ECON1102 Lecture Notes - Lecture 10: Aggregate Demand, Aggregate Supply, Output Gap

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8 Oct 2018

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Aggregate demand model: aggregate demand shows the relationship between equilibrium output (y) and the inflation rate ( ). It is the total demand within the economy: the ad curve is downward sloping. Therefore, when inflation is high, demand is low, and when inflation is low, demand is high: five reasons why the ad curve is downward sloping, when inflation is high, the rba increases interest rates. Inflation makes net assets worth less in real terms. Inflation causes people on lower incomes to cut their spending significantly, whilst rich people shift expenditure to savings. Inflation causes uncertainty, and hence people become less confident in the economy and more cautious with their spending. Eg, fiscal policy, consumer confidence, technology and export demand: monetary policy stances by the rba. Eg, a tighter monetary policy stance would cause ad to decrease. It does not change when potential gdp equals actual gdp.

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Hi !! i was studying for final exam for eco Few more question i don't really get
Q6) When each firm is producing its capacity and there is full employment, this shows:

1. An inflationary gap

2. all of the above

3. a deflationary gap

4. the long run AS curve

Q7) According to the RBA, the rate of unemployment is beginning to edge higher. Which of the following causes of unemployment is not associated with an excess supply of labour?

1. Efficiency wages
2. Job Search

3. Minimum wage laws
4. Unions

Q8) According to the RBA, public spending is scheduled to be subdued. Public spending is

1. The amount of income that businesses have left after paying for the factors of production

2. the amount of tax revenue that the government has left after paying for its spending

3. the amount of income that households have left after paying their taxes and paying for their consumption

4. always equal to investment

Q9) The demand for loanable funds is downward-sloping because:
1. As the interest rate falls, the demand for loanable funds falls

2. As the interest rate rises, the quantity of loanable funds demanded rises

3. as the interest rate falls, the demand for loanable fund increases

4. as the interest rate rises the quantity of loanable funds demand falls.

Q10) Suppose that the government decides to issue an investment tax credit to encourage more investment spending. Then this:
1. Shifts the demand curve for loanable fund to the right

2. does not affect the interest rate

3. reduces the supply of loanable funds

4. lowers the interest rate

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.

	decreases; decreases; falls short of
	increases; decreases; equals
	decreases; increases; exceeds
	decreases; increases; equals
	increases; decreases; exceeds

The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that

	Y* is independent of the price level and that actual output Y > Y* in the long run
	Y* equals actual output (Y) in the long run
	Y* is independent of the price level and that actual output Y = Y* in the long run
	Y* is independent of the price level
	Y* is independent of the price level and that actual output Y < Y* in the long run

Stagflation arises in the context of the AD-AS model when some external factor causes

	the LRAS curve to shift to the right
	the AD curve to shift leftwards
	the SRAS curve to shift downwards
	the SRAS curve to shift upwards
	the AD curve to shift rightwards

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.

	either an increase or a decrease
	no change
	an increase
	a decrease
	an initial increase, and then a decrease

Which of the following will shift the aggregate demand curve to the right?

	Consumers become pessimistic about the future
	A new technology is developed that will increase profits
	Income taxes are raised
	Foreign economies fall into recession, reducing their demand for domestic exports
	The government reduces purchases to balance the budget

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?

	A leftward shift the AD curve
	There will be no movement of the AD curve
	A movement down the AD curve
	A movement up the AD curve
	A rightward of the shift the AD curve

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

	100
	110
	120
	90
	105

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.

	recessionary; recessionary
	recessionary; expansionary
	expansionary; expansionary
	output; output
	expansionary; recessionary

The aggregate demand curve shows

	the amount of planned aggregate expenditure (and output) at the current price level
	the amount of planned aggregate expenditure (and output) at an average price level
	the amount of planned aggregate expenditure (and output) at a constant price level
	the amount of planned aggregate expenditure (and output) at various price levels
	the amount of planned aggregate expenditure (and output) at last year's price level

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 __________.

	an increase; left; Y = Y*
	a decrease; right; Y > Y*
	an increase; right; Y = Y*
	a decrease; left; Y > Y*
	no change; left; Y = Y*

1. Menu costs are:

A) the costs of materials.

B) the cost of changing prices.

C) particularly low when inflation is high.

D) a reason that the inflation rate typically underestimates true price level changes.

2. A market basket costs $150 to buy in the base year and $60 to buy in year X.

A. the price index for year X is 250.

B. Year X probably occurred after the base year.

C. Year X is the base year.

D. the price index for year X is .4 or 40%.

3. A traditional expansionary gap is created when the aggregate demand curve moves to the:

A. right of the natural rate of output; inflation rises and unemployment falls.

B. left of the natural rate of output; inflation falls and unemployment rises.

C. right of the natural rate of output; inflation falls and unemployment rises.

D. left of the natural rate of output; inflation rises and unemployment falls.

4. Consumers change their purchases and move ALONG the same consumption function when:

A) Their income changes

B) Their tastes change

C) The price level changes

D) All of the above.

5. If MPC is .75 then if consumer income rises by $10,000 we would predict that consumption will:

A. rise by $7500 while savings fall by $2500.

B. fall by $2500 while savings rise by $7500.

C. rise by $7500 while savings rise by $2500.

D. fall by $2500 while savings fall by $7500.

6. Autonomous consumption is

A. that part of consumption that rises or falls with changes in disposable income.
B. the minimum that people will spend even if disposable income is zero.
C. the amount people will spend when the C line crosses the 45-degree line.
D. the amount people will spend when income is equal to consumption.

7. A low rate of investment could be explained by a

A. low rate of saving and low-interest rates.
B. low rate of saving and high-interest rates.
C. high rate of saving and low-interest rates.
D. high rate of saving and high-interest rates.

8. Mr. A makes $40,000 a year; Ms. B makes $20,000 a year. Mr. A pays $6,000 in taxes while Ms. B pays $4,000 in taxes. Which of the following is true?

A. Taxes are progressive because Mr. A pays a higher dollar amount in taxes than Ms. B

B. Taxes are neutral because Mr. A makes more money before and after taxes than Ms. B.

C. Taxes are regressive because Mr. A pays a lower tax rate than Ms. B.

D. Taxes are progressive because Ms. B pays a lower dollar amount in tax.

9. The 45 degree line in the full AE model represents

A. all points where C = Y.

B. all points where AE = Y

C. all points where C + I = G + Xn

D. all points where C = I + G + Xn

10. International trade:

A. Allows countries to specialize in the goods at which they are best at producing.

B. can increase the goods and services both trading partners have.

C. can be unbalanced where one partner exports more to the other than the other way around.

D. all of the above.

11. If AD rises in the short run:

A. it pushes up the price level.

B. it decreases national output.

C. increases full employment.

D. all of the above.

12. We cut down trees and sell the timber for $8000. The timber is sawn up into lumber that sells for $18,000. The lumber is used to build furniture that sells to consumers for $30,000.

A. $30,000 goes into GDP.

B. $4000 goes into GDP.

C. $56,000 goes into GDP.

D. $22,000 goes into GDP.

13. The long-run annual growth rate of the U.S. economy tends to be about:

A. 1% or less.

B. 2%

C. 5%

D. 10% or more.

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ECON1102 Lecture Notes - Lecture 10: Aggregate Demand, Aggregate Supply, Output Gap

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