ECON-E 202 Lecture Notes - Lecture 20: Aggregate Demand, Keynesian Cross

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cerisegiraffe538

27 Apr 2018

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Economics

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ECON-E 202

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First Half of Unit Review

Second Half on Thursday TEST THURSDAY NIGHT

Module 4a: Keynesian Model: Short Run Aggregate Supply & Demand

Keynesian:

● short run & demand focused

● rigid prices due to unions and long term contracts etc

● government should be a significant player since they control an aspect of aggregate

demand (which determines GDP)

● Classical: flexible prices, long run & supply focused

Hayek v Keynes Static A.D & A.S Model

● Level of price flexibility determines shape of SRAS and LRAS.

● in the long run prices are super flexible so its vertical

SRAS slopes up

● As price level increases quantity supplied with increase

● Failure to accurately predict level level changes

● Shifts LRAS: Savings, Production, Education, Number of resources, Technology

○ I.e new materials, fewer trade barriers, changes in marginal tax RATES, inflation

expectations

○ These also all shift SRAS

○ However input prices only shift SRAS

What causes an inflationary gap?

○ Actual GDP>Potential

○ *The fed will raise interest rates to reduce consumer spending*

○ If everyone gets a cola= more inflation and more unemployment

Great Recession caused by: decrease in AD

○ Everyone had invested in their homes and then the housing market crashed

Static Model: Misleading

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Document Summary

Module 4a: keynesian model: short run aggregate supply & demand. Short run & demand focused rigid prices due to unions and long term contracts etc. Government should be a significant player since they control an aspect of aggregate demand (which determines gdp) Classical: flexible prices, long run & supply focused. Hayek v keynes static a. d & a. s model. Level of price flexibility determines shape of sras and lras. in the long run prices are super flexible so its vertical. As price level increases quantity supplied with increase. Failure to accurately predict level level changes. Shifts lras: savings, production, education, number of resources, technology. I. e new materials, fewer trade barriers, changes in marginal tax rates, inflation expectations. *the fed will raise interest rates to reduce consumer spending* If everyone gets a cola= more inflation and more unemployment. Everyone had invested in their homes and then the housing market crashed.

Related Questions

Please help wtih these economics questions. I'll give the best answer to the person who justifies their answer.. or someone who does well in economics and knows the subject area well.

Which of the following statements is not true about Say's Law?

A. People produce more goods than they want for their own use only if they seek to trade them for other goods.

B. Markets would be regularly hit by severe shortages and surpluses.

C. Desired expenditures will equal actual expenditures.

D. Surpluses will be eliminated by falling prices and shortages will be eliminated by increasing prices.

Which of the following is not an assumption of the classical model?

A. Buyers and sellers react to changes in relative prices.

B. Households want to maximize economic well being.

C. Wages and prices will move freely in the upward direction but not the downward direction.

D. No single buyer or seller of a commodity can affect its price.

Money illusion is

A. when people think they are better off when their income increases even though prices have increased by the same amount.

B. when people are motivated by self-interest.

C. could not exist if the economy did not have competitive markets.

D. a basic condition that all classical economists assume people have.

Saving is not a problem in the classical model because

A. interest rates were flexible and savings were channeled into investment.

B. savers and investors were the same people.

C. the classical economists assumed that saving was beneficial to people for retirement.

D. saving would be spent by consumers eventually.

Which of the following statements is true?

A. There is an inverse relationship between investment and the interest rate.

B. There is no relationship between investment and the interest rate.

C. There is a direct relationship between investment and the interest rate.

D. Investment is always less than savings.

In the classical model, high unemployment due to either a demand or a supply shock

A. will return to its normal level quickly as wages adjust.

B. will persist if due to a supply shock but not if due to a demand shock.

C. can persist for an indefinite period of time.

D. never exists because unemployment can never deviate from its normal level.

The classical model makes little distinction between the long-run and short-run because

A. the model has not been fully developed yet.

B. prices adjust so fast that the economy is quickly moving towards the long-run.

C. the classical economists knew that we are always operating in the short run.

D. current changes influence the long run, so it is not possible to plan for the future.

In the classical model

A. the level of real GDP per year does not depend on the level of aggregate demand.

B. the level of GDP is demand determined.

C. the level of GDP determines prices independent of demand.

D. changes in aggregate supply affect the price level, not real GDP.

Which of the following is a true statement?

A. Classical economists believed output adjusted more than prices when aggregate demand fell while Keynes believed prices adjusted more than output.

B. Classical economists believed price adjusted more than output when aggregate demand fell while Keynes believed output adjusted more than prices.

C. A decrease in aggregate demand has no short-run effects according to the classical economists, but had significant effects according to Keynes.

D. A decrease in aggregate demand was not possible according to the classical economists, but was possible according to Keynes.

Which of the following is not a reason why GDP can be expanded beyond a level consistent with its long-run growth path in modern Keynesian analysis?

A. Prices and wages are flexible allowing for needed adjustments.

B. In the short-run existing workers can work more hours.

C. The existing capital stock can be used more intensively.

D. Higher prices induce firms to hire more workers.

A recessionary gap can be caused by

A. a decrease in aggregate supply holding aggregate demand constant.

B. an increase in aggregate demand holding aggregate supply constant.

C. an increase in the long run aggregate supply curve holding the aggregate demand constant.

D. a decrease in both aggregate demand and aggregate supply.

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ECON-E 202 Lecture Notes - Lecture 20: Aggregate Demand, Keynesian Cross

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