ECON 102 Lecture Notes - Lecture 10: Output Gap, Business Cycle

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ECON 102 Lecture 9: Econ 102 Lecture 9 From Short Run to Long Run con’t

ECON 102 Lecture Notes - Lecture 10: Output Gap, Business Cycle

ECON 102 Lecture Notes - Lecture 11: Output Gap, Business Cycle

Document Summary

Econ 102 lecture 10 from short run to long run con"t: contractionary ad shocks. Assume productivity constant, thus as w decreases, ac decreases. 1: #1 ad shock: e. g. decrease autonomous i, ad shifts left, recessionary gap: y1 - y* <0, adjust: wages fall costs fall sras shifts right (chain) Initially, assume in eq y = y*: (y*, p1) (anchor) Economy languishes in recession: both inflationary and recessionary gaps disappear. 2. automatically but slowly compared to discretionary fiscal policy. Inflationary gap disappears more quickly than the recessionary gap (asymmetry: recessionary gap disappears more quickly when wages are flexible, as shocks. Note: redistribution of income from workers to shareholders: lr equilibrium. Shocks and the business cycle: business cycle = change in y over time due to random shocks, positive ad or as shock: = y is no longer adjusting to output gaps. Lras = relationship between p and y after all input costs have adjusted to eliminate input shortages or u.

Related Questions

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*

ECON 102 Lecture Notes - Lecture 10: Output Gap, Business Cycle

ECON 102 Lecture 9: Econ 102 Lecture 9 From Short Run to Long Run con’t

ECON 102 Lecture Notes - Lecture 10: Output Gap, Business Cycle

ECON 102 Lecture Notes - Lecture 11: Output Gap, Business Cycle

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