 --> 00:08:55.631
sticky prices.

00:08:55.631 --> 00:08:58.539
Sticky, sticky prices.

00:08:58.539 --> 00:09:01.906
It's the general idea
that even if in aggregate

00:09:01.906 --> 00:09:04.008
prices are increasing,
so in the whole economy

00:09:04.008 --> 00:09:06.881
prices are increasing, in
all parts of the economy

00:09:06.881 --> 00:09:09.209
they all won't increase at the same rate.

00:09:09.209 --> 00:09:10.361
There are parts of the economy

00:09:10.361 --> 00:09:13.045
where the prices might
be stickier than other

00:09:13.045 --> 00:09:14.660
places and there's multiple reasons why

00:09:14.660 --> 00:09:15.960
prices could be sticky.

00:09:15.960 --> 00:09:19.343
You could have wage
contracts or people might

00:09:19.343 --> 00:09:21.745
just be slow to realize
prices are going up

00:09:21.745 --> 00:09:23.951
and then renegotiating their contracts.

00:09:23.951 --> 00:09:28.142
You might have long term
agreements with suppliers

00:09:28.142 --> 00:09:30.741
that you're going to
pay a fixed price over

00:09:30.741 --> 00:09:31.998
some period of time.

00:09:31.998 --> 00:09:33.378
You've already agreed for the next year

00:09:33.378 --> 00:09:35.227
to pay it so even if aggregate prices

00:09:35.227 --> 00:09:37.076
are going up, it's
going to take a while in

00:09:37.076 --> 00:09:39.929
different parts of the
economy, for contracts

00:09:39.929 --> 00:09:42.595
or for transactions in
those parts of the economy,

00:09:42.595 --> 00:09:44.136
to actually reflect those things.

00:09:44.136 --> 00:09:47.071
Another reason why in
parts of the economy you

00:09:47.071 --> 00:09:50.073
might not have everything
move in tandem or

00:09:50.073 --> 00:09:52.469
everything move as quickly
as you would expect

00:09:52.469 --> 00:09:56.171
is because of something called menu costs.

00:09:56.171 --> 00:09:58.543
Menu costs.

00:09:58.543 --> 00:10:01.421
Menu costs are just the
idea that if prices are

00:10:01.421 --> 00:10:05.473
changing, if prices move
up in the next hour 5%,

00:10:05.473 --> 00:10:07.877
it's not actually trivial to increase your

00:10:07.877 --> 00:10:09.730
prices by 5%.

00:10:09.730 --> 00:10:11.543
For example, if you were
running a restaurant,

00:10:11.543 --> 00:10:14.139
you would have to reprint
new menus, so that's

00:10:14.139 --> 00:10:15.878
where the name comes from,
but it's not just true

00:10:15.878 --> 00:10:17.548
of a restaurant; it's true of anything.

00:10:17.548 --> 00:10:20.660
It would be true if you're
any type of supplier.

00:10:20.660 --> 00:10:23.179
You would have to change your brochures.

00:10:23.179 --> 00:10:24.469
You might have to change
your computer systems.

00:10:24.469 --> 00:10:26.672
You have to do a ton of
things to actually make

00:10:26.672 --> 00:10:29.129
things; you have to tell your sales force

00:10:29.129 --> 00:10:30.870
how the pricing might be different.

00:10:30.870 --> 00:10:32.742
There's a ton of things
that you have to do to

00:10:32.742 --> 00:10:34.135
actually change costs.

00:10:34.135 --> 00:10:36.860
These menu costs actually
might slow down the

00:10:36.860 --> 00:10:39.140
ability for all prices to move in tandem.

00:10:39.140 --> 00:10:41.852
Some of them will be
stickier than others and

00:10:41.852 --> 00:10:44.938
the reason why this is can be a rationale

00:10:44.938 --> 00:10:47.544
for an upward sloping
aggregate supply curve

00:10:47.544 --> 00:10:49.958
in the short run is if I'm in one of these

00:10:49.958 --> 00:10:54.030
industries, let's say
my sales I am able to

00:10:54.030 --> 00:10:56.666
raise the prices but
let's say the wages and my

00:10:56.666 --> 00:10:57.388
costs are sticky.

00:10:57.388 --> 00:10:59.880
I've already got into a
long term wage contract

00:10:59.880 --> 00:11:04.071
and all my suppliers
can't raise their prices

00:11:04.071 --> 00:11:07.531
as fast, so in the short
run I'm going to say gee,

00:11:07.531 --> 00:11:09.081
I'm making a lot of profit now.

00:11:09.081 --> 00:11:12.070
Even in real terms
because my costs are being

00:11:12.070 --> 00:11:14.296
relatively sticky, while
the money that's coming

00:11:14.296 --> 00:11:17.404
in the door I'm able
to raise the prices so

00:11:17.404 --> 00:11:18.545
I'm going to produce more.

00:11:18.545 --> 00:11:20.007
I'm going to run the factories longer.

00:11:20.007 --> 00:11:21.742
Maybe I'll defer maintenance so that I can

00:11:21.742 --> 00:11:23.014
produce more.

00:11:23.014 --> 00:11:25.539
Maybe I'll try to hire
more people under these

00:11:25.539 --> 00:11:26.284
agreements.

00:11:26.284 --> 00:11:28.706
Maybe I'll try to buy
more goods and services

00:11:28.706 --> 00:11:30.906
under these long term costs.

00:11:30.906 --> 00:11:32.470
The reason why I say
these are really the same

00:11:32.470 --> 00:11:35.693
side of the same coin
is you can imagine here

00:11:35.693 --> 00:11:41.374
you have company A that
is able to increase

00:11:41.374 --> 00:11:44.402
its prices so its revenue
starts going up and

00:11:44.402 --> 00:11:47.403
let's say its supplier is company B.

00:11:47.403 --> 00:11:50.961
It's company B and this
right over here is sticky.

00:11:50.961 --> 00:11:52.681
This is sticky.

00:11:52.681 --> 00:11:55.338
Maybe A buys lemons from B and then sells

00:11:55.338 --> 00:11:56.128
lemonade.

00:11:56.128 --> 00:11:57.669
It's able to raise the price of lemonade,

00:11:57.669 --> 00:12:00.140
but it has a fixed price
contract on the lemons

00:12:00.140 --> 00:12:00.903
in the short run.

00:12:00.903 --> 00:12:03.460
Eventually that will expire,
in the long run B will

00:12:03.460 --> 00:12:05.953
be able to renegotiate it upwards.

00:12:05.953 --> 00:12:07.944
A's costs are sticky, but this is B's

00:12:07.944 --> 00:12:09.268
prices are sticky.

00:12:09.268 --> 00:12:12.140
These are really the same
thing that one's costs

00:12:12.140 --> 00:12:15.000
are really the other's prices.


Long-run aggregate supply

WEBVTT
Kind: captions
Language: en

00:00:00.567 --> 00:00:02.156
Narrator: We've talked a lot about

00:00:02.156 --> 00:00:04.781
aggregate demand over the last few videos,

00:00:04.781 --> 00:00:06.354
so in this video, I thought I would talk

00:00:06.354 --> 00:00:08.902
a little bit about aggregate supply.

