ECO102H1 Lecture Notes - Lecture 9: Fiscal Policy, Stagflation, Government Budget Balance
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8 Mar 2019
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Last lecture adjustment will eventually reach to yf again. All workers will get the work back. Normally 2 years for a contract, a lot of time. Government policy can speed up the adjustment process. Decrease in taxes aep increases (c and yd increases), ad shifts to the right. Ir decrease, increase in c and ip increase in aep. Worker will deplete saving faster than before. Trigger drop in nominal wage, which will reduce the production cost per unit, shifting the sras to the right. Not as easy since we are dealing with supply and not ad management. If we shift ad2, the policy induced positive ad shock, inflation will increase even higher. Benefit decrease the pain for unemployed workers. Changing taxes change disposable income change consumption. Change in tr change disposable income change in g. If the government always spend, less money for the private to spend. True if output is at full employment.
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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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