EC140 Lecture Notes - Lecture 11: Output Gap, Phillips Curve, Potential Output
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Real gdp determined by intersection of supply and demand. Technology and factor supplier are assumed constant. Total output if all productive resources were full employed independent of price level: fully employed resources does not mean unemployment is zero. Changes in potential output are long run and not short run. Recessionary gap if real gdp < potential output. Potential gdp as an anchor and economy returns to potential gdp after a shock. Inflationary gap if real gdp > potential output. This causes the as curve to shift left. Labour shortages emerge when firms offer increased wages to attract or keep workers. Higher wages lead to higher costs for all inputs. Inflationary gap where resources are used beyond capacity. This causes the as curve to shift right. Shifts end when real gdp equals potential output. Labour surpluses where firms offer workers reduced wages. Lower wages lead to lower costs for other inputs.
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Related Questions
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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