ECON 102 Chapter Notes - Chapter 24: Aggregate Demand, Macroeconomic Model, Demand Shock
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Short run to long run: the adjustment of factor. Factor prices are exogenous (changes not explain in the model) Technology and factor supplies are assumed to be constant (y* is then constant) Equilibrium occurs at the intersection of ad & as curve. Level of real gdp fluctuates around constant level of potential output (y*) Aka the business cycle fluctuations of the real gdp relative to the level of potential output. The theory of the adjustment processes that take the economy from short to long run are based off the assumptions that: Factor prices are assumed to adjust in response to output gaps. Technology and factor supplies are assumed to be constant. Deviations of real gdp from potential output cause wages and other factor prices to adjust essential to shift from short to long run. The adjustment processes examines how shocks and policy effects differ in the short and long run.
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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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