ECO 1102 Lecture Notes - Lecture 11: Potential Output, Business Cycle, Government Spending

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23 Aug 2018

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The last three chapters have focused separately on three features of economy: output (gdp), prices, unemployment. A demand and supply model for the macroeconomy would be useful. The model f aggregate demand and aggregate supply show how output prices, and employment are all tied together as part of a single economic equilibrium. Because of each component of ad ( c, i, g, nx) Note that this is very different from microeconomy: consumptions (c) : As prices rise, people reduce consumption because their real wealth decreases. i. this is called wealth effect: investment (i) : This causes borrowing to decrease and results in a decrease in investment spending: government spending (g): Most government spending is independent of the price level. Government spending does not contribute to a downward sloping ad: net exports (nx) : When u. s. prices increase, u. s. goods become relatively more expensive compared to other countries goods.

Related Questions

1. Which of the following shifts aggregate demand to the right?
a. Congress reduces purchases of new weapons systems.
b. US exports increase.
c. The price level falls
d. New developments in IT increase the productivity of most manufacturing industries in the US.

2. Suppose the EPA introduces new smog regulation that makes it costlier to produce cars. As a result, aggregate supply falls (primary effect) and firms cut back on production. With less output in the economy available for consumers, consumers bid up the prices of available output. With higher prices, firms choose to produce more (secondary effect).
Which of the following best explains what the net effect on GDP?
a. The two effects should essentially cancel out, with little to no effect on GDP, but the price level clearly rises.
b. It is impossible to say what happens to GDP without being able to compare the magnitudes of the two effects.
c. Real GDP rises as the secondary effect dominates the primary effect.
d. Real GDP falls since the primary effect dominates the secondary effect.

3. A Keynesian economist who observes an output gap would conclude that
a. aggregate demand should be shifted to the right.
b. a policy of deregulation would be better than demand management policy
c. aggregate supply should be shifted to the right
d. All proposed answer options are correct

4. Monetarists believe
a. the Aggregate Supply curve is upward-sloping (but not vertical) over all time frames.
b. the Aggregate Supply curve can be treated as horizontal in the long run (over 10 years
c. the Aggregate Supply curve is vertical only in the very long run (over 20 years).
d. the Aggregate Supply curve can be treated as vertical in the short-to-medium run (1-2 years)

5. Suppose the price of oil increases due to conflict in the Middle East. How will this be illustrated in the AD-AS model?
a. The aggregate demand curve will shift to the left
b. The aggregate supply curve will shift to the left.
c. The aggregate demand curve will shift to the right
d. The aggregate supply curve will shift to the right

6. Assume a Keynesian AS curve. In the short run, when there is a large output gap
a. contractionary demand management policy is likely to be highly inflationary
b. expansionary demand management policy does not cause much inflation.
c. expansionary demand management policy is likely to be highly inflationary
d. the government should use contractionary demand management policy

7. As a result of Bush tax cuts that partially expired in January 2013, the marginal tax rates for some households increased and these households paid higher taxes. Which of the following would be the best description of the tax cut expiration?
a. Rightward shift in AS
b. Rightward shift in AD
c. Leftward shift in AD
d. Leftward shift in AS

8. Suppose that the U.S. government increases income taxes on individuals earning more than $500,000/year and uses the revenue from this tax increase to subsidize the cost of energy for businesses. How will this policy change affect the U.S. economy?
a. The effect on output is ambiguous but price level will decrease for sure
b. The effect on both output and price level is ambiguous.
c. The effect on price level is ambiguous but output will increase for sure
d. The effect on price level is ambiguous but output will decrease for sure

9. If Australia, which imports goods from the United States, went into recession, we would expect that U.S. net exports would
a. rise, making aggregate demand shift right.
b. rise, making aggregate demand shift left
c. fall, making aggregate demand shift left
d. fall, making aggregate demand shift right

10. Suppose that Greece decides to exit the European Union and the Euro Zone, causing a boost in business confidence in European markets. How would you illustrate the primary effect of Greeceâs decision in the AD-AS model for the EU economy?

Note: for this question, assume that Y in the AD-AS model represents output (GDP) of EU member countries without Greece.
a. a shift in the aggregate supply curve to the left and a shift in the aggregate demand curve to the left
b. a shift in the aggregate demand curve to the right
c. a shift in the aggregate demand curve to the left
d. movement along the aggregate demand curve to the left

11. The Austrian school of thought believes that demand management policy should not be used because
a. big government prefers deregulation, which shifts aggregate supply
b. the economy is always at full employment
c. shifting AD to the right is likely to cause deflation
d. big government has a bias towards inflationary policy

rosedolphin326

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.

bluewolf591

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.

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ECO 1102 Lecture Notes - Lecture 11: Potential Output, Business Cycle, Government Spending

ECO 1102 Full Course Notes

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