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Economics 1022A/B Lecture Notes - Monetarism, Nominal Rigidity, Main Source

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pearrat410
11 May 2013
School
Western University
Department
Economics
Course
Economics 1022A/B
Professor
Jeannie Gillmore

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ECON 1022A/B Full Course Notes
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ECON 1022A/B Full Course Notes
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Document Summary

An inflation that starts because aggregate demand increases is called demand-pull inflation: can be initiated by any factors that change aggregate demand: fall in the interest rate increase in the quantity of money. Money wage rate response: with unemployment below its natural rate, there is a shortage of labour, which causes the money wage rate to rise. Sas decreases and shifts leftward price level rises further and real gdp decreases this continues until real gdp is back at potential gdp is back at original level, but at a higher price level. Demand-pull inflation process: for inflation to proceed, aggregate demand persistently increases. Caused by persistent increases in the quantity of money: suppose that every day, the boc buys bonds in an open market operation. Cost-push inflation inflation that is kicked off by an increase in costs is called cost-push inflation, which sources from: an increase in the money wage rate, an increase in the money prices of raw materials.

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Related Questions

Refer to the table given below. Suppose that aggregate demand increases such that the amount of real output demanded rises by $15 billion at each price level.

Real Output Demanded (Original)

Price
Level

Real Output
Supplied

$500

112

$515

505

106

512

510

100

510

515

94

507

520

88

500


a.) By what percentage will the price level increase? _______ percent

b.) Will this inflation be demand-pull inflation or will it be cost-push inflation? (Click to select) Cost-push inflation or Demand-pull inflation

c.) If potential real GDP (that is, full-employment GDP) is $510 billion, what will be the size of the positive GDP gap after the change in aggregate demand? $ _______ billion

d.) If the government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it? (Click to select) (Increase or Decrease)

A. A decrease in aggregate supply can result in:

  1. a recession
  2. cost-push inflation
  3. demand-pull inflation
  4. unemployment 

B. In the short run (intermediate-range) of the aggregate supply curve, higher aggregate demand will increase

  1. the price level but reduce real GDP.
  2. real GDP without raising the price level
  3. the price level without affecting real GDP
  4. both the price level and real GDP

C. Which of the following helps explain why real GDP is inversely related to the price level within the framework of the AD-AS model?

  1. As prices fall, domestic consumers have an incentive to buy more of the cheaper goods and services
  2. As prices fall, the wealth of people holding the fixed quantity of money increases, causing them to expand their purchases of goods and services
  3. As prices fall, the government will have to reduce taxes, which will lead to an increase in the number of goods and services purchased
  4. As prices fall, the monetary authorities will have to increase the money supply, which will lead to an increase in the number of goods and services purchased

2) Which of the following situations illustrates how fiscal policy can influence aggregate demand? A) The Bank of Canada raises interest rates so people plan to buy less consumer durables. As a result, aggregate demand decreases. B) The government increases its expenditures. The demand for loanable funds increases, which raises the real interest rate. Investment increases. The government reduces the goods and services tax. As a result, consumption expenditure increases and aggregate demand increases. D) Investors, anticipating an erosion of financial wealth due to inflation, decide to save more. As a result, aggregate demand decreases. E) The exchange rate value of the Canadian dollar rises. As a result, people living near the U.S.-Canada border increase their imports of goods and net exports decrease.