00:00:08.902 --> 00:00:10.447
In particular, we're going to think about

00:00:10.447 --> 00:00:12.993
aggregate supply in the long-run.

00:00:12.993 --> 00:00:15.556
In economics, whether
it's in micro or macro

00:00:15.556 --> 00:00:17.132
economics, when we think about long-run,

00:00:17.132 --> 00:00:19.017
we're thinking about
enough time for a lot of

00:00:19.017 --> 00:00:22.419
fixed costs and a lot of
fixed contracts to expire.

00:00:22.419 --> 00:00:24.407
In the short-term, you
might be stuck into some

00:00:24.407 --> 00:00:28.033
labor contract, or stuck
into your using some factory

00:00:28.033 --> 00:00:30.551
that you've already paid
money for, so it was a fixed

00:00:30.551 --> 00:00:33.269
cost, but over the long-run
you'll have a chance that

00:00:33.269 --> 00:00:34.860
factory will wear down
and you'll have a chance

00:00:34.860 --> 00:00:36.590
to decide whether you
want another factory or

00:00:36.590 --> 00:00:38.120
the price of the factory might change;

00:00:38.120 --> 00:00:39.813
or in the long-run, you'll have a chance

00:00:39.813 --> 00:00:41.681
contracts will expire,
and you'll have a chance

00:00:41.681 --> 00:00:44.164
to renegotiate those
contracts at a new price.

00:00:44.164 --> 00:00:45.931
That's what we really mean

00:00:45.931 --> 00:00:47.839
when we talk about the long-run.

00:00:47.839 --> 00:00:51.456
I'm going to plot aggregate
supply on the same axis

00:00:51.456 --> 00:00:54.155
as we plotted aggregate
demand, and we're going

00:00:54.155 --> 00:00:55.777
to focus on the long-run
now, and then we're going

00:00:55.777 --> 00:00:57.107
to think about what
actually might happen in the

00:00:57.107 --> 00:01:00.258
short-run while we are
in fixed-price contracts,

00:01:00.258 --> 00:01:02.065
or we already have spent
money on something,

00:01:02.065 --> 00:01:04.433
or we have already, in
some ways, there are sticky

00:01:04.433 --> 00:01:06.598
things that can't adjust as quickly.

00:01:06.598 --> 00:01:08.500
But, we'll first focus on the long-run.

00:01:08.500 --> 00:01:10.202
On this axis, I'm just
going to plot price, and

00:01:10.202 --> 00:01:12.797
remember, we're thinking
in macro-economic terms.

00:01:12.797 --> 00:01:15.387
This is some measure of the prices

00:01:15.387 --> 00:01:17.762
of the goods and services in our economy.

00:01:17.762 --> 00:01:19.322
This axis right over here,

00:01:19.322 --> 00:01:24.685
the horizontal axis is
going to be real GDP.

00:01:24.685 --> 00:01:26.401
Once again, this is just
a model, you should take

00:01:26.401 --> 00:01:29.639
everything in economics
with a huge grain of salt.

00:01:29.639 --> 00:01:31.803
These are over-simplifications
of a highly,

00:01:31.803 --> 00:01:33.838
highly complex thing, the economy.

00:01:33.838 --> 00:01:35.154
Millions and millions of actors doing

00:01:35.154 --> 00:01:37.513
complex things, human
beings, each of them and

00:01:37.513 --> 00:01:39.749
their brain have billions
and billions and billions

00:01:39.749 --> 00:01:42.534
of neurons, doing all sorts
of unpredictable things.

00:01:42.534 --> 00:01:43.755
But economists like to make

00:01:43.755 --> 00:01:46.818
really simplifying,
super-simplifying assumptions,

00:01:46.818 --> 00:01:49.425
so that we can deal with
it in a attractable way,

00:01:49.425 --> 00:01:51.846
and in a even dealing
in a mathematical way.

00:01:51.846 --> 00:01:54.608
The assumtion that economists often make

00:01:54.608 --> 00:01:56.123
when we think about aggregate supply

00:01:56.123 --> 00:01:57.781
and aggregate demand is, in the long-run,

00:01:57.781 --> 00:02:00.686
real GDP actually does
not depend on prices

00:02:00.686 --> 00:02:03.175
in the long-run; so, what you have is,

00:02:03.175 --> 00:02:04.967
regardless of what the
price is, you're going

00:02:04.967 --> 00:02:06.815
to have the same real GDP.

00:02:06.815 --> 00:02:09.709
You can view this as a natural level

00:02:09.709 --> 00:02:11.712
of productivity for the economy.

00:02:11.712 --> 00:02:13.641
This is some level right over here.

00:02:13.641 --> 00:02:15.003
It's important to realize this is just

00:02:15.003 --> 00:02:18.263
a snap shot in time, and this
is all else things equal,

00:02:18.263 --> 00:02:20.579
so we're not assuming that
we're having changes in

00:02:20.579 --> 00:02:24.196
productivity overtime;
this is just a snap shot if

00:02:24.196 --> 00:02:26.127
we did have any of those
things that change.

00:02:26.127 --> 00:02:30.125
For example, if the population
increased, then that

00:02:30.125 --> 00:02:33.725
would cause this level to
shift to the right, then

00:02:33.725 --> 00:02:36.446
we would have a higher
natural level of productivity.

00:02:36.446 --> 00:02:39.354
If, for whatever reason, we
were able to create tools

00:02:39.354 --> 00:02:42.391
so that it was easier to
find people jobs, there's

00:02:42.391 --> 00:02:44.688
always a natural rate of unemployment.

00:02:44.688 --> 00:02:46.502
There's frictions, people
have to look for jobs,

00:02:46.502 --> 00:02:48.702
some people have to retrain
to get their skills,

00:02:48.702 --> 00:02:50.573
but maybe we improve
that in some way so that

00:02:50.573 --> 00:02:52.614
there's some website
where people can find jobs

00:02:52.614 --> 00:02:54.728
easier, or easier ways to train for jobs,

00:02:54.728 --> 00:02:56.365
and the natural level of
unemployment goes down,

00:02:56.365 --> 00:02:58.050
more people can produce, that would also

00:02:58.050 --> 00:03:00.257
shift this curve to the right.

00:03:00.257 --> 00:03:02.603
You could have a reality where there's

00:03:02.603 --> 00:03:06.043
technological improvements
that would also,

00:03:06.043 --> 00:03:07.358
and then all of a sudden, on an average,

00:03:07.358 --> 00:03:09.006
people would become more productive;

00:03:09.006 --> 00:03:10.817
that could shift things to the right.

00:03:10.817 --> 00:03:13.224
You could have discovery
of natural resources,

00:03:13.224 --> 00:03:15.830
new land that is super
fertile, and everything else;

00:03:15.830 --> 00:03:18.083
that could also shift things to the right.

00:03:18.083 --> 00:03:20.967
You could have a war, and maybe your

00:03:20.967 --> 00:03:25.651
factories get bombed, or
bad things happen in a war,

00:03:25.651 --> 00:03:27.954
especially if the war is on your soil,

00:03:27.954 --> 00:03:32.210
and that could actually
shift things to the left.

