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Economics 1022A/B Chapter Notes - Chapter 28: Aggregate Demand, Aggregate Supply, Potential Output

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School
Western University
Department
Economics
Course
Economics 1022A/B
Professor
Emilie Mc Hugh Rivers

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ECON 1022A/B Full Course Notes
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ECON 1022A/B Full Course Notes
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Document Summary

In the short run, many factors can start inflation, and real gdp and the price level interact. Demand-pull inflation: an inflation that starts because aggregate demand increases. Can be kicked off by any of the factors that change aggregate demand. For inflation to proceed, aggregate demand must be persistently increasing. Can only happen if quantity of money persistently increases. Cost-push inflation: an inflation that is kicked off by an increase in costs. 2 main sources: increase in money wage rate or increase in money prices of raw materials. For inflation to proceed, the quantity of money must persistently increase. If inflation is expected, the fluctuations in real gdp that accompany demand-pull inflation and cost-push inflation don"t occur. Instead, inflation proceeds as it does in the long run, with real gdp = potential gdp and unemployment at its natural rate. In anticipation of increase in ad, money wage rate rises and sas shifts left.

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Related Questions

If we observe an increase in real GDP and an increase in the price level after an increase in aggregate demand, we can conclude that

A. the aggregate supply curve is upward sloping.

B. the economy is now at full employment.

C. the aggregate supply curve is vertical.

D. the aggregate supply curve is horizontal.


An inflationary gap occurs when

A. the equilibrium level of real GDP is greater than the long-run aggregate supply curve.

B. short-run aggregate supply falls, but other things remain constant.

C. the equilibrium level of real GDP is less than the long-run aggregate supply curve.

D. aggregate demand falls, but other things remain constant.


Cost-push inflation is

A. inflation caused by decreases in aggregate supply that are not matched by decreases in aggregate demand.

B. inflation caused by decreases in aggregate supply that generate an even larger decrease in aggregate demand.

C. inflation caused by increases in aggregate demand that generate an even larger increase in aggregate supply.

D. inflation caused by increases in aggregate demand that are not matched by increases in aggregate supply.


A stronger dollar in world exchange markets is shown by

A. a dollar buying less units of foreign currency than it could before.

B. a dollar buying more units of foreign currency than it could before.

C. a dollar buying the same amount of foreign currency than it could before, with gold backing up the value of the dollar.

D. foreigners selling the dollars that they have.

A. A decrease in aggregate supply can result in:

  1. a recession
  2. cost-push inflation
  3. demand-pull inflation
  4. unemployment 

B. In the short run (intermediate-range) of the aggregate supply curve, higher aggregate demand will increase

  1. the price level but reduce real GDP.
  2. real GDP without raising the price level
  3. the price level without affecting real GDP
  4. both the price level and real GDP

C. Which of the following helps explain why real GDP is inversely related to the price level within the framework of the AD-AS model?

  1. As prices fall, domestic consumers have an incentive to buy more of the cheaper goods and services
  2. As prices fall, the wealth of people holding the fixed quantity of money increases, causing them to expand their purchases of goods and services
  3. As prices fall, the government will have to reduce taxes, which will lead to an increase in the number of goods and services purchased
  4. As prices fall, the monetary authorities will have to increase the money supply, which will lead to an increase in the number of goods and services purchased

Refer to the table given below. Suppose that aggregate demand increases such that the amount of real output demanded rises by $15 billion at each price level.

Real Output Demanded (Original)

Price
Level

Real Output
Supplied

$500

112

$515

505

106

512

510

100

510

515

94

507

520

88

500


a.) By what percentage will the price level increase? _______ percent

b.) Will this inflation be demand-pull inflation or will it be cost-push inflation? (Click to select) Cost-push inflation or Demand-pull inflation

c.) If potential real GDP (that is, full-employment GDP) is $510 billion, what will be the size of the positive GDP gap after the change in aggregate demand? $ _______ billion

d.) If the government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it? (Click to select) (Increase or Decrease)