ECO202Y5 Lecture Notes - Lecture 26: Money Supply, Aggregate Demand, Financial Market
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In the short run, prices don"t adjust so we normalize them by setting p=1 , but we can"t do that in the mr. Uctuations come from difference in actual price and expected price. Goos market - is relation y = c(y-t) + i (y, i) + g. To gure out what happens to the ad curve when there is a change in a variable, look at affect on is-lm graph rst, then the ad curve. Output is an increasing function of the real money stock, and increasing function of gov spending, and a decreasing function of t. Given monetary and scal policies, an increase in the price levele, leads to a decrease in the real money stock, which leads to decrease in output. Workers set wages rst, and the dollars they demand depends on how expensive it will be for workers to live. In sr, yn doesn"t need to equal y.
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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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