00:03:32.210 --> 00:03:33.917
So, it's important to realize
that this is just taking

00:03:33.917 --> 00:03:35.552
a snap shot in time, and a lot of these

00:03:35.552 --> 00:03:37.489
other things that we
think about would just

00:03:37.489 --> 00:03:41.579
shift it in 1 direction or another.

00:03:41.579 --> 00:03:44.454
I'm going to leave you
there, and this is a kind of

00:03:44.454 --> 00:03:46.278
it might not seem
intuitive at first, because

00:03:46.278 --> 00:03:48.517
you're saying, "Wait, look,
if prices were to change

00:03:48.517 --> 00:03:50.062
dramatically, if all of a
sudden everything in the

00:03:50.062 --> 00:03:52.387
economy got twice as
expensive, that would have

00:03:52.387 --> 00:03:54.901
some impact on peoples'
minds and that they would

00:03:54.901 --> 00:03:58.696
behave differently and all
the rest, and that might

00:03:58.696 --> 00:04:01.182
affect how much they can produce."

00:04:01.182 --> 00:04:02.264
We did think a little
about that when we thought

00:04:02.264 --> 00:04:04.130
about aggregate demand, but when we think

00:04:04.130 --> 00:04:06.018
about aggregate supply,
we're just thinking

00:04:06.018 --> 00:04:07.859
about their capability to produce.

00:04:07.859 --> 00:04:09.317
We're saying all else equal.

00:04:09.317 --> 00:04:10.735
We're saying that peoples'
mind-shifts aren't

00:04:10.735 --> 00:04:13.948
changing, their willingness
to work isn't changing,

00:04:13.948 --> 00:04:16.330
nothing else is changing,
technology isn't changing.

00:04:16.330 --> 00:04:19.267
Given that, price really
is just a numeric thing.

00:04:19.267 --> 00:04:20.930
If you just looked at the resources

00:04:20.930 --> 00:04:23.125
and the productive
capability of a country,

00:04:23.125 --> 00:04:25.632
the factors of production,
the people and all the rest,

00:04:25.632 --> 00:04:28.980
regardless of what the
prices are, they in theory,

00:04:28.980 --> 00:04:30.788
should be able to produce the same level

00:04:30.788 --> 00:04:33.861
of goods and services.


Shifts in aggregate demand

WEBVTT
Kind: captions
Language: en

00:00:00.337 --> 00:00:02.535
In the last video, we
started thinking a little bit

00:00:02.535 --> 00:00:05.002
about the aggregate demand curve

00:00:05.002 --> 00:00:07.623
and why it might be downward sloping

00:00:07.623 --> 00:00:09.936
and we actually reviewed
some of the possible

00:00:09.936 --> 00:00:12.470
justifications for a downwards sloping

00:00:12.470 --> 00:00:14.736
aggregate demand curve, the wealth affect.

00:00:14.736 --> 00:00:16.336
Remember, all other things equal.

00:00:16.336 --> 00:00:18.470
We're not talking about
changing the amount of money

00:00:18.470 --> 00:00:20.442
in people's pockets or
changing their outlook

00:00:20.442 --> 00:00:22.207
or changing their jobs or changing

00:00:22.207 --> 00:00:23.671
the level of investment, we're just saying

00:00:23.671 --> 00:00:26.275
if prices were to just go down,

00:00:26.275 --> 00:00:28.670
all of a sudden people would
have ... They'd feel richer

00:00:28.670 --> 00:00:30.405
because they could buy
more with what they have

00:00:30.405 --> 00:00:33.206
and so they might ... They
might want to buy more,

00:00:33.206 --> 00:00:34.623
demand more and so those things

00:00:34.623 --> 00:00:38.736
would have to be produced
and so real GDP would go up.

00:00:38.736 --> 00:00:40.874
Real GDP would go up and
that was the Wealth Affect

00:00:40.874 --> 00:00:42.605
and likewise if prices went up,

00:00:42.605 --> 00:00:43.873
the opposite would happen.

00:00:43.873 --> 00:00:45.804
People would have less money or

00:00:45.804 --> 00:00:47.136
they would have the same amount of money

00:00:47.136 --> 00:00:49.039
in their pockets, but they
could buy less with it

00:00:49.039 --> 00:00:50.470
and so they would demand less

00:00:50.470 --> 00:00:54.328
and real GDP would go ... real GDP,

00:00:54.328 --> 00:00:55.955
real GDP would go down.

00:00:55.955 --> 00:00:59.137
The other factor or justification
I should really say,

00:00:59.137 --> 00:01:01.206
because these are really
just theories so you should

00:01:01.206 --> 00:01:03.002
view them with huge grains of salt,

00:01:03.002 --> 00:01:06.110
is that if prices ... If
the general level of prices

00:01:06.110 --> 00:01:08.938
were to go down, then
interest rates would go down

00:01:08.938 --> 00:01:10.270
and if interest rates would go down,

00:01:10.270 --> 00:01:11.469
there would be more investments.

00:01:11.469 --> 00:01:14.742
So prices go down, more
investment. GDP goes up.

00:01:14.742 --> 00:01:17.246
Prices go up. Interest rates would go up.

00:01:17.246 --> 00:01:20.635
Real GDP would shrink
and we would go over here

00:01:20.635 --> 00:01:22.873
and then the last one dealt with exports

00:01:22.873 --> 00:01:25.597
and that if general
price levels went down,

00:01:25.597 --> 00:01:27.041
both interest rates would go down

00:01:27.041 --> 00:01:29.719
and just things would be
cheaper in that country

00:01:29.719 --> 00:01:32.670
and so we might have more net exports.

00:01:32.670 --> 00:01:35.707
So once again, prices
go down. GDP expands.

00:01:35.707 --> 00:01:38.738
Prices go up. GDP ... GDP contracts.

00:01:38.738 --> 00:01:41.804
All of these are possible
theories or justification

00:01:41.804 --> 00:01:45.671
for a downward sloping
aggregate demand curve.

00:01:45.671 --> 00:01:47.822
What I want to do in
this video is think about

00:01:47.822 --> 00:01:49.271
what, all other things equal,

00:01:49.271 --> 00:01:52.540
what might cause the aggregate
demand curve to shift

00:01:52.540 --> 00:01:53.874
and how would it cause the

00:01:53.874 --> 00:01:55.605
aggregate command curve to shift?

00:01:55.605 --> 00:01:57.108
And to think about that,

00:01:57.108 --> 00:01:59.270
to think about what the
possible causes could be,

00:01:59.270 --> 00:02:01.594
we just have to think about
well, what are all of the things

00:02:01.594 --> 00:02:03.073
that make up GDP?

00:02:03.073 --> 00:02:06.069
And you might remember GDP and we use Y

00:02:06.069 --> 00:02:07.736
as the variable for GDP.

00:02:07.736 --> 00:02:13.142
It's equal to ... It's equal
to consumption plus investment

00:02:13.142 --> 00:02:17.873
plus government spending plus net exports

00:02:17.873 --> 00:02:19.404
and this is a pretty
good way to think about

00:02:19.404 --> 00:02:21.623
what are all the things that might shift

00:02:21.623 --> 00:02:23.624
the aggregate demand curve.

