ECO 111 Lecture Notes - Lecture 11: 3, Aggregate Demand
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3 Oct 2016
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Any increase in planned aggregate expenditures will increase ad for goods and services (shift right) Shift in ad: as taxes decreases, consumer spending increases, which increases ad. Increase in government spending increases ad: as interest rates decrease, investment spending decreases, which increases. Ad: net export increase (decrease in trade barriers, $ depreciates, increase in foreign gdp, as marginal propensity to consume increases, ad increases (future expectations, decreases in stock or housing values, decreases wealth, decreases consumption, decreases ad. Endogenous variables - (rate of in ation, gdp) determined by or in the model. Exogenous variables - shifts not determined by the model. You save more and in ation goes down (money goes farther), interest rates go down. As interest rate goes down, investment spending goes up. As gdp increases, want to hire more labor. In short run we can increase labor without increasing wages. But over time wages will increase and in ation will increase.
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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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