MGEB05H3 Lecture Notes - Lecture 8: Money Supply, Menu Cost, Business Cycle
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16 Sep 2020
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We derive the ad curve from the is-lm model in topic 7. Aggregate supply shows the relationship between the price level and the amount of goods and services supplied: there are 2 different as curves: the long-run aggregate supply (lras) and the short-run aggregate supply (sras). The long run: the vertical aggregate supply curve (lras: the classical theory is used to analyze the economy in the long run, the long-run level of output is called the full-employment or natural level of output (yfe). From the short run to the long run. Suppose the central bank lowers the level of money supply: 9-4 stabilization policy: we can use the as-ad model to address the following issues: To analyze the impacts of both supply shocks (shocks that alter the production costs) and demand shocks (shocks that shift the ad curve) on the economy in both short run and long run.
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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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