00:02:23.624 --> 00:02:26.039
First of all you could
think about consumption,

00:02:26.039 --> 00:02:27.707
if there was some factor that would cause

00:02:27.707 --> 00:02:29.289
consumption to increase.

00:02:29.289 --> 00:02:32.803
So maybe you have a ...
something like a tax cut.

00:02:32.803 --> 00:02:34.736
You have a tax cut and you don't have a

00:02:34.736 --> 00:02:36.941
corresponding government spending cut,

00:02:36.941 --> 00:02:38.136
so essentially the
government would have to.

00:02:38.136 --> 00:02:40.070
If the government is already
spending all the money it has,

00:02:40.070 --> 00:02:42.874
it would probably have
to go in to debt to allow

00:02:42.874 --> 00:02:45.373
this tax cut to happen,
but if you had this tax cut

00:02:45.373 --> 00:02:46.938
all of a sudden people
would have more money

00:02:46.938 --> 00:02:50.213
in their pockets and they
might be able to demand more.

00:02:50.213 --> 00:02:52.138
That would cause ... that would cause

00:02:52.138 --> 00:02:55.671
consumption to go up and it
would make ... it would make

00:02:55.671 --> 00:02:58.026
aggregate ... aggregate productivity or

00:02:58.026 --> 00:02:59.596
aggregate demand go up.

00:02:59.596 --> 00:03:02.737
So if you have a tax cut,
something like that for consumers,

00:03:02.737 --> 00:03:05.070
that might shift aggregate
demand to the right

00:03:05.070 --> 00:03:06.589
at any given level of prices,

00:03:06.589 --> 00:03:08.371
people are going to demand more.

00:03:08.371 --> 00:03:11.675
Likewise, if you had a tax
increase and that tax increase

00:03:11.675 --> 00:03:14.004
wasn't ... also didn't have
more government spending,

00:03:14.004 --> 00:03:15.957
then aggregate demand
would go the other way.

00:03:15.957 --> 00:03:18.911
So tax cut, it would shift
to the right for people.

00:03:18.911 --> 00:03:21.138
If there was a tax increase,
all other things equal,

00:03:21.138 --> 00:03:24.471
it would probably shift to the
left, if you believe this model.

00:03:24.471 --> 00:03:25.802
Likewise, investment.

00:03:25.802 --> 00:03:29.527
Maybe government ... Maybe the government

00:03:29.527 --> 00:03:32.206
allows all of a sudden
companies to write-off

00:03:32.206 --> 00:03:34.472
investments that they make
this year or there are some

00:03:34.472 --> 00:03:37.123
tax benefit from making
investments in this year

00:03:37.123 --> 00:03:41.039
and so you could have situations
where for whatever reason

00:03:41.039 --> 00:03:43.670
investment ... investment were
to go up or it could just be

00:03:43.670 --> 00:03:46.823
a natural ... There might be
a newly discovered industry

00:03:46.823 --> 00:03:49.070
where all of a sudden or
resources that people start

00:03:49.070 --> 00:03:52.539
investing in to find that
thing and once again that would

00:03:52.539 --> 00:03:56.137
cause aggregate GDP to
go up, more investment.

00:03:56.137 --> 00:03:57.956
And then the third piece of this,

00:03:57.956 --> 00:04:00.206
we have the direct government.

00:04:00.206 --> 00:04:01.736
We have the government right over here.

00:04:01.736 --> 00:04:03.206
So if the government says,

00:04:03.206 --> 00:04:06.394
"Hey, maybe ... Maybe
we're going to incur",

00:04:06.394 --> 00:04:08.096
assuming they're already
spending as much money

00:04:08.096 --> 00:04:09.520
as they have or maybe more than they have,

00:04:09.520 --> 00:04:11.815
"We're going to incur
even more ... even more

00:04:11.815 --> 00:04:14.289
"debt to ... to spend more money."

00:04:14.289 --> 00:04:16.603
So if government spending were to go up,

00:04:16.603 --> 00:04:17.784
If government spending were to go up,

00:04:17.784 --> 00:04:20.069
that would also shift the
demand curve to the right

00:04:20.069 --> 00:04:22.206
and all other things equal,
if government spending were

00:04:22.206 --> 00:04:25.471
to go down that might shift
demand curve to the left

00:04:25.471 --> 00:04:27.337
and the last one and this might be

00:04:27.337 --> 00:04:28.873
a little bit common sense to you.

00:04:28.873 --> 00:04:31.707
If for whatever reason, maybe
our country all of a sudden

00:04:31.707 --> 00:04:34.776
produces some goods and services
that the rest of the world

00:04:34.776 --> 00:04:37.802
really, really, really values.
They can't produce it themselves

00:04:37.802 --> 00:04:39.804
and that net exports were to go up,

00:04:39.804 --> 00:04:42.069
if net exports were to go
up, that means more people

00:04:42.069 --> 00:04:44.789
in other countries are buying
our goods and services,

00:04:44.789 --> 00:04:47.706
then that, too, would cause
aggregate demand to go up

00:04:47.706 --> 00:04:50.206
or on the other hand, if all of
a sudden people in our country

00:04:50.206 --> 00:04:51.805
started saying, "Hey, we don't
want to buy the stuff that we"

00:04:51.805 --> 00:04:53.618
"produce. We want to buy
what the people on the other"

00:04:53.618 --> 00:04:54.956
"side of the ocean are producing."

00:04:54.956 --> 00:04:57.336
That would make aggregate demand go down.

00:04:57.336 --> 00:04:59.138
So to really think about
how aggregate demand shifts,

00:04:59.138 --> 00:05:02.105
you just have to really think
about the components of GDP

00:05:02.105 --> 00:05:06.804
and how different macro ...
macro things might impact

00:05:06.804 --> 00:05:08.873
those components of GDP and
those will tell you whether

00:05:08.873 --> 00:05:12.470
at a ... at a given level of
prices of goods and services

00:05:12.470 --> 00:05:15.438
in the economy whether it'll
shift demand to the right

00:05:15.438 --> 00:05:18.000
or to the left.


Aggregate demand

WEBVTT
Kind: captions
Language: en

00:00:00.673 --> 00:00:02.076
In this and the next few videos

00:00:02.076 --> 00:00:03.874
we're going to be
studying something called

00:00:03.874 --> 00:00:06.333
"aggregate supply" and "aggregate demand."

00:00:06.333 --> 00:00:07.405
Actually, we're going to start

00:00:07.405 --> 00:00:08.207
with aggregate demand

00:00:08.207 --> 00:00:10.739
and then start talking
about aggregate supply.

00:00:10.739 --> 00:00:13.075
We're going to think
about aggregate demand

00:00:13.075 --> 00:00:16.343
and aggregate, I'll rewrite the word,

00:00:16.343 --> 00:00:19.618
aggregate supply.

00:00:19.618 --> 00:00:20.810
What I really want to emphasize

00:00:20.810 --> 00:00:22.403
in this video is in a lot of ways,

00:00:22.403 --> 00:00:23.990
it's going to look similar to

00:00:23.990 --> 00:00:25.078
traditional supply and demand,

00:00:25.078 --> 00:00:26.621
but I want to emphasize that there's

00:00:26.621 --> 00:00:28.207
a very big difference between

00:00:28.207 --> 00:00:30.957
aggregate demand and traditional demand

00:00:30.957 --> 00:00:33.207
in a microeconomic context.

