ECON 0110 Lecture Notes - Consumption Function, Parsec, Autonomous Consumption
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The level of output in which planned or desired purchases by consumers, businesses, governments and foreigners equals actual aggregate output. When the economy is in equilibrium, producers have no incentive to increase (or decrease) output. Total production = production for immediate sale + production to increase inventories. Equilibrium is achieved when people want to buy everything that has been produced for immediate sale. In this case, the firm"s level of inventories will be at exactly the desired level. Equilibrium is achieved if the amount that people desire to spend matches the amount that producers produced for immediate sale. If actual output for immediate sale exceeds desired spending, then producers produced too much and inventories will increase above the desired level. If actual output exceeds desired output, actual output will decline. If actual output is less than desired spending, people purchase more than expected and inventories will decrease below the desired level. If desired output exceeds actual output, output will increase.
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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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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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