ECON-1007EL Study Guide - Final Guide: Output Gap, Nominal Interest Rate, Real Interest Rate
16 Apr 2016
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Chapter 11 important - just know how to do the different graphs and how to fix them. Expansionary gap (p. 276/278) (graph 1) (graph 2) The difference between these two graphs is that the rst one will take longer to reduce the expansionary gap because there is no government involvement helping to speed up the process. In the second graph, the expansionary gap is reduced much quicker since government spending is decreased and taxes and interest rates are increased to slow the economy down. Graph 1 - this shows an expansionary gap at point a (orange). This is because the actual output is greater than the potential output, since the economy is producing more than the long run aggregated supply. It shows that in the long run as time goes on, the short run aggregated supply will shift upwards to the. Sras1 and return to the potential output that creates a stable economy however, will result in a higher price.