00:00:33.207 --> 00:00:34.959
Aggregate supply in a macroeconomic

00:00:34.959 --> 00:00:38.469
context and just regular supply

00:00:38.469 --> 00:00:40.468
in a microeconomic context.

00:00:40.468 --> 00:00:41.606
To think about that,

00:00:41.606 --> 00:00:43.803
let's go to the micro version.

00:00:43.803 --> 00:00:46.142
These are macroeconomics

00:00:46.142 --> 00:00:47.933
so we're looking at economy as a whole.

00:00:47.933 --> 00:00:51.472
These are macro ideas.

00:00:51.472 --> 00:00:52.455
To make that comparison,

00:00:52.455 --> 00:00:54.124
let's revisit the micro-,

00:00:54.124 --> 00:00:56.447
the microeconomics ideas of

00:00:56.447 --> 00:00:57.199
supply and demand.

00:00:57.199 --> 00:00:59.046
To do that, we can focus on

00:00:59.046 --> 00:01:00.454
a particular market.

00:01:00.454 --> 00:01:03.019
Maybe it's the market for candy bars,

00:01:03.019 --> 00:01:05.834
so this is the market for candy bars.

00:01:05.834 --> 00:01:07.813
We've seen this many, many, many times,

00:01:07.813 --> 00:01:08.994
this is most of what we were doing

00:01:08.994 --> 00:01:10.804
when we were studying microeconomics.

00:01:10.804 --> 00:01:12.991
On the vertical axis, we would

00:01:12.991 --> 00:01:14.860
plot the price per unit from

00:01:14.860 --> 00:01:16.584
the candy bar and the horizontal axis

00:01:16.584 --> 00:01:19.482
you would have the quantity bought or sold

00:01:19.482 --> 00:01:22.286
in the given amount of time.

00:01:22.286 --> 00:01:23.940
We saw that the demand curve

00:01:23.940 --> 00:01:25.859
tended to be downward sloping,

00:01:25.859 --> 00:01:27.949
it would look something like that.

00:01:27.949 --> 00:01:30.067
There was multiple ways to interpret this.

00:01:30.067 --> 00:01:32.806
One way to interpret this at a high price,

00:01:32.806 --> 00:01:35.697
people would say, "Why should I buy this

00:01:35.697 --> 00:01:36.794
candy bar? I could buy other things

00:01:36.794 --> 00:01:38.531
with that money that would make me

00:01:38.531 --> 00:01:39.863
just as happy or happier."

00:01:39.863 --> 00:01:42.447
So they would purchase
a low quantity of it.

00:01:42.447 --> 00:01:46.026
At a low price, this is a low price

00:01:46.026 --> 00:01:47.023
right over here, people say,

00:01:47.023 --> 00:01:48.325
"This is a pretty good deal. I can get

00:01:48.325 --> 00:01:50.008
candy bars, they're so cheap,

00:01:50.008 --> 00:01:51.280
I can buy a bunch of them.

00:01:51.280 --> 00:01:52.610
Instead of buying other
things, instead of buying

00:01:52.610 --> 00:01:55.523
lollipops and ice cream,
I'll buy candy bars,"

00:01:55.523 --> 00:01:57.530
then they'll buy a high quantity of it.

00:01:57.530 --> 00:01:58.590
So that's one way to interpret it.

00:01:58.590 --> 00:01:59.614
The other way to interpret it was

00:01:59.614 --> 00:02:01.393
as essentially as a
marginal benefit curve.

00:02:01.393 --> 00:02:03.867
That very first few units of candy bars

00:02:03.867 --> 00:02:06.095
to get produced, there's someone there

00:02:06.095 --> 00:02:08.114
who just loves candy bars so much

00:02:08.114 --> 00:02:09.647
there's a high willingness to pay for it.

00:02:09.647 --> 00:02:11.854
There's a high benefit
for those first few units.

00:02:11.854 --> 00:02:13.719
As you have more and more units,

00:02:13.719 --> 00:02:15.522
the incremental benefit to the market

00:02:15.522 --> 00:02:16.609
gets less and less.

00:02:16.609 --> 00:02:18.153
You can view as they are people who

00:02:18.153 --> 00:02:20.446
still like candy bars, but not as much

00:02:20.446 --> 00:02:22.658
as the people who bought
those first few units.

00:02:22.658 --> 00:02:26.514
That is why you have a
downward sloping curve.

00:02:26.514 --> 00:02:29.595
When we think about aggregate demand,

00:02:29.595 --> 00:02:30.985
it's going to look very similar,

00:02:30.985 --> 00:02:33.590
but the idea is a good bit different.

00:02:33.590 --> 00:02:36.650
I'll do it in a different color

00:02:36.650 --> 00:02:38.153
to show that it's different.

00:02:38.153 --> 00:02:39.320
Now we're in the macro version.

00:02:39.320 --> 00:02:42.067
We're talking about aggregate demand.

00:02:42.067 --> 00:02:44.180
Aggregate demand.

00:02:44.180 --> 00:02:45.665
The first thing to realize is we're

00:02:45.665 --> 00:02:46.852
talking about aggregate demand.

00:02:46.852 --> 00:02:47.733
We're going to be thinking about

00:02:47.733 --> 00:02:48.612
the economy as a whole.

00:02:48.612 --> 00:02:49.717
We're not just thinking about

00:02:49.717 --> 00:02:52.191
the market for just one good or service.

00:02:52.191 --> 00:02:54.936
In aggregate demand, what we do is

00:02:54.936 --> 00:02:57.448
we plot on the horizontal
axis, not quantity,

00:02:57.448 --> 00:02:59.219
not just the quantity bought or sold

00:02:59.219 --> 00:03:01.022
of one good or service
in an amount of time,

00:03:01.022 --> 00:03:04.010
we plot the actual production of

00:03:04.010 --> 00:03:06.150
the economy in a given period of time.

00:03:06.150 --> 00:03:07.731
We've already studied that.

00:03:07.731 --> 00:03:09.356
The actual production of the economy

00:03:09.356 --> 00:03:12.205
in a given period of time is real GDP.

00:03:12.205 --> 00:03:16.252
We plot, on this axis, real GDP,

00:03:16.252 --> 00:03:17.998
so it's really how much are we producing?

00:03:17.998 --> 00:03:19.669
I guess there is an analogy to quantity,

00:03:19.669 --> 00:03:21.010
it's kind of the quantity of the

00:03:21.010 --> 00:03:23.124
productivity of the economy.

00:03:23.124 --> 00:03:25.122
In this axis right over here,

00:03:25.122 --> 00:03:26.921
we plot price level.

00:03:26.921 --> 00:03:28.854
This is prices.

00:03:28.854 --> 00:03:33.004
This isn't prices for one good or service,

00:03:33.004 --> 00:03:34.455
this isn't just a price for candy bars,

00:03:34.455 --> 00:03:37.856
this is the general level of prices

00:03:37.856 --> 00:03:39.600
in the economy.

