EC140 Lecture Notes - Lecture 16: Output Gap, Potential Output, Phillips Curve

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EC140 Lecture Notes - Lecture 15: Potential Output, Government Spending, Price Level

EC140 Lecture Notes - Lecture 16: Output Gap, Potential Output, Phillips Curve

EC140 Lecture Notes - Lecture 17: Per Capita Income, Potential Output, Savings Account

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Potential output: defined potential output as y, the total output that can be produced when all productive resources are being utilized at their normal rates of utilization. In the long run, the price level will be determined by the intersection of the ad curve and the vertical line drawn at potential output. No: nominal wages rise quickly in an inflationary gap, nominal wages are sticky or downwardly rigid. It appears to be difficult to convince workers to accept a nominal wage cut even when prices are falling and it is not a real wage cut. It appears to take much longer to close a recessionary gap through the self-adjustment process. The phillips curve and the adjustment process: recall that if the output gap is positive prices and wages rise in our model, phillips a british economist from the 1950s thought the rate of unemployment could.

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1. As prices fall, the value of people's existing assets rises and people increase expenditures. This occurs as a result of the:

a. international effect.

b. interest rate effect.

c. money wealth effect.

d. multiplier effect.

2. An increase in aggregate demand, in the long run, will change:

a. both output and the price level.

b. neither output nor the price level.

c. the price level but not output.

d. output but not the price level.

3. A change in which of the following will shift the long-run aggregate supply curve?

a. The price level

b. Aggregate demand

c. Available resources

d. Sales or excise taxes

4. If potential output exceeds actual output, the economy:

a. is experiencing a recessionary gap.

b. is in neither a short-run nor long-run equilibrium.

c. may be in a long-run equilibrium but is not in short-run equilibrium.

d. is experiencing an inflationary gap.

5. Keynes believed the economy was:

a. always moving toward potential income.

b. always at potential income.

c. always moving away from potential income.

d. fluctuating around potential income.

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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.

	decreases; decreases; falls short of
	increases; decreases; equals
	decreases; increases; exceeds
	decreases; increases; equals
	increases; decreases; exceeds

The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that

	Y* is independent of the price level and that actual output Y > Y* in the long run
	Y* equals actual output (Y) in the long run
	Y* is independent of the price level and that actual output Y = Y* in the long run
	Y* is independent of the price level
	Y* is independent of the price level and that actual output Y < Y* in the long run

Stagflation arises in the context of the AD-AS model when some external factor causes

	the LRAS curve to shift to the right
	the AD curve to shift leftwards
	the SRAS curve to shift downwards
	the SRAS curve to shift upwards
	the AD curve to shift rightwards

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.

	either an increase or a decrease
	no change
	an increase
	a decrease
	an initial increase, and then a decrease

Which of the following will shift the aggregate demand curve to the right?

	Consumers become pessimistic about the future
	A new technology is developed that will increase profits
	Income taxes are raised
	Foreign economies fall into recession, reducing their demand for domestic exports
	The government reduces purchases to balance the budget

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?

	A leftward shift the AD curve
	There will be no movement of the AD curve
	A movement down the AD curve
	A movement up the AD curve
	A rightward of the shift the AD curve

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

	100
	110
	120
	90
	105

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.

	recessionary; recessionary
	recessionary; expansionary
	expansionary; expansionary
	output; output
	expansionary; recessionary

The aggregate demand curve shows

	the amount of planned aggregate expenditure (and output) at the current price level
	the amount of planned aggregate expenditure (and output) at an average price level
	the amount of planned aggregate expenditure (and output) at a constant price level
	the amount of planned aggregate expenditure (and output) at various price levels
	the amount of planned aggregate expenditure (and output) at last year's price level

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 __________.

	an increase; left; Y = Y*
	a decrease; right; Y > Y*
	an increase; right; Y = Y*
	a decrease; left; Y > Y*
	no change; left; Y = Y*

1. In the long run, when prices are perfectly flexible:

a. aggregate supply is vertical and a market economy is self-correcting.

b. a market economy cannot self-correct.

c. government will be required to set prices to maintain equilibrium.

d. changes in aggregate demand cause equilibrium real GDP to change.

2. An increase in household wealth when the SRAS curve is upward sloping:

a. leads to an increase in the price level but has no impact on real GDP

b. has no impact on the price level but leads to an increase in real GDP

c. leads to an increase in both the price level and real GDP

d. has no impact on the price level or real GDP

3. In the long run, continued increases in aggregate demand not matched by similar increases in aggregate supply will cause:

a. an increase in the full-employment level of real GDP

b. a recessionary gap

c. a decrease in the price level

d. an increase in the price level

4. The vertical long-run aggregate supply curve implies that:

a. changes in aggregate demand will not affect the price level

b. the short-run aggregate supply curve is also vertical

c. natural or full-employment real GDP does not depend on the price level, in the long run

d. natural or full-employment real GDP is the same as the equilibrium real GDP in the short run

5. A rightward shift of the long-run aggregate supply curve illustrates:

a. economic growth

b. a recessionary gap

c. an inflationary gap

d. a decrease in natural real GDP

6. When the economy is in a recessionary gap

a. there is a surplus of labor

b. there is a shortage of labor

c. it is producing a real GDP level that is greater than natural real GDP

d. the unemployment rate is less than the natural unemployment rate

7. If the actual unemployment rate is less than the natural unemployment rate:

a. a recessionary gap exists and wages are likely to rise

b. an inflationary gap exists and wages are likely to rise

c. a recessionary gap exists and wages are likely to fall

d. an inflationary gap exists and wages are likely to fall

8. An economy in long-run equilibrium is producing:

a. a level of real GDP that is greater than its natural real GDP

b. where both the price level and real output are maximized

c. a level of real GDP equal to its natural real GDP

d. in the vertical range of aggregate demand.

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EC140 Lecture Notes - Lecture 16: Output Gap, Potential Output, Phillips Curve

EC140 Lecture Notes - Lecture 15: Potential Output, Government Spending, Price Level

EC140 Lecture Notes - Lecture 16: Output Gap, Potential Output, Phillips Curve

EC140 Lecture Notes - Lecture 17: Per Capita Income, Potential Output, Savings Account

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