EC140 Chapter Notes - Chapter 30: Stagflation, Nairu, Output Gap

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graydonkey67

14 Apr 2016

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Inlation ~ a rise in the average level of all prices. Usually expressed as the annual percentage change in the consumer price index (cpi) Note: the bank of canada"s current target rate of inlation is 2%! As wages and factor prices rise, unit costs increase and the as curve shifts up; as wages and factor prices fall, unit costs decrease and the as curve shifts down. Inluence of the output gap on nominal wages: the excess demand for labor that is associated with an inlationary gap (y. > y*) puts upward pressure on nominal wages (they rise: the excess supply of labor that is associated with a recessionary gap (y < Y*) puts downward pressure on nominal wages (they fall), though the adjustment is quite slow: the absence of either output gap (y = y*) implies that no pressure is being exerted on nominal wages.

Related Questions

1. In the long run, when prices are perfectly flexible:

a. aggregate supply is vertical and a market economy is self-correcting.

b. a market economy cannot self-correct.

c. government will be required to set prices to maintain equilibrium.

d. changes in aggregate demand cause equilibrium real GDP to change.

2. An increase in household wealth when the SRAS curve is upward sloping:

a. leads to an increase in the price level but has no impact on real GDP

b. has no impact on the price level but leads to an increase in real GDP

c. leads to an increase in both the price level and real GDP

d. has no impact on the price level or real GDP

3. In the long run, continued increases in aggregate demand not matched by similar increases in aggregate supply will cause:

a. an increase in the full-employment level of real GDP

b. a recessionary gap

c. a decrease in the price level

d. an increase in the price level

4. The vertical long-run aggregate supply curve implies that:

a. changes in aggregate demand will not affect the price level

b. the short-run aggregate supply curve is also vertical

c. natural or full-employment real GDP does not depend on the price level, in the long run

d. natural or full-employment real GDP is the same as the equilibrium real GDP in the short run

5. A rightward shift of the long-run aggregate supply curve illustrates:

a. economic growth

b. a recessionary gap

c. an inflationary gap

d. a decrease in natural real GDP

6. When the economy is in a recessionary gap

a. there is a surplus of labor

b. there is a shortage of labor

c. it is producing a real GDP level that is greater than natural real GDP

d. the unemployment rate is less than the natural unemployment rate

7. If the actual unemployment rate is less than the natural unemployment rate:

a. a recessionary gap exists and wages are likely to rise

b. an inflationary gap exists and wages are likely to rise

c. a recessionary gap exists and wages are likely to fall

d. an inflationary gap exists and wages are likely to fall

8. An economy in long-run equilibrium is producing:

a. a level of real GDP that is greater than its natural real GDP

b. where both the price level and real output are maximized

c. a level of real GDP equal to its natural real GDP

d. in the vertical range of aggregate demand.

crimsonreindeer720

If membership falls in labor unions and unions become less popular, then:

	production costs will increase, SRAS will shift to the left, decreasing equilibrium GDP and increasing the aggregate price level.
	production costs will fall, SRAS will shift to the right, increasing equilibrium GDP and lowering the aggregate price level.
	production costs will not change, AD will shift to the right, increasing equilibrium GDP and aggregate price level.
	production costs will fall, there will be a downward movement along SRAS, equilibrium GDP will increase and aggregate price level will fall.

If the short-run macroeconomic equilibrium is _________ of the economy's potential output, then there is a(n) ________ and the aggregate price level is expected to ________.

	to the left; inflationary gap; fall
	to the left; recessionary gap; fall
	to the right; recessionary gap; rise
	to the right; inflationary gap; fall

harlequinplatypus643

1. In economy A, all workers agree in advance on the nominal wages that their employers will pay them. In economy B, half of all workers have these nominal wage contracts. In contrast, the other half have indexed employment contracts, so their wages rise and fall automatically with the price level.

A. According to the sticky-wage theory of aggregate supply, which economy has a more steeply sloped short-run aggregate-supply curve?
B. In which economy would a 5 percent increase in the money supply have a larger impact on output in the short run?
C. In which economy would it have a larger impact on the price level in the short run?

2. When output rises, unemployment falls.