ECON 1110 Lecture Notes - Lecture 10: Aggregate Supply, Demand Curve, Aggregate Demand
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13 Mar 2016
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Chapter 23: output and prices in the short run. So far, we have assumed that prices are constant. Increase in price level: decrease in real value of money, decrease in wealth, increase in imports, decrease in exports, decrease in aggregate expenditures. A curve showing combinations of real gdp and the price level that make desired expenditure (ae) equal to national income (y) The ad curve is not the demand curve we have seen in microeconomics. Downward sloping: increase in price = decrease in wealth = decrease in consumption = decrease in national income, increase in price = increase in imports = decrease in net exports = decrease in national income. Shifts of the ad curve are called aggregate demand shocks . The simple multiplier measures the horizontal shift in the aggregate demand curve in response to a change in autonomous desired expenditure. Assume: increase in c0, i0, g0, or x0 and price is fixed at p0.
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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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