ECO230Y1 Lecture Notes - Lecture 22: Capital Outflow, Price Discrimination, Interest Rate
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Long run vs. short run: in the long run, output is depending only on the available resources, so in the long run output is equal to full employment output level, yf. In the short run, output y, or aggregate demand d, can be below or above. Yf, depending on the over or under-employment of resources. In the short run, price is rigid, while in the long run price is flexible, such that aggregate demand is equal to full employment level of output. D = y = c + i + g + ca. Suppose: i is exogenous, g is a policy variable. Consumption (private consumption) is positively related to disposable income: C = c(yd) yd = y = t c = c(y t) T = income tax is a policy variable. Current account (net foreigners demand): ca = ex qim. Y* = foreigners income q= real exchange rate.
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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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