Sir when housing prices goes up , it will be difficult to purchase. Then why AD will increase,when real estate prices are high to purchase than normally would be?
The wealth effect explains this. Real estate is part of people's portfolios, thus part of household wealth. If housing prices go up, household wealth goes up, people start saving less toward retirement, marginal propensity to save goes down and marginal propensity to consume goes up. This decrease in current period saving and increase in current period consumption is known as the wealth effect. The other side of the coin to this wealth effect is shown in the 2008 crisis--housing prices fell, saving rose dramatically, and consumption decreased.
why does a higher bank reserves shift AD curve to the right? as it decreases the money supply, which means AD should shift to the left. Sorry if I misunderstood .
Reducing the required reserve ratio increases the level of deposits (i.e., money) consistent with a given level of reserves in the system which leads to increase in money supply. As a result, AD shifts to the right. IFT Support Team
@@IFT-CFA Thanks for the answer! By the way, 14.55 the instructor says that the bank reserves increases. So based on your answer, reducing the required reserve ratio will cause the bank to increase their reserve, therefore, the money supply increases? Sounds contradictory.
@@pkapoor183 Regardless of Fed or commercial banks concept, simply a high bank reserve will release less money out in the economy which will further reduce the overall demand, no?
why nominal wages, input prices, expectation of future prices, business taxes, subsidy, and exchange rate dont have any effect on LRAS? Can you please explain that.
No impact on LRAS of a change in wages bc all it does is set a new price level but doesn’t change potential output bc it doesn’t change any of the factors that affect LRAS. The LRAS depends on the factors of production, not the cost of that production. The next video goes over the production function which shows the LRAS natural level of output as a function of factors of production (Labor & Capital). Labor in the production function is the QUANTITY of labor, it has nothing to do with the COST of labor (wages). The cost of those variables like wages that only affect SRAS will affect the price level, but not potential output (LRAS). Just changing the price per hour that you pay does not change LRAS as this is temporary. This is why higher nominal wages will make SRAS shift to the left, which is stagflation in the short-run, but in the long-run fiscal/monetary policy restores the economy back to its potential output. Thus, AD & SRAS will intersect back on the LRAS after policy implementation, with stagflation only being temporary. There is nuance with each variable that affects only SRAS and not LRAS--they may cause shifts in demand as well so we have combined changes in SRAS & AD, if policy is implemented it may affect AD/SRAS/LRAS, policy may not even be needed if market mechanisms are sufficient, etc. The point is that for the LRAS to shift, the resource base (factors of production) of the economy must change through one of the five variables listed in the table. The next video also explains how these five variables are linked to economic growth, which is when the LRAS shifts to the right. It gets interesting bc if policy is implemented at one of these five variables, especially technology, that will shift the LRAS to the right.
isnt it true that if reserves increase there will be less money supply in the economy. Increase in reserve of the rbi also means that banks will increase interest rates, which will reduce cunsumer's purchasing power and aggregate deman will eventually fall.So as per what i reakon demand supply will shift to the left.
The increase in bank reserves / real money balances will decrease interest rates and encourage lending within the banking system. Lower interest rates and higher credit will increase both investment and consumption expenditures and shift the AD curve to the right. IFT Support Team
@@IFT-CFA I am still unable to understand. "Bank reserves are the minimal amounts of cash that banks must keep on hand in case of unexpected demand. Excess reserves are the additional cash that a bank keeps on hand and declines to loan out." Now if we increase bank reserves, naturally less money out in the economy, leading to overall less demand = hence AD shifts to the left. Is this logic incorrect?
@@isbahajaz278 i think bank reserves here means bank deposits so as bank deposits increase then banks have more money to lend and thus decreasing the int rate. CRR doesnt have to do anything with growth and here we are concerned with growth.
