EC140 Chapter Notes - Chapter 24: Output Gap, Phillips Curve, Demand Shock
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From the short-run to the long-run: the adjustment of factor prices. Factor prices are assumed to be exogenous; they may change, but any change is not explained within the model. Factor prices are assumed to adjust in response to output gaps. Technology and factor supplies are assumed to be constant (and therefore. Note: the assumption that potential output is constant leads to the prediction that ad or as shocks have no long-run efect on real gdp; output eventually returns to y*. Factor prices are assumed to have fully adjusted to any output gap. Technology and factor supplies are assumed to be changing. Potential output is graphed as a vertical straight line on a graph comparing real gdp and the price level. When the ad and as curve intersect before (to the left) of the line of y*, it is considered a recessionary gap (real output is less than potential). When the opposite happens, it is considered an inlationary gap!
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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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