ECON102 Lecture Notes - Lecture 28: Potential Output, Aggregate Demand

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pinkbuffalo105

9 Apr 2015

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University of Waterloo

Department

Economics

Course

ECON102

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ECON102 Full Course Notes

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We can identify two sources of inflation: demand pull inflation, starts with an increase aggregate demand, for any number of reasons. Increase ad -> ad shifts right: outcome, increase real gdp (inflationary gap, increase price level. In the new short run equilibrium, unemployment is low, so money wages increase. Increase money wages -> decrease sas (sifts left: outcomes, real gdp = potential gdp, price level is higher. In the new short run equilibrium, assuming the bank wants to increase ourput and decrease unemployment, the bank will stimulate (increase) ad. An inflationary spiral will result only if costs continue to increase and the bank continues to respond to the recession by increase ms -> increase ad. If ad is expected to increase, and the price level is expected to increase, the money wage will increase in anticipation. If increase p = increase money wage, real gdp will not change.

Related Questions

A. A decrease in aggregate supply can result in:

a recession
cost-push inflation
demand-pull inflation
unemployment

B. In the short run (intermediate-range) of the aggregate supply curve, higher aggregate demand will increase

the price level but reduce real GDP.
real GDP without raising the price level
the price level without affecting real GDP
both the price level and real GDP

C. Which of the following helps explain why real GDP is inversely related to the price level within the framework of the AD-AS model?

As prices fall, domestic consumers have an incentive to buy more of the cheaper goods and services
As prices fall, the wealth of people holding the fixed quantity of money increases, causing them to expand their purchases of goods and services
As prices fall, the government will have to reduce taxes, which will lead to an increase in the number of goods and services purchased
As prices fall, the monetary authorities will have to increase the money supply, which will lead to an increase in the number of goods and services purchased

carminewasp285

If we observe an increase in real GDP and an increase in the price level after an increase in aggregate demand, we can conclude that

A. the aggregate supply curve is upward sloping.

B. the economy is now at full employment.

C. the aggregate supply curve is vertical.

D. the aggregate supply curve is horizontal.

An inflationary gap occurs when

A. the equilibrium level of real GDP is greater than the long-run aggregate supply curve.

B. short-run aggregate supply falls, but other things remain constant.

C. the equilibrium level of real GDP is less than the long-run aggregate supply curve.

D. aggregate demand falls, but other things remain constant.

Cost-push inflation is

A. inflation caused by decreases in aggregate supply that are not matched by decreases in aggregate demand.

B. inflation caused by decreases in aggregate supply that generate an even larger decrease in aggregate demand.

C. inflation caused by increases in aggregate demand that generate an even larger increase in aggregate supply.

D. inflation caused by increases in aggregate demand that are not matched by increases in aggregate supply.

A stronger dollar in world exchange markets is shown by

A. a dollar buying less units of foreign currency than it could before.

B. a dollar buying more units of foreign currency than it could before.

C. a dollar buying the same amount of foreign currency than it could before, with gold backing up the value of the dollar.

D. foreigners selling the dollars that they have.

redseal200

Illustrate how each of the following events would shift the AS schedule and potential Real GDP, thereby altering equilibrium prices and output levels in the economy. Use an aggregate supply-aggregate demand diagram in your explanation and assume that the economy is initially at full employment.

Note: Although some of the events listed below will also shift AD conditions in the economy, you do not need to show AD shifts in answering this question.

a) an increase in the general level of money wages

b) an increase in the price of imported oil and related energy products.

c) a decrease in the level of US interest rates

d) an increase in the productivity of labor

e) an increase in the expected inflation rate

f) an increase in the labor force growth rate

cyanalpaca633

ECON102 Lecture Notes - Lecture 28: Potential Output, Aggregate Demand

ECON102 Full Course Notes

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