EC140 Lecture 9: One Class Notes- Chapter 23
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Aggregate demand- consumption: assertion: a rise in the price level for all goods reduces the real value of wealth held by households and thus reduces consumption. It looks like the bond holders lose a lot of real wealth and they do but the bond issuers gain wealth: a rise in the price level will leave net wealth of society unchanged from the perspective of. This price change would increase imports (this effect is big) Imports move same level as income, an increase in income does not influence our own domestic purchases: as our price level (p) rises, foreign prices and exchange rates stay the same lower slope as m rises. Aggregate demand: definition of aggregate demand: for any given price level, the aggregate demand curve shows the level of real gdp for which desired aggregate expenditure equals actual real gdp. Intuition: as p rises consumption falls as wealth falls: net exports fall as exports fall and imports rise.
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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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