00:03:39.600 --> 00:03:41.060
Maybe you're saying
it's a weighted average

00:03:41.060 --> 00:03:41.982
or however you want to measure it,

00:03:41.982 --> 00:03:44.289
some way of measuring the level

00:03:44.289 --> 00:03:45.690
of prices and economy.

00:03:45.690 --> 00:03:47.250
What we will see is this is a

00:03:47.250 --> 00:03:49.260
downward sloping curve.

00:03:49.260 --> 00:03:51.120
It does look like this.

00:03:51.120 --> 00:03:53.984
It will look something like this or

00:03:53.984 --> 00:03:56.927
we can assume, we actually don't know

00:03:56.927 --> 00:03:58.051
whether it definitely looks like that,

00:03:58.051 --> 00:04:00.220
but economists will tell
you it looks like that

00:04:00.220 --> 00:04:02.262
based on certain theories.

00:04:02.262 --> 00:04:03.191
They like it this way because

00:04:03.191 --> 00:04:04.134
it starts to explain,

00:04:04.134 --> 00:04:05.520
based on their models,

00:04:05.520 --> 00:04:06.682
and you can kind of separate out

00:04:06.682 --> 00:04:08.461
the emotional aspects of economics,

00:04:08.461 --> 00:04:10.856
it is one way of potentially

00:04:10.856 --> 00:04:12.475
explaining economic cycles,

00:04:12.475 --> 00:04:13.866
although if you know from the last video

00:04:13.866 --> 00:04:16.356
I'm actually a stronger believer in

00:04:16.356 --> 00:04:17.853
the emotional aspects of it.

00:04:17.853 --> 00:04:19.686
But it will be downward sloping.

00:04:19.686 --> 00:04:23.719
It will be downward sloping like this.

00:04:23.719 --> 00:04:25.583
Once again, this is one product,

00:04:25.583 --> 00:04:27.118
goods or service right over here.

00:04:27.118 --> 00:04:28.856
This is the economy as a whole.

00:04:28.856 --> 00:04:30.456
This is just a general level of prices.

00:04:30.456 --> 00:04:33.788
This is the actual
productivity of the economy.

00:04:33.788 --> 00:04:36.008
This is saying, and it's
a little unintuitive

00:04:36.008 --> 00:04:39.960
at first, that if prices are high,

00:04:39.960 --> 00:04:41.787
it's seldom this extreme, it's not like

00:04:41.787 --> 00:04:43.285
the GDP would go to zero,

00:04:43.285 --> 00:04:45.544
but we'll just assume it's simplified

00:04:45.544 --> 00:04:46.730
like this ... Maybe I'll draw it with

00:04:46.730 --> 00:04:47.719
something like this ...

00:04:47.719 --> 00:04:49.386
Maybe I'll have it something like,

00:04:49.386 --> 00:04:51.226
maybe draw it something like that

00:04:51.226 --> 00:04:52.465
so I don't have to make the extreme

00:04:52.465 --> 00:04:53.895
statement that if prices
are at some level,

00:04:53.895 --> 00:04:55.501
that there will be no GDP.

00:04:55.501 --> 00:04:57.720
Generally saying if prices are high,

00:04:57.720 --> 00:05:00.927
GDP will contract and remember,

00:05:00.927 --> 00:05:04.246
ceteris paribus, all other things equal,

00:05:04.246 --> 00:05:07.986
if prices are low, GDP will expand.

00:05:07.986 --> 00:05:09.542
It's happening for completely different

00:05:09.542 --> 00:05:11.674
reasons than this downward sloping.

00:05:11.674 --> 00:05:13.124
This downward sloping is essentially

00:05:13.124 --> 00:05:14.070
a substitution effect.

00:05:14.070 --> 00:05:16.205
When prices are high, people say,

00:05:16.205 --> 00:05:17.462
"I don't need to buy candy bars.

00:05:17.462 --> 00:05:19.130
I can go buy ice cream or Slurpees

00:05:19.130 --> 00:05:20.589
or Slushees or something else

00:05:20.589 --> 00:05:22.475
that makes me happy," or

00:05:22.475 --> 00:05:24.429
and when prices are low, they say,

00:05:24.429 --> 00:05:25.661
"Let me substitute candy bars for

00:05:25.661 --> 00:05:26.934
other things because I'm getting a good

00:05:26.934 --> 00:05:29.131
deal on candy bars."

00:05:29.131 --> 00:05:31.248
Over here that is not what is happening.

00:05:31.248 --> 00:05:32.939
What's happening here,
and there's a couple

00:05:32.939 --> 00:05:36.411
of theories why economists will justify

00:05:36.411 --> 00:05:39.423
a downward sloping aggregate demand curve,

00:05:39.423 --> 00:05:46.224
let me make this clear,
this is aggregate demand.

00:05:46.224 --> 00:05:47.469
This is essentially saying
how much productivity

00:05:47.469 --> 00:05:49.754
there will be in the economy as a function

00:05:49.754 --> 00:05:52.135
of price levels in the economy.

00:05:52.135 --> 00:05:54.073
This is aggregate demand ...

00:05:54.073 --> 00:05:56.382
And this is just demand right over here.

00:05:56.382 --> 00:05:58.804
There's three major theories why

00:05:58.804 --> 00:06:01.149
economists believe that
there is a downward

00:06:01.149 --> 00:06:03.910
sloping aggregate demand curve.

00:06:03.910 --> 00:06:06.651
The first is called the "wealth effect."

00:06:06.651 --> 00:06:08.022
Let me write these down.

00:06:08.022 --> 00:06:12.065
The first is called the "wealth effect."

00:06:16.219 --> 00:06:18.535
The wealth effect is just saying,

00:06:18.535 --> 00:06:20.800
and once again, it's
a little nonintuitive,

00:06:20.800 --> 00:06:22.899
because in my mind when I start saying

00:06:22.899 --> 00:06:26.005
prices have gone down, I start saying,

00:06:26.005 --> 00:06:27.293
"Prices have gone down,

00:06:27.293 --> 00:06:28.934
wages have gone down, maybe

00:06:28.934 --> 00:06:30.262
profits have gone down, and then

00:06:30.262 --> 00:06:32.069
people will get less optimistic,

00:06:32.069 --> 00:06:33.727
the economy will shrink."

00:06:33.727 --> 00:06:35.523
That's not what we're saying

00:06:35.523 --> 00:06:36.734
in this chart right over here.

00:06:36.734 --> 00:06:38.075
Remember, ceteris paribus ...

00:06:38.075 --> 00:06:40.075
All other things equal.

00:06:40.075 --> 00:06:41.931
We're assuming over here only,

00:06:41.931 --> 00:06:44.128
so if we take this
scenario right over here,

00:06:44.128 --> 00:06:47.284
we're assuming only prices have gone down.

00:06:47.284 --> 00:06:49.607
Everything else in the economy is equal.

00:06:49.607 --> 00:06:51.338
Employment has not changed.

00:06:51.338 --> 00:06:52.998
Profits have not changed.

00:06:52.998 --> 00:06:56.239
People's optimism has not changed.

00:06:56.239 --> 00:06:58.261
The only thing that changes is

00:06:58.261 --> 00:07:00.268
people wake up one day and everything

00:07:00.268 --> 00:07:02.162
in the economy is half the price

00:07:02.162 --> 00:07:03.669
it was before.

