ECO102H1 Chapter Notes - Chapter 24: Aggregate Demand, Demand Shock, Vertica
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Chapter 24: from the short run to the long run the adjustment of factor prices. Factor prices assumed to adjust in response to output gaps. Technology & factor supplies assumed to be constant (y* is constant) Potential output: total output produced when all productive resources (land, labour, capital) used at normal rates of utilization. Nation"s actual output diverges from potential output, difference is called output gap. View variations in output gap as determined by variations in actual gdp around constant level of potential gdp. Recessionary gap: recessions are characterized as having gdp below potential output. Inflationary gap: when ad & as curves intersect to produce equilibrium real gdp above potential output. Relationships assumed to hold for prices of all factors production: labour, land & capital equipment presence of ongoing inflation influences factor prices especially wages. Wage contracts allow for changes in price level that are expected to occur during life of contract.
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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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