ECO100Y5 Lecture Notes - Lecture 24: Output Gap, Phillips Curve, Potential Output
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Chapter #24: from the short run to the long run: the adjustment of factor prices. The short run: factor prices are assumed to be exogenous, they may change, technology and factor supplies are constant, y* is constant. The long run: factor prices are assumed to have fully adjusted to any output gap, technology and factor supplies are assumed to be changing. 24. 1 the adjustment process: potential output, total output that can be produced when all productive resources (land, labour, capital) are fully employed, when a nation"s output diverges from its potential output, the difference is called an output gap. Downward wage stickiness: booms (inflationary gaps) cause labour shortages, wages to rise, and unit costs to rise really fast, slumps (recessionary gaps) cause wages to fall only slowly. The phillips curve: wages tend to fall in high unemployment, wages tend to rise in low unemployment, relationship between unemployment and the rate of changes in wages is called the.
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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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