ECON 102 Lecture Notes - Longrun, Shortage, Negative Relationship
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ECON 102 Full Course Notes
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Defined not by length of time, but rather according to which variables are assumed to change. Technology and factor supplies are constant affects y: ppb is fixed; therefore, potential output is also constant. Exogenous shocks to supply and demand cause fluctuation around y* In the short run, equilibrium, is determined by the intersection of the as and ad curves. Factor prices are flexible and adjust to output gaps. Long run equilibrium occurs when as = ad and factor prices are fully adjusted. Factor prices have fully adjusted to output gaps: therefore, there are no more output gaps (eliminated, real gdp = potential level. Short run equilibrium where two curves cross. But y0 < y* recessionary gap. Relationship between recessionary gap and intensity of resource use: some resources are sitting idle that can possibly be productive: firms producing below potential output, demand for factors of production is low.
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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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