ECON 1110 Lecture Notes - Lecture 12: Aggregate Demand, Stagflation, Output Gap
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13 Mar 2016
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Result of: decrease in g0, decrease in i0, decrease in c0, decrease in business confidence. Ad curve will shift to the left. If wages are flexible, the as curve will shift quickly. If wages are sticky, the as curve will shift slowly. Increase in input prices: example: oil prices. As curve will shift to the left. As curve will shift to the right. Y (goes to as1 and then back to as0) In the long run, the as curve is vertical. The long run as curve shows the relationship between the price level and the amount of output supplied by firms after all of the factor prices have adjusted to output gaps. In the long run, real gdp is solely determined by y*, the role of aggregate demand is only to determine the price level. The only way for real gdp to increase in the long run is through growth in potential output: human capital, technological.
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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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