If AD increases and AS declines, the price level will rise, but the effect on real GDP is not clear unless we know the magnitude of the changes because an increase in AD increases real GDP, whereas a decrease in AS decreases real GDP. If AD increases more than AS declines, GDP will rise. If AS decreases more than AD increases, real GDP will fall. If AD decreases and AS increases, the price level will decline but the impact on real GDP is not clear unless we know the magnitudes of the changes because a decrease in AD decreases real GDP, whereas an increase in AS increases real GDP. If AD decreases more than AS increases, real GDP will fall. If AS increases more than AD declines, real GDP will rise. IFT Support Team
@@isbahajaz278 Draw the curves. We know if both increase, real GDP will rise, but the effect on price level is not clear unless we know the magnitude of the changes because an increase in AD increases price level, whereas an increase in AS decreases price level. If AD increases more than AS increases, price level will rise. If AS increases more than AD increases, price level will fall. If AD decreases and AS decreases, real GDP will decline but the impact on price level is not clear unless we know the magniturdes of the changes because a decrease in AD decreases price level, whereas an decrease in AS increases price level. If AD decreases more than AS decreases, price level will fall. If AS decreases more than AD decreases, price level will rise.
GDP is the Output (Y) on the x-axis. We find the level of GDP by looking at the equilibrium/intersection of AD & AS and drawing a line down to the x-axis. More specficially, we look at the level of GDP indicated by the short-run equilibrium of AD & SRAS, then we compare that to the level of GDP indicated by the long-run full employment on the LRAS. If the short-run equilibrium's output occurs at a level above or below full employment (maximum output), we say the economy is above or below full employment.
I am confused about the influence of housing prices. I thought as housing prices go up, people spend more on housing and feel less confident in their buying power, so demand less on other goods. As a result, consumption will go down. Can anyone correct this type of logic?
Sir when housing prices goes up , it will be difficult to purchase. Then why AD will increase,when real estate prices are high to purchase than normally would be?
The wealth effect explains this. Real estate is part of people's portfolios, thus part of household wealth. If housing prices go up, household wealth goes up, people start saving less toward retirement, marginal propensity to save goes down and marginal propensity to consume goes up. This decrease in current period saving and increase in current period consumption is known as the wealth effect. The other side of the coin to this wealth effect is shown in the 2008 crisis--housing prices fell, saving rose dramatically, and consumption decreased.
29:17 "Change in AD"=Increase means shift AD curve to the right or move along the curve in forward direction?
It means shifting AD curve to right
It means shift in the curve.
IFT Support Team
why does a higher bank reserves shift AD curve to the right? as it decreases the money supply, which means AD should shift to the left. Sorry if I misunderstood .
i have the same question. when bank reserves are high, it means the interest rate have increased right?
Reducing the required reserve ratio increases the level of deposits (i.e., money) consistent with a given level of reserves in the system which leads to increase in money supply. As a result, AD shifts to the right.
IFT Support Team
@@IFT-CFA Thanks for the answer! By the way, 14.55 the instructor says that the bank reserves increases. So based on your answer, reducing the required reserve ratio will cause the bank to increase their reserve, therefore, the money supply increases? Sounds contradictory.
@@Monsterrrrrrrrrr32321 bro bank reserves as in the money with the bank itself and not the fed.
@@pkapoor183 Regardless of Fed or commercial banks concept, simply a high bank reserve will release less money out in the economy which will further reduce the overall demand, no?
why nominal wages, input prices, expectation of future prices, business taxes, subsidy, and exchange rate dont have any effect on LRAS?
Can you please explain that.
No impact on LRAS of a change in wages bc all it does is set a new price level but doesn’t change potential output bc it doesn’t change any of the factors that affect LRAS. The LRAS depends on the factors of production, not the cost of that production. The next video goes over the production function which shows the LRAS natural level of output as a function of factors of production (Labor & Capital). Labor in the production function is the QUANTITY of labor, it has nothing to do with the COST of labor (wages).
The cost of those variables like wages that only affect SRAS will affect the price level, but not potential output (LRAS). Just changing the price per hour that you pay does not change LRAS as this is temporary. This is why higher nominal wages will make SRAS shift to the left, which is stagflation in the short-run, but in the long-run fiscal/monetary policy restores the economy back to its potential output. Thus, AD & SRAS will intersect back on the LRAS after policy implementation, with stagflation only being temporary.
