EC250 Chapter Notes - Chapter 9: Canadian Dollar, Risk Premium, Deflation

121 views9 pages

yellowmule139

7 Mar 2016

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

9. 2 expenditure and output: goods market equilibrium: expected taxes, government purchases, monetary policy (sets short term interest rate, term structure (influences long term interest rates) Model now determine equilibrium level of output as well as real interest rate. Is curve: equilibrium in the goods market where planned expenditure equals output. Interest: control policy of central bank that affects long-term real interest rates. Term structure: effects short term interest rate and long term rates affects equilibrium of goods in market. Equilibrium of economy is when ic=is: determines level of output and real interest rate. Aggregate expenditure: the sum of all demands. Aggregate output: the sum of all production. Two relationship between output and expenditure: value of output = total income, aggregate expenditure depends on income (people will spend according to income) Goods market based on comparing planned aggregate expenditure and actual level of output. Planned expenditure = consumption + planned investment + government purchases + net.

Related Questions

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.

	decreases; decreases; falls short of
	increases; decreases; equals
	decreases; increases; exceeds
	decreases; increases; equals
	increases; decreases; exceeds

The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that

	Y* is independent of the price level and that actual output Y > Y* in the long run
	Y* equals actual output (Y) in the long run
	Y* is independent of the price level and that actual output Y = Y* in the long run
	Y* is independent of the price level
	Y* is independent of the price level and that actual output Y < Y* in the long run

Stagflation arises in the context of the AD-AS model when some external factor causes

	the LRAS curve to shift to the right
	the AD curve to shift leftwards
	the SRAS curve to shift downwards
	the SRAS curve to shift upwards
	the AD curve to shift rightwards

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.

	either an increase or a decrease
	no change
	an increase
	a decrease
	an initial increase, and then a decrease

Which of the following will shift the aggregate demand curve to the right?

	Consumers become pessimistic about the future
	A new technology is developed that will increase profits
	Income taxes are raised
	Foreign economies fall into recession, reducing their demand for domestic exports
	The government reduces purchases to balance the budget

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?

	A leftward shift the AD curve
	There will be no movement of the AD curve
	A movement down the AD curve
	A movement up the AD curve
	A rightward of the shift the AD curve

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

	100
	110
	120
	90
	105

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.

	recessionary; recessionary
	recessionary; expansionary
	expansionary; expansionary
	output; output
	expansionary; recessionary

The aggregate demand curve shows

	the amount of planned aggregate expenditure (and output) at the current price level
	the amount of planned aggregate expenditure (and output) at an average price level
	the amount of planned aggregate expenditure (and output) at a constant price level
	the amount of planned aggregate expenditure (and output) at various price levels
	the amount of planned aggregate expenditure (and output) at last year's price level

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 __________.

	an increase; left; Y = Y*
	a decrease; right; Y > Y*
	an increase; right; Y = Y*
	a decrease; left; Y > Y*
	no change; left; Y = Y*

Suppose that the chairman of the Federal Reserve Board decides to intervene in the economy at the Federal Open Market Committee Meeting, increasing short term interest rates

) Now state in words the impact in the economy in the short run. In particular, explain what will happen in the goods markets and in the money markets. What are the final effects of this policy on prices and output in the short run? Explain what the monetary mechanism is in this context.

(d) Use the IS-LM diagrams to graphically illustrate the impact of a Federal Reserve decision in the long run. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift, v. the long-run equilibrium values.

(e) Now state in words the impact in the economy in the long run. What is the key variable that links the short run to the long run, and how in this case? What are the final effects of this policy on prices and output in the long run? Explain what the Classical dichotomy is in this context.

(f) Draw a graph showing the effect of this policy on real GDP over time, that is, a graph showing the economic fluctuation in the short run and in the long run (GDP real in the Y-axis and time in the X-axis).

orchidpanda693

Consider the scenario in which the Fed is implementing a contractionary monetary policy aimed at alleviating inflationary pressures.In this regard please provide an answer to the questions listed below. In order to answer, it might be a good idea to use a money market diagram and show how interest rates affect the economy using the AD/AS diagram. No need to submit the graphs, but once again drawing the two graphs (money market and AD/AS) for yourself will go a long way in guiding you towards the right answer. Note. In the static AD/AS model, initially assume that the economy is in SR equilibrium and real GDP is above potential GDP. a) As a result of the contractionary monetary policy pursued by the Fed, what would happen with the interest rate? The interest rate is going to (rise/fall/stay fixed) Blank 1 . b) What would happen with the short run aggregate supply curve? Short run aggregate supply curve will shift (left/right/stay fixed) Blank 2 . c) What would happen with the long run aggregate supply curve? Long run aggregate supply curve will shift (left/right/stay fixed) Blank 3 . d) What would happen with the aggregate demand curve? Aggregate demand curve will shift (left/right/stay fixed) Blank 4 . e) What would happen with the Real GDP level? Real GDP will (rise/fall/stay fixed) Blank 5 . f) What would happen with the employment level? Unmployment level will (rise/fall/stay fixed) Blank 6 .

silverwildebeest561

EC250 Chapter Notes - Chapter 9: Canadian Dollar, Risk Premium, Deflation

Document Summary

Get access

Related Documents

EC250 Chapter Notes - Chapter 9: Overnight Rate, Securitization, Real Interest Rate

EC250 Lecture Notes - Lecture 9: Real Interest Rate, Nominal Interest Rate, Economic Equilibrium

EC250 Chapter Notes - Chapter 9: Real Interest Rate, Nominal Interest Rate, Exogeny

Related Questions