EC140 Lecture Notes - Lecture 24: Automatic Stabilizer, Shortage, Output Gap
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From the short run to the long-run: the adjustment of factor prices. The short-run assumptions : factor prices are assumed to adjust in response to output gaps, technology and factor supplies are assumed to be constant, and therefore y* is constant. The long-run assumptions : factor prices are assumed to have fully adjusted to any output gap. Real gdp will return to the level of potential output: technology and factor supplies are assumed to be changing. Potential output the total output that can be produced when all productive resources are fully employed. The productive resources are land, labour and capital. Output gaps in the short-run the output gap is the difference between the actual gdp and potential gdp (y y*). Booms can cause wages to rise rapidly, while recessions usually causes wages to fall only slowly. Potential output as an anchor following an ad or as shock, the short-run equilibrium level of output may be different from potential output.
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a) | 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.
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b) | The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that
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c) | Stagflation arises in the context of the AD-AS model when some external factor causes
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d) | 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.
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e) | Which of the following will shift the aggregate demand curve to the right?
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f) | 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?
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g) | 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
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h) | 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.
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i) | The aggregate demand curve shows
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j) | 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 __________.
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