EC140 Lecture Notes - Lecture 9: Output Gap, Potential Output

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EC140 Lecture Notes - Lecture 1: Lectionary

EC140 Lecture Notes - Lecture 2: Lectionary, Price Level, Real Wages

EC140 Lecture Notes - Lecture 9: Output Gap, Potential Output

Document Summary

Ec140 lecture 9- using fiscal policy & intro to ch 23. Government can use g taxes/transfers to in uence ae and a ect ye. The goal is stabilize the economy and perhaps generate future growth. Opens the possibility that the government can intervene in a macroeconomy when output is not at potential. If recessionary gap (potential output greater than actual), an increase in g and/or reduction in t (taxes) could be used to raise y and return the economy back to potential output. If in ationary gap (potential output less than actual), a decrease in g and/or increase in t could lower y and return the economy to potential. Immediate impact is to increase the government spending component of ae, this shifts the ae curve in a parallel fashion by exactly the same amount as the increase in g. The multiplier means that the initial increase in y induces changes in c that results in further increase in y, etc.

Related Questions

Which of the following statement(s) about fiscal policy is/are true?

		A fiscal policy action to close a recessionary gap is to decrease taxes
		Fiscal policy may require time before it takes effect (lags)
		Expansionary fiscal policy can be achieved by increases in transfer payments and decreasing government purchases to pay for it.
		One potential problem with using fiscal policy to close recessionary output gaps is that sustained government deficits can be harmful to long-run economic growth.
		Fiscal policy may affect potential output as well as potential spending.
		The choices of government spending have little effect on fiscal policy since government spending is tied directly to the business cycle through Y=C+I+G+NX.
		A fiscal policy action to close an expansionary gap is to decrease government purchases
		Balanced budget fiscal policy is more effective than borrowing or re-paying government debt.

ceruleanmuskrat915

Suppose that the economy of Freedonia obeys the following relationships:

C = 100 + 0.6(Y ï¿½ T)

I^P = 150

G = 250

NX = 120

T = 200

a. Find the numerical equation relating to planned aggregate expenditure (PAE) to output (Y).

b. Calculate short-run equilibrium output, showing all calculations. What is the government budget balance? Does Freedoniaï¿½s government have a budget surplus or a budget deficit?

c. What is the effect of an increase in government purchases from G = 250 to G = 300 on GDP (Y)? Solve for the new level of equilibrium output. What is the multiplier? Show your work.

d. Suppose that the government simultaneously increases net taxes by 50 (that is, continue to assume that government purchases have increased by 50, as in part (c)). Calculate the new level of equilibrium output, showing your work. What is the new government budget balance? How has it changed from (b)? Does Freedoniaï¿½s government have a budget surplus or a budget deficit?

e. Assume that the equilibrium output found in (b) above is the potential output (Y*) of this economy. After the rise in both government purchases (in (c)) and net taxes (in (d)), what is the output gap in percentage terms? Is this an expansionary gap or a recessionary gap? If the natural rate of unemployment is 6%, use Okunï¿½s law to calculate what the actual unemployment rate must be.

turquoisemole375

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*

EC140 Lecture Notes - Lecture 9: Output Gap, Potential Output

EC140 Lecture Notes - Lecture 1: Lectionary

EC140 Lecture Notes - Lecture 2: Lectionary, Price Level, Real Wages

EC140 Lecture Notes - Lecture 9: Output Gap, Potential Output

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