MGEA06H3 Study Guide - Final Guide: Fiat Cr.42, 1, Sub Sub
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7 Mar 2014
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MGEA06H3 Full Course Notes
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Topic 7: part a the as-ad model in the long run. The effect of a change in wages on as and ad curves. Inflationary or deflationary gap can be eliminated by change in (nominal) wages in the long run: a rise or fall in (nominal) wages will have no effect on ad curve. The (natural) adjustment mechanism from the short run to the long run. Note: since the natural adjustment mechanism for the as curve always go back to yfe, this indicate that the long-run as curve is vertical. The position of ad curve is what determines the long-run price level. Does the adjustment mechanism actually work: case 1: for deflationary gap (y* < yfe, wages are sticky downwards because: (meaning it takes a long time for the lr to arrive) Workers are very reluctant to lower their wages, even if they are out of work people are not happy to give up what they think they have earned.
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a) | In the AD-AS model, stagflation does not persist, because the working of the self-correcting mechanism of the economy _____ the level of output and _____ the price level until the economy eventually returns to a long-run equilibrium state, where actual output _____ potential output.
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b) | The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that
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c) | Stagflation arises in the context of the AD-AS model when some external factor causes
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d) | If the SRAS curve is positively sloped, then a decrease in the demand for Canadian-made goods in Europe will lead to _____ in the price level, in the short run.
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e) | Which of the following will shift the aggregate demand curve to the right?
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f) | Suppose a stock market crash decreases the stock of household wealth and therefore causes autonomous consumption to fall. Which of the following is the likely result?
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g) | An economy is characterized by the AD equation P = 200 ? 0.02Y, SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence of any change in policy or exogenous shocks, this economy will achieve a long-run price level of
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h) | The AD-AS model depicts a self-correcting economy. This means that the price level in the model adjusts automatically in response to a(n) _____ gap, so as to eliminate the _____ gap in the long run, without requiring any help from government policies.
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i) | The aggregate demand curve shows
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j) | Consider an economy initially at long-run equilibrium with output (Y) equal to potential output (Y*). If the SRAS is positively sloped, then a shift to the right of the AD curve will lead to _____ in the price level, in the short run. In the long run, the SRAS curve will shift to the _____ and the equilibrium will be at __________.
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