00:07:03.669 --> 00:07:04.743
People have the same savings.

00:07:04.743 --> 00:07:06.267
They have the same amount of money

00:07:06.267 --> 00:07:07.153
in their wallet.

00:07:07.153 --> 00:07:09.407
If that happens, all things equal,

00:07:09.407 --> 00:07:10.823
now they say, "With the same amount of

00:07:10.823 --> 00:07:12.195
money that I have in my wallet,

00:07:12.195 --> 00:07:15.626
I can now buy more. I feel wealthier."

00:07:15.626 --> 00:07:16.996
That's the wealth effect.

00:07:16.996 --> 00:07:19.059
They will say, "I will go and demand more

00:07:19.059 --> 00:07:22.160
goods and services
because with what I have

00:07:22.160 --> 00:07:25.465
in my pocket, I can go buy more things."

00:07:25.465 --> 00:07:28.235
Likewise, if for whatever reason people

00:07:28.235 --> 00:07:28.989
woke up the next morning ...

00:07:28.989 --> 00:07:32.301
Remember, all other things equal,

00:07:32.301 --> 00:07:34.256
if the price of everything were to double,

00:07:34.256 --> 00:07:35.496
they say, "Oh my God! I can't buy anything

00:07:35.496 --> 00:07:37.191
anymore. Everything's too expensive.

00:07:37.191 --> 00:07:38.408
I have to buy less of it. I'm going to

00:07:38.408 --> 00:07:41.105
demand fewer goods and service."

00:07:41.105 --> 00:07:42.272
The wealth effect is one theory

00:07:42.272 --> 00:07:45.715
that would explain,
all other things equal,

00:07:45.715 --> 00:07:47.417
why you would have a downward sloping

00:07:47.417 --> 00:07:50.873
aggregate demand curve.

00:07:50.873 --> 00:07:52.940
The other one is related
to interest rates.

00:07:55.154 --> 00:08:00.297
I would call it savings
and interest rate effect.

00:08:00.297 --> 00:08:05.466
Interest rate effect.

00:08:05.466 --> 00:08:08.526
You can imagine, if before this bar

00:08:08.526 --> 00:08:11.129
represented the total amount of money

00:08:11.129 --> 00:08:12.399
someone had in their pockets,

00:08:12.399 --> 00:08:14.698
and this is how much they needed to spend

00:08:14.698 --> 00:08:16.857
on goods and services in order to have

00:08:16.857 --> 00:08:18.697
a nice, happy, productive life,

00:08:18.697 --> 00:08:20.660
this is originally what they were

00:08:20.660 --> 00:08:22.188
going to save, now all of a sudden,

00:08:22.188 --> 00:08:22.893
now if all of a sudden if things get

00:08:22.909 --> 00:08:25.458
a lot cheaper, they don't have to

00:08:25.458 --> 00:08:27.276
spend this much on goods and services.

00:08:27.276 --> 00:08:28.235
They could spend less

00:08:28.235 --> 00:08:29.165
on goods and services.

00:08:29.165 --> 00:08:30.914
Maybe if things got a lot cheaper,

00:08:30.914 --> 00:08:32.630
they could spend less
on goods and services.

00:08:32.630 --> 00:08:34.865
Now they could spend maybe this amount

00:08:34.865 --> 00:08:36.013
on goods and services,

00:08:36.013 --> 00:08:37.817
and they could save much more.

00:08:37.817 --> 00:08:41.335
Right over here ... Remember,

00:08:41.335 --> 00:08:42.576
all other things equal,

00:08:42.576 --> 00:08:43.743
if everyone woke up tomorrow

00:08:43.743 --> 00:08:45.163
and things were just half priced,

00:08:45.163 --> 00:08:46.936
people would be able to spend less

00:08:46.936 --> 00:08:48.272
on the things they need,

00:08:48.272 --> 00:08:50.835
and they would be able
to save a lot more money.

00:08:50.835 --> 00:08:53.210
We've seen before, savings,

00:08:53.210 --> 00:08:55.104
when people save money, it just goes into

00:08:55.104 --> 00:08:56.417
the financial system.

00:08:56.417 --> 00:08:57.495
You save it, you put it into the bank,

00:08:57.495 --> 00:08:59.606
and it just gets lent out to other people.

00:08:59.606 --> 00:09:02.278
So when you have increase in savings,

00:09:02.278 --> 00:09:05.277
all other things equal,

00:09:05.277 --> 00:09:06.410
when prices goes down,

00:09:06.410 --> 00:09:08.292
all other things equal,

00:09:08.292 --> 00:09:10.605
then savings go up which means

00:09:10.605 --> 00:09:13.914
that the supply of money to be lent,

00:09:13.914 --> 00:09:17.749
supply of lenders or money to be lent,

00:09:17.749 --> 00:09:22.029
money lending goes up.

00:09:22.029 --> 00:09:23.611
We saw that in a previous video.

00:09:23.611 --> 00:09:24.802
If you increase the supply of money

00:09:24.802 --> 00:09:25.918
that can be lent, the price of

00:09:25.918 --> 00:09:28.003
borrowing the money will go down.

00:09:28.003 --> 00:09:29.430
Another way to think about it,

00:09:29.430 --> 00:09:30.615
interest rates.

00:09:30.615 --> 00:09:32.745
Interest rates will go down.

00:09:32.745 --> 00:09:34.500
When interest rates go down,

00:09:34.500 --> 00:09:35.631
it becomes cheaper,

00:09:35.631 --> 00:09:36.623
you have to spend less interest

00:09:36.623 --> 00:09:39.340
to borrow money and make investments.

00:09:39.340 --> 00:09:41.336
Borrow money, build a house.

00:09:41.336 --> 00:09:42.827
Borrow money, build a factory.

00:09:42.827 --> 00:09:45.749
Borrow money, do whatever
... buy inventory.

00:09:45.749 --> 00:09:47.611
Interest rates go down,

00:09:47.611 --> 00:09:50.606
that stimulates investment,

00:09:50.606 --> 00:09:53.810
that stimulates investment,

00:09:53.810 --> 00:09:54.672
which once again, would cause

00:09:54.672 --> 00:09:57.916
the economy to expand.

00:09:57.916 --> 00:09:59.473
You would have more goods and services

00:09:59.473 --> 00:10:00.907
being produced.

00:10:00.907 --> 00:10:02.356
Likewise, if you went the other way,

00:10:02.356 --> 00:10:03.610
if prices went up,

00:10:03.610 --> 00:10:07.233
this is a situation
where prices went down.

00:10:07.233 --> 00:10:09.989
if prices went up, now all of a sudden,

00:10:09.989 --> 00:10:11.622
people have to spend more of their money.

00:10:11.622 --> 00:10:14.885
More of their money on the things

00:10:14.885 --> 00:10:16.289
that they maybe think that they need

00:10:16.289 --> 00:10:18.014
to survive and be happy.

00:10:18.014 --> 00:10:19.604
There will be less savings.

00:10:19.604 --> 00:10:20.856
If there's less savings,

00:10:20.856 --> 00:10:23.365
there's less money to be lent.

