ECON 1P92 Lecture Notes - Lecture 11: Demand Shock, Aggregate Demand
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20 Oct 2016
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Any positive shock [increase in exports (x)] Any negative shock [fall in investment (i)] Decreases ad shifts the ad leftward: the drop in the price of oil. K x a measures size of horizontal shift of ad curve. Summary: price level changes, ae line shifts up or down (c changes [real balances effect] and nx change, movement up or down ad curve. Price level rises : ae shifts down (c and nx fall, move left and up ad curve, autonomous expenditure (i,g,x) changes, ae line shifts up or down, ad curve shifts right or left. I increase : ae shifts up, ad shifts right. More is demanded at the same price level. Relates price level to quantity of output. Cost per unit of output (unit costs) rise as output increase. Firms produce more output only if prices increase. Output increases without causing large increases in unit cost.
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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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