EC140 Lecture Notes - Lecture 8: Price Level, Large Deviations Theory, Output Gap
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Short run to long run: adjustment of factor prices. Technology and factor supplies are assumed to be constant. 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. Output gaps in short-run are diference between actual gdp and potenial gdp: inlaionary gap y > y, recessionary gap y < y* Inlaionary gap: demand for labour (and other factor services) is relaively high, high proits for irms and unusually large demand for labour. Wages and unit costs tend to rise. Recessionary gap: demand for labour (and other factor services) is relaively low, low proits for irms and low demand for labour. Wage and unit costs tend to fall. Adjustment asymmetry: inlaionary output gaps wages raise rapidly, recessionary output gaps wages reduce slowly (downward wage sickiness) Y > y* excess demand for labour wages rise. Y < y* excess supply for labour wages fall.
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Related Questions
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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