00:10:23.365 --> 00:10:25.618
There will be higher interest rates

00:10:25.618 --> 00:10:26.939
and there will be less investment,

00:10:26.939 --> 00:10:29.006
so the economy will contract.

00:10:29.006 --> 00:10:31.894
So real GDP ... And remember,

00:10:31.894 --> 00:10:34.410
when I say GDP here, maybe
I'll call it real GDP,

00:10:34.410 --> 00:10:36.740
real GDP would go down.

00:10:36.740 --> 00:10:42.202
This is real GDP would go up.

00:10:42.202 --> 00:10:43.686
The third theory of why ...

00:10:43.686 --> 00:10:44.995
or the third justification because

00:10:44.995 --> 00:10:47.509
economists like to have this downward

00:10:47.509 --> 00:10:48.789
sloping curve so that they can justify,

00:10:48.789 --> 00:10:51.730
and we'll see how aggregate supply

00:10:51.730 --> 00:10:53.519
and demand can cause business cycles,

00:10:53.519 --> 00:10:54.855
the third effect is essentially,

00:10:54.855 --> 00:10:56.270
I'll call it a foreign exchange effect.

00:10:56.270 --> 00:10:59.808
A foreign exchange effect.

00:10:59.808 --> 00:11:04.717
Foreign exchange.

00:11:04.717 --> 00:11:06.122
Based on the line of reasoning,

00:11:06.122 --> 00:11:07.872
so let's say a situation once again where

00:11:07.872 --> 00:11:09.133
prices went down,

00:11:09.133 --> 00:11:10.596
based on their line of reasoning and

00:11:10.596 --> 00:11:12.536
justification, we said if prices go down,

00:11:12.536 --> 00:11:16.870
then interest rates go down because

00:11:16.870 --> 00:11:18.465
there's more money to be lent

00:11:18.465 --> 00:11:20.399
in that economy in that currency.

00:11:20.399 --> 00:11:22.337
If interest rates go down,

00:11:22.337 --> 00:11:23.710
investors might say,

00:11:23.710 --> 00:11:25.731
"I only get low interest in my country.

00:11:25.731 --> 00:11:29.305
Why don't I convert my money into

00:11:29.305 --> 00:11:30.581
other currencies where I can get

00:11:30.581 --> 00:11:31.938
higher interest rates?"

00:11:31.938 --> 00:11:33.688
So if interest rates go down,

00:11:33.688 --> 00:11:35.457
people convert out of the currency.

00:11:35.457 --> 00:11:40.524
Convert out of the currency.

00:11:40.524 --> 00:11:42.190
So maybe before, if we're talking about

00:11:42.190 --> 00:11:44.159
America and maybe the interest rates

00:11:44.159 --> 00:11:46.334
are really low in the
US and interest rates

00:11:46.334 --> 00:11:48.450
are higher in the UK, maybe because

00:11:48.450 --> 00:11:51.183
prices didn't go down there as much,

00:11:51.183 --> 00:11:52.529
people say, "I'm going to convert my money

00:11:52.529 --> 00:11:55.120
from dollars to pound sterling."

00:11:55.120 --> 00:11:56.913
When they do that, they will essentially,

00:11:56.913 --> 00:11:58.827
because once again, if people are

00:11:58.827 --> 00:12:01.930
converting from ... I've gone in-depth

00:12:01.930 --> 00:12:03.411
on some of the videos on foreign exchange,

00:12:03.411 --> 00:12:05.274
if people are converting from dollars

00:12:05.274 --> 00:12:07.741
to pounds, that means that there's

00:12:07.741 --> 00:12:10.428
a larger supply of dollars and

00:12:10.428 --> 00:12:11.746
more demand for pounds.

00:12:11.746 --> 00:12:13.744
The price of the dollar relative to

00:12:13.744 --> 00:12:15.165
the pound will go down.

00:12:15.165 --> 00:12:16.737
Essentially, the dollar will weaken.

00:12:16.737 --> 00:12:22.416
The dollar will weaken
relative to other currencies.

00:12:22.416 --> 00:12:24.329
If the dollar weakens relative to

00:12:24.329 --> 00:12:24.948
the other currency,

00:12:24.948 --> 00:12:26.001
this is a little confusing,

00:12:26.001 --> 00:12:27.662
I go into more depth into this when

00:12:27.662 --> 00:12:29.384
I talk about currency exchange,

00:12:29.384 --> 00:12:31.000
if the dollar weakens relative to

00:12:31.000 --> 00:12:32.715
other currencies, then American

00:12:32.715 --> 00:12:34.731
goods and services are going to appear

00:12:34.731 --> 00:12:37.635
to be cheaper to people in England.

00:12:37.635 --> 00:12:42.154
For example, if I offer to make a car

00:12:42.154 --> 00:12:44.011
in America for $10,000,

00:12:44.011 --> 00:12:49.683
maybe $10,000 before all of this happened,

00:12:49.683 --> 00:12:51.452
translates into 5,000 pounds,

00:12:51.452 --> 00:12:53.174
but now the dollar has weakened.

00:12:53.174 --> 00:12:56.135
Now $10,000 is going to translate into

00:12:56.135 --> 00:12:58.021
4,000 pounds.

00:12:58.021 --> 00:12:59.485
Foreign consumers will say,

00:12:59.485 --> 00:13:01.862
"Wow, American cars just got cheaper

00:13:01.862 --> 00:13:03.606
when we view it in our own currency."

00:13:03.606 --> 00:13:05.080
More and more of them are going to want

00:13:05.080 --> 00:13:06.785
to buy American things so America will

00:13:06.785 --> 00:13:08.536
export more.

00:13:08.536 --> 00:13:10.006
Once again, if there's more demand

00:13:10.006 --> 00:13:11.362
for American goods and services,

00:13:11.362 --> 00:13:13.211
the GDP will expand.

00:13:13.211 --> 00:13:16.185
This is related to low interest rates

00:13:16.185 --> 00:13:18.078
driving people to take currency out

00:13:18.078 --> 00:13:20.943
or exchange out of the currency we're

00:13:20.943 --> 00:13:22.535
talking about, which will make that

00:13:22.535 --> 00:13:23.530
currency cheaper, which will make

00:13:23.530 --> 00:13:24.660
its goods and services cheaper to

00:13:24.660 --> 00:13:25.922
the rest of the world,

00:13:25.922 --> 00:13:27.315
which it will essentially

00:13:27.315 --> 00:13:31.588
once again, make net exports increase.

00:13:31.588 --> 00:13:32.882
You really could just cut to the chase

00:13:32.882 --> 00:13:34.914
and say if the price level all of a sudden

00:13:34.914 --> 00:13:36.311
in US dollars just got cheaper,

00:13:36.311 --> 00:13:38.447
people say there's deals to be had

00:13:38.447 --> 00:13:40.314
in the US, and once again,

00:13:40.314 --> 00:13:42.318
net exports would increase.

00:13:42.318 --> 00:13:43.922
Once again, when you have low price level,

00:13:43.922 --> 00:13:47.644
you could have GDP expanding.

00:13:47.644 --> 00:13:48.979
Obviously if the prices were to increase,

00:13:48.979 --> 00:13:52.066
the opposite dynamic might occur.