ECON 100 Lecture Notes - Lecture 14: Money Illusion, Menu Cost, Aggregate Supply
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Document Summary
Shifts in lras: the lras curve shifts when there is a long-run change in a nation"s ability to produce output, or a change in y* The factors that shift lras are the same factors that determine economic growth- resources, technology, and institutions. Short- run as: while, in the long run, the price level does not impact as, in the short run there is a positive relationship between the price level and the quantity of as. There are three reasons for their relationship- inflexible input prices, money illusion, and menu costs: input prices: sticky since they take time to change, output prices: flexible (easy to change) Money illusion: occurs when people interpret nominal values as real values. In terms of as, if output prices are falling but workers are reluctant to accept nominal pay decreases, they reinforce the (downward) stickiness of input prices. Resources, technology, and institutions: affect long- run aggregate supply. Sras: supply shocks can be negative or positive.
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Related Questions
1. Which of the following is likely to happen if the Fed buys Treasury securities from banks?
| interest rate rises; investment falls |
| interest rate rises; investment rises |
| interest rate falls; investment rises |
| interest rate falls; investment falls |
2. The main goal of monetary policy is to shift
| AD. |
| SRAS. |
| LRAS. |
| both AD and SRAS. |
| both AD and LRAS. |
3. Which of the following is true regarding the effects of an expansionary monetary policy?
| Printing more money will affect real GDP only in the short run because all prices do not adjust fully in the short run. |
| Printing more money will affect real GDP both in the short and long run because inflation is a natural occurrence of expansionary monetary policy. |
| Printing more money will not lower the value of money in the short run because prices are fully flexible in the short run. |
| Printing more money will ultimately raise the value of money in the long run because prices are fully flexible in the long run. |
4. In which of the following cases are you likely to be adversely affected by unexpected inflation?
| You, the owner of a local restaurant, charge the price of lamb lasagna as per the daily market rate of lamb. |
| You purchase Mountain Dew every day from the dormitory vending machine, which keeps its prices fixed for the entire school year. |
| You, the owner of an airline company, sign a two-year contract for airline fuel. |
| You deposit $10,000 in a bank account for 5 years for a fixed interest rate of 1%. |
5. The Phillips curve depicts the relation between
| real GDP and price level. |
| price level and inflation rate. |
| unemployment rate and inflation rate. |
| unemployment rate and real GDP. |
6. Which of the following statements is true regarding the shapes of short-run and long-run Phillips curves?
| The short-run Phillips curve is vertical and the long-run Phillips curve is downward sloping. |
| The short-run Phillips curve is downward sloping and the long-run Phillips curve is vertical. |
| Both the short-run and long-run Phillips curves are downward sloping. |
| Both the short-run and long-run Phillips curves are vertical. |
7. Suppose the table below lists the actual annual inflation rates for 2010 to 2015. What would be the most likely predictions people make about the inflation rate for 2016 based on adaptive and rational expectations theories, respectively?
| Year | Actual Inflation rate |
| 2010 | 0% |
| 2011 | 0% |
| 2012 | 3% |
| 2013 | 3% |
| 2014 | 6% |
| 2015 | 6% |
| 6% and 3% |
| 6% and 9% |
| 6% and 12% |
| 9% and 6% |
| 3% and 6% |
8. Which of the following can change relatively quickly in the short-run?
| the price of a latte in a coffee shop |
| the salary of a finance professor |
| the rent paid for a store |
| 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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