01:220:103 Lecture Notes - Lecture 15: Paul Volcker, Stagflation, Aggregate Demand
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4 Apr 2017
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Fiscal policy effects: flat portion of the as curve. If the shift in the ad curve is caused by a decrease in net taxes, it is consumption that causes the crowding out of investment. When the economy is on the flat part of the as curve, there is very little crowding out of planned investment. Output expands to meet the increased demand. Because the price level increases very little, the fed does not raise the interest rate much, and so there is little change in planned investment. Fiscal policy effects in the long run o. If wages adjust fully to match higher prices, than the long-run as is vertical, and so fiscal policy will have no effect on output. The fed"s response to the z factors: an increase in z. Shape of the ad curve when the fed cares more about the price level than output.
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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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