ECON 203 Lecture 7: Chapter 11
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27 Mar 2017
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In ae model prices are fixed (very short run). So ae model can show the effect of any change in policies or variables only on output (y). As/ad model, prices are not necessarily fixed. So as/ad model can show the effect of any change in variables or policies on both of the output and prices. 1: differences and similarities between ad and ae curve: Input prices v construction of an ad curve. Ad: relationship between demand for goods and services and price level is the movement along an ad curve. Graph: (assume that nominal money supply (ms) is fixed and p decrases) Ad is downward sloping due to three reasons: wealth effect, interest rate effect and substitution effect. Reduction in income tax (expansionary fiscal policy) Federal spending on education (expansionary fiscal policy) Increase in money supply (or mb) by central bank (expansionary monetary policy) Decreases in interest rate (expansionary monetary policy) v short run as curve (sas)
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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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