ECON 1110 Lecture Notes - Lecture 11: Shortage, Output Gap, Aggregate Supply
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13 Mar 2016
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Aggregate supply shocks cause the price level and real gdp to change in opposite directions: increase in price = decrease in output = stagflation (inflation + stagnation) Chapter 24: from the short run to the long run. Short run: factor prices are fixed, technology and factors of production are fixed, real gdp is determined by both aggregate demand and aggregate supply. Medium run: factor prices are adjusting, technology and factors of production are fixed, gdp adjusts to potential gdp (y*) Long run: factor prices have fully adjusted, technology and factors of production are changing, potential gdp grows over the long run. The total output that can be produced when all productive resources (land, labour, capital) are fully employed. If potential output is to the right of equilibrium output (real gdp) then we have a recessionary gap. If potential gdp is to the left of equilibrium output (real gdp) then we have an inflationary gap.
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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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