ECON-1007EL Chapter Notes - Chapter 8: Potential Output, Output Gap, Parsec
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2 Mar 2017
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The key(cid:374)esia(cid:374) model"s crucial assu(cid:373)ptio(cid:374): fir(cid:373)s meet de(cid:373)a(cid:374)d at preset. The basic keynesian model is a somewhat simplified model of the economy. It is geared towards showing how an economy suffering from a recessionary gap can raise actual output to the level of. It treats the level of potential output as fixed and assumes zero inflation. potential output. In the short-run, firms meet the demand for their product at preset prices. Firms do not respond to every change in the demand for their products by changing their prices. Instead, they typically set a price for some period and then meet the demand as that price. By meeting the demand, we mean that firms produce just enough to satisfy their customers at the prices that have been set. Menu costs are the costs of changing prices. However, this will not prevent firms from changing their prices indefinitely.
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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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