ECON 1100 Chapter Notes - Chapter 8: Fiscal Policy, Monetary Policy, Output Gap
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7 Dec 2013
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Chapter 8: spending and output in the short run. The keynesian model"s crucial assumption: firms meet demand at preset prices. In the short-run firms meet the demand for their products at preset prices. Firms do not respond to every change in demand, they generally set a price for some period and then meet demand at that price. Meeting the demand means that firms produce just enough to satisfy their consumers at the prices that have been set. Increases in output which imply increases income cause consumption to rise. The graphical solution is based on the keynesian cross which shows the relationship of pae on output. Short-run equilibrium output is determined at the intersection of the two lines, when s-re output differs from potential output an output gap exists. Increases in autonomous expenditure shift the expenditure line upward, increasing the s-re 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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