ECON 202 Lecture Notes - Lecture 15: Aggregate Supply, Aggregate Demand

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tancockroach82

22 Mar 2016

School

University of Waterloo

Department

Economics

Course

ECON 202

Professor

Fiona T Rahman

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Document Summary

Response to aggregate demand shock (will be completed in class): no policy response. Long-run effect: policy stabilizes economic activity in the short-run (will be completed in class): Response to a permanent supply shock (will be completed in class): no policy response. Long-run effect: policy stabilizes inflation (will be completed in class): Response to a temporary supply shock (will be completed in class): no policy response. Short-run effect: long-run effect: policy stabilizes inflation in the short-run (will be completed in class): Short-run effect: long-run effect: policy stabilizes economic activity in the short-run (will be completed in class): If most shocks to the macro economy are aggregate demand shocks or permanent aggregate supply shocks, then policy that stabilizes inlaion will also stabilize economic acivity, even in the short run. If temporary supply shocks are more common, then a central bank must choose between the two stabilizaion objecives in the short run.

Related Questions

A) Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = $1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500.

i) If the economy is initially in long-run equilibrium, what are the values of P and Y?

ii) What is the velocity of money in this economy?

iii) If M increases to 2,000, what are the new short-run values of P and Y?

iv) Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y?

B) Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = $1.0. The aggregate demand curve is Y = 3(M/P) and M = 1,000.

i) Suppose a supply shock moves the short-run aggregate supply curve to P=$1.5. What are the new short-run P and Y? What will be the new long-run P and Y?

ii) Suppose that immediately after the supply shock the Federal Reserve Bank wanted to hold output at its long-run level. What level of M would be required? If this level of M were maintained, what would be long-run equilibrium P and Y?

C) Use the aggregate demand/aggregate supply model to illustrate graphically the impact in the short run and the long run of the following changes. (Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values). Also, state what happens to prices and output in the short run and the long run.

i) The Federal Reserve Bank engages in expansionary monetary policy.

ii) Climate change causes reduced food production.

iii) Labor unions are banned.

lavenderrat653

Assume an economy is closed. According to classical economic theory, explain what will be the long-run effects of an increase in taxes. You may want to organize your answer around these three parts:

A) Aggregate Supply/Output (includes a discussion of the determinant of the level of output and the effect of fiscal policy on output in the long-run

B) Aggregate Demand/Real expenditures (includes a discussion of components of expenditures, their determinants, and the effect of fiscal policy on expenditures and the composition of expenditures).

C) Loanable Funds Markets (includes a discussion of the determinant of the interest rate in the loanable funds market and the effect of the fiscal policy on the real interest rate in the long run). Please include a graph if possible.

skyfrog367

1. Does the Aggregate Demand (AD) curve always slope downward? Discuss and use explanations (interest rate effect, wealth effects, open economy effect).

2. The Aggregate Supply (AS) curve slopes upward to reflect the profit motive of businesses. So, why there are two versions of the AS curve( i.e. short run and long- run). Discuss.

3. Does Aggregate Demand and Aggregate Supply always occur at full-employment level?

a) If yes, will there be some unemployment? Explain

b) If no, then the actual real GDP may be different from the potential real GDP. When the actual and potential GDP are not the same, then the economy is either in a recessionary gap or inflationary gap. Explain

ECON 202 Lecture Notes - Lecture 15: Aggregate Supply, Aggregate Demand

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