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Economics 1022A/B Lecture Notes - Lecture 23: John Stuart Mill, Output Gap, Macroeconomics

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Western University
Department
Economics
Course
Economics 1022A/B
Professor
Macdonald

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Economics 1022A/B Lecture Notes - Lecture 22: Aggregate Demand, Monetary Policy, Potential Output

23

Economics 1022A/B Lecture Notes - Lecture 23: John Stuart Mill, Output Gap, Macroeconomics

24

Economics 1022A/B Lecture Notes - Lecture 24: Disposable And Discretionary Income, Consumption Function, Aggregate Demand

Document Summary

The amount by which potential gdp exceeds real gdp is called a inflationary gap When real gdp is less than potential gdp, the gap is called a recessionary gap. An increase in aggregate demand shifts the ad curve rightward. Firms increase production and the price level rises in the short run. At the short-run equilibrium, there is an inflationary gap. The money wage rate begins to rise and the sas curve starts to shift leftward. The price level continues to rise and real gdp continues to decrease until it equals potential gdp. Real gdp decreases and the price level rises. Macroeconomists can be divided into three broad schools of thought: A classical macroeconomist believes that the economy is self-regulating and always at full employment. The term classical derives from the name of the founding school of economics that includes adam smith, david ricardo, and john stuart mill.

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Related Questions

6) According to Classical theory, the economy is self-regulating. If it is in a recessionary gap, what happens? Question options:

Wages rise, the SRAS curve shifts leftward, and both Real GDP and the price level rise.

Wages fall, the SRAS curve shifts rightward, the price level falls, and Real GDP rises.

Wages fall, the SRAS curve shifts leftward, the price level rises, and Real GDP falls.

none of the above

7) According to the classical economists, which of the following statements is true?

Question options:

Financial markets ensure that S will equal I..

Interest rate flexibility will ensure that planned saving is equal to planned investment.

There is a direct relationship between the amount individuals plan to save and the interest rate - higher rates cause people to save more and lower rates reduce savings.

Interest rates determine how much business firms invest - higher interest rates reduce investment and lower rates increase investment.

All of the above are true.

10)

If actual Real GDP is greater than the full employment Real GDP, then the (actual) unemployment rate is

Question options:

greater than the natural unemployment rate and an inflationary gap exists.

less than the natural unemployment rate and a recessionary gap exists.

greater than the natural unemployment rate and a recessionary gap exists.

less than the natural unemployment rate and an inflationary gap exists.

equal to the natural unemployment rate and no gap exists.

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.

 

A.

If membership falls in labor unions and unions become less popular, then:
production costs will increase, SRAS will shift to the left, decreasing equilibrium GDP and increasing the aggregate price level.
production costs will fall, SRAS will shift to the right, increasing equilibrium GDP and lowering the aggregate price level.
production costs will not change, AD will shift to the right, increasing equilibrium GDP and aggregate price level.
production costs will fall, there will be a downward movement along SRAS, equilibrium GDP will increase and aggregate price level will fall.

B.

If the short-run macroeconomic equilibrium is _________ of the economy's potential output, then there is a(n) ________ and the aggregate price level is expected to ________.
to the left; inflationary gap; fall
to the left; recessionary gap; fall
to the right; recessionary gap; rise
to the right; inflationary gap; fall