There is nuance with each variable that affects only SRAS and not LRAS--they may cause shifts in demand as well so we have combined changes in SRAS & AD, if policy is implemented it may affect AD/SRAS/LRAS, policy may not even be needed if market mechanisms are sufficient, etc. The point is that for the LRAS to shift, the resource base (factors of production) of the economy must change through one of the five variables listed in the table. The next video also explains how these five variables are linked to economic growth, which is when the LRAS shifts to the right. It gets interesting bc if policy is implemented at one of these five variables, especially technology, that will shift the LRAS to the right.
isnt it true that if reserves increase there will be less money supply in the economy. Increase in reserve of the rbi also means that banks will increase interest rates, which will reduce cunsumer's purchasing power and aggregate deman will eventually fall.So as per what i reakon demand supply will shift to the left.
The increase in bank reserves / real money balances will decrease interest rates and encourage lending within the banking system. Lower interest rates and higher credit will increase both investment and consumption expenditures and shift the AD curve to the right.
IFT Support Team
@@IFT-CFA I am still unable to understand.
"Bank reserves are the minimal amounts of cash that banks must keep on hand in case of unexpected demand. Excess reserves are the additional cash that a bank keeps on hand and declines to loan out."
Now if we increase bank reserves, naturally less money out in the economy, leading to overall less demand = hence AD shifts to the left.
Is this logic incorrect?
@Sourav, did you understand this?
@@isbahajaz278 i think bank reserves here means bank deposits so as bank deposits increase then banks have more money to lend and thus decreasing the int rate. CRR doesnt have to do anything with growth and here we are concerned with growth.
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what does indeterminate, there are changes in the price level in first 2 scenarios and even for the real GDP for last 2 ones?
If AD increases and AS declines, the price level will rise, but the effect on real GDP is not clear unless we know the magnitude of the changes because an increase in AD increases real GDP, whereas a decrease in AS decreases real GDP. If AD increases more than AS declines, GDP will rise. If AS decreases more than AD increases, real GDP will fall.
If AD decreases and AS increases, the price level will decline but the impact on real GDP is not clear unless we know the magnitudes of the changes because a decrease in AD decreases real GDP, whereas an increase in AS increases real GDP. If AD decreases more than AS increases, real GDP will fall. If AS increases more than AD declines, real GDP will rise.
IFT Support Team
Could you please explain how an increase in both AD and AS and a decrease in both AD and AS leave the price changes indeterminate?
Please assist
@@isbahajaz278 Draw the curves. We know if both increase, real GDP will rise, but the effect on price level is not clear unless we know the magnitude of the changes because an increase in AD increases price level, whereas an increase in AS decreases price level. If AD increases more than AS increases, price level will rise. If AS increases more than AD increases, price level will fall.
If AD decreases and AS decreases, real GDP will decline but the impact on price level is not clear unless we know the magniturdes of the changes because a decrease in AD decreases price level, whereas an decrease in AS increases price level. If AD decreases more than AS decreases, price level will fall. If AS decreases more than AD decreases, price level will rise.
are GDP AGGREGATE SUPPLY AND AGGREGATE DEMAND EQUAL?
GDP is the Output (Y) on the x-axis. We find the level of GDP by looking at the equilibrium/intersection of AD & AS and drawing a line down to the x-axis. More specficially, we look at the level of GDP indicated by the short-run equilibrium of AD & SRAS, then we compare that to the level of GDP indicated by the long-run full employment on the LRAS. If the short-run equilibrium's output occurs at a level above or below full employment (maximum output), we say the economy is above or below full employment.
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I am confused about the influence of housing prices. I thought as housing prices go up, people spend more on housing and feel less confident in their buying power, so demand less on other goods. As a result, consumption will go down. Can anyone correct this type of logic?
Rent forms a part of Consumption (C) in macro, housing prices increase -> C increases -> AD increases
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