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ECON 2000 Chapter Notes - Chapter 9: Demand Shock, Price Level, Aggregate Supply

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mag0sea
23 Feb 2017
School
York University
Department
Economics
Course
ECON 2000
Professor
Daniel Cohn

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Document Summary

How the short run and the long run differ. In the long run, prices are flexible and react to changes in supply or demand. In the short run, prices are sticky and do not react immediately to changes in supply or demand. Recall the theoretical separation of real and nominal variables is called the classical. Dichotomy and the irrelevance of the money supply for the determination of real variables is called monetary neutraility. Suppose that the bank of canada suddenly reduced the money supply by 5 percent. In the long run, the price level will decrease by 5 percent (including nominal wages) but all real variables will remain the same (output will remain the same since it is fixed by fop) For instance, real wages (wages in terms of the goods and service you can purchase will remain the same) Thus, in the long-run, changes in the money supply do not cause fluctuations output or employment (y)

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Related Questions

Question 2

  1. For any given expected inflation rate, short-run aggregate supply curves show the relationship between

    the money supply and growth rate of output.

    inflation and growth rate of output.

    production factors and wages.

    inflation and wages.

1 points

Question 3

  1. Why is the SRAS curve steeper above its intersection with the Solow growth curve?

    Wages are stickier in the upward direction.

    Wages are less sticky in the upward direction.

    Lower inflation will lead to faster growth.

    Employees become less motivated to work during times of unexpected inflation.

1 points

Question 4

  1. What factors triggered the Great Depression?

    decreased consumer spending and tight monetary policy

    decreased investment and increased inflation

    decreased employment and increased money supply

    decreased inflation and increased income taxes

1 points

Question 5

  1. How might changes in the money supply be non-neutral in the short run?

    As the amount of money circulating in the economy changes before prices respond, consumers' purchases change accordingly, which leads producers to change production levels.

    When money supply changes in the short run, it will affect nominal, but not real, variables in the short run.

    As money growth increases at a faster rate, it will cause real GDP to grow at an equally faster rate.

    If producers expect inflation to increase, they will increase supply in order to sell before the arrival of inflation.

1 points

Question 6

  1. For a given nominal interest rate, an increase in deflation will cause the real rate of interest to

    remain relatively constant.

    increase.

    decrease.

    become unpredictable.

    Question 8

    Which of the three price indexes measures the average price level of the largest total number of goods?

    the consumer price index

    the GDP deflator

    the producer price index

    Each price index accomplishes the same task.

    The textbook uses the

Suppose an economy is in long-run equilibrium. The central bank raises the money supply by 5 percent. what causes the economy to move from its short-run equilibrium to its long-run equilibrium?

1. The government increases taxes to curb aggregate demand.

2. Nominal wages, prices, and perceptions adjust upward to this new price level.

3. The government increases spending to increase aggregate demand.

4. Nominal wages, prices, and perceptions adjust downward to this new price level.

1. If the price level doubles and the real output doesn't change, then nominal output also doubles.
2. Inflation makes it less difficult to interpret the information conveyed by prices.

3. Laissez-faire economists oppose government intervention in the market process.

4. Active demand management policies are based on the work of JohnMaynard Keynes.

5. In the AS/AD model, as the price level rises, the real value of assets increases, causing consumption to increase. This is one reason why the aggregate demand curve slopes down.

6. The short-run aggregate supply curve is upward sloping in part because increases in aggregate demand cause some firms to increase their price markups.

7. If productivity and wages both raises by 3 percent, then the short-run aggregate supply curve does not shift.

8. The long-run aggregate supply curve is vertical because all prices adjust in the long run.

9. If the economy is not in long-run equilibrium and other things are equal, then prices will eventually adjust to bring the economy to long-run equilibrium.

10. Most economists agree that it is possible for fiscal policy to fine-tune the economy.