MGEA06H3 Lecture Notes - Macroeconomics, Frictional Unemployment, Automatic Stabilizer

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olivebeaver965

14 Dec 2012

School

UTSC

Department

Economics for Management Studies

Course

MGEA06H3

Professor

Ata Mazaheri

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MGEA06H3 Full Course Notes

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Fiscal policy & the aggregate supply aggregate. Discuss the concepts like inflationary gap, deflationary gap, and full-employment level of output. The relationship between budget balance and national debt. The link between budget balance and output gaps. The use of fiscal policy to smooth out business cycles. Develop the as-ad model bringing price into the model. Full-employment level of output, yfe: when the economy is operating at its full potential, then we can say that the economy is at its full employment1. The level of output consistent with full employment is called the full-employment level of output, yfe. It is also the level of output that the economy will converge to in the long run. The unemployment rate at yfe is called the non-accelerating inflation rate of unemployment (nairu) or natural rate of unemployment (nru). 1 you can interpret the term full employment as. Good/productive workers find it easy to find a job.

Related Questions

The Modified Keynesian Model

Y = C + I + G + X â IM â¦ equilibrium condition in a 4-sector model where:

C = 150 + 0.9DI â¦ consumption function

I = 50 â¦ autonomous investment

G = 100 â¦ autonomous government spending

X = 200 â¦ autonomous exports

IM = 100 â¦ autonomous imports

And also:

DI = Y â T + Tr T = 0 â¦ autonomous taxes

Tr = 0 â¦ autonomous transfer payments

YF = 5000 â¦ full-employment Y

1. Solve for the equilibrium level of real output/income (Y*) in this economy.

2. Given the model above, net exports equal $________. Does this represent a trade deficit or trade surplus?

3. Given the model above, the federal budget has a (deficit/surplus) equal to $________.

4. What is the value of the MPC? â¦ the value of the MPS?

5. Calculate the âoversimplifiedâ expenditure multiplier.

6. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?

7. (Refer to question â6â.) How much is the gap equal to?

8. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., increasing G). Given the numbers above, by how much would government spending (G) need to increase to achieve the goal of full-employment?

9. Suppose instead that the government decided to lower taxes to eliminate the output gap in question â6â. How much would taxes need to fall to achieve the goal of full-employment?

10. Which action (raising G or lowering T) has the largest effect on the federal budget deficit and the national debt?

11. Suppose the national debt equaled $6000 before the tax cut (refer to question â9â). What would be the value of the national debt after this policy action?

azurellama883

The graph below depicts an economy where a decline in aggregate demand has caused a recession. This economy's current level of real GDP (Y1) is below its long-run equilibrium, which is illustrated by the long-run aggregate supply curve (LRAS), and a price level (P1) below the equilibrium value of Pe. a. Without any fiscal policy, we expect the economy to eventually return to full employment on its own. Use the graph below to illustrate that process. Instructions: Use the tool provided 'New Curve' to plot the appropriate line (2 points total). After placing the curve, double click or tap the question marks next to it and choose whether to label the curve as AS1, LRAS1, or AD2 from the dropdown. b. Assume the government instead enacts fiscal policy to reduce the burden of the recession. Use the graph below to illustrate that process. Instructions: Use the tool provided 'New Curve' to plot the appropriate line (2 points total). After placing the curve, double click or tap the question marks next to it and choose whether to label the curve as AS1, LRAS1, or AD2 from the dropdown. c. When comparing the two options for restoring the economy to its full-employment level of output, the benefit of allowing the economy to return to full employment on its own, as seen in part a, is that: the economy will recover faster without fiscal policy. lower unemployment and higher real GDP are reached. full employment is reached with a higher price level. full employment is reached with a lower price level.

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*

MGEA06H3 Lecture Notes - Macroeconomics, Frictional Unemployment, Automatic Stabilizer

MGEA06H3 Full Course Notes

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