Log in
HomeTextbook Notes300,000CA170,000

ECON 1010 Chapter Notes - Chapter 28.2: Output Gap, Stagflation, Potential Output

35 views7 pages
School
York University
Department
Economics
Course
ECON 1010
Professor
All

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

The aggregate demand curve shifts rightward: read the textbook carefully, real gdp and price level increases. Real gdp cannot remain above potential gdp forever: with unemployment below its natural rate. Sas decreases and the curve shifts leftward. For inflation to proceed, aggregate demand must persistently increase: quantity of money has to persistently increase for aggregate demand to increase. As the aggregate demand continues to increase, businesses increase wage rate and sas curve shifts to the left. The new intersection on the las is the new real gdp and price level is increased: this constantly occurs, which makes it a persistent increase since wage rate always responds to aggregate demand. Situation in chatham: aggregate demand increases the demand for pop. Bottling plant works overtime and increases production. Higher cost of production = less amount produced: aggregate supply decreases if prices to produce is high. Initial effect of a decrease in aggregate supply.

Get access

Grade+
$40 USD/m
Billed monthly
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
10 Verified Answers
Class+
$30 USD/m
Billed monthly
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
7 Verified Answers

Related Documents

ECON 1010
Final Exam
Study Guide
ECON 1010 Study Guide - Aggregate Demand, Aggregate Supply, Potential Output
turquoisemosquito379
ECON 1010 Chapter Notes - Chapter 28: Aggregate Supply, Aggregate Demand, Potential Output
goldmacaw224
ECON 1010 Chapter Notes - Chapter 28: Phillips Curve, Real Business-Cycle Theory, Potential Output
bronzeant361

Related Questions

True or False

1. The loanable fund market demand is the demand for consumption.

( ) 2. An increase in the bond price increases the bond yield.

( ) 3. An increase in the stock price increases the stock rate of return.

( ) 4. Monopoly increases unemployment, but monopsony does not.

( ) 5. The open market operation is the changes in interest rate in open market.

( ) 6. The high reserve requirement has the direct relationship with money creation.

( ) 7. The money value and price level have inverse relationship.

( ) 8. The nominal interest rate is related to inflation.

( ) 9. An inflation tax is the tax put on inflation.

( ) 10. Government expenditure belongs to the aggregate supply.

( ) 11. 1973-1975 recession is due to aggregate demand shift.

( ) 12. 2001 recession is due to aggregate demand shift.

( ) 13. As potential GDP is smaller than actual GDP, recession occurs.

( ) 14. A money supply results in shift of aggregate supply GDP.

( ) 15. The multiplier effect is bigger as marginal propensity to consume is smaller.

( ) 16. The multiplier effect comes together with crowding effect.

( ) 17. A recession results in decrease of welfare program.

( ) 18. A recession results in decrease of tax revenue.

( ) 19. The unemployment and inflation are in inverse relation.

( ) 20. The unemployment and inflation relation does not related to aggregate demand.

( ) 21. A quota deceases export

( ) 22. A tariff decreases import.

( ) 23. A real exchange rate is not related to nominal exchange rate.

( ) 24. A purchasing power parity exchange rate is not related to nominal exchange rate.

( ) 25. A flexible exchange rate is not related to nominal exchange rate.

( ) 26. The export increases consumer surplus.

( ) 27. The trade deficit results in capital inflow.

2. Summarize

(1) loanable fund market

(2) monetary policy tools

(3) quantity equation

(4) Okun's law

(5) mutiplier effect and crowding effect

(6) automatic stabilizers

(7) risk aversion and risk taking

(8) Fisher effect

(9) aggregate model

(10) aggregate demand shift

(11) Phillips curve

(12) protectionist policies

(13) capital inflow and capital outflow

The demand for money
A) d and e are correct
B) all of the following are correct
C) decreases as the average selling price of a unit of outputincreases
D) increases as GDP increases
E) is increased by credit card usage
2. The higher the interest rate, the more of their wealth peoplewill hold as money.
A) True
B) False
3. The money demand curve slopes
A) downward because the cost of holding money decreases as theinterest rate decreases
B) downward because the cost of holding money increases as theinterest rate decreases
C) upward because people demand more money as GDP increases
D) upward because people demand more money as GDP decreases
E) downward because people demand more money as the price levelincreases
4. Which of the following, other things constant, will shift themoney demand curve to the left?
A) an increase in the interest rate
B) a decrease in the interest rate
C) a decrease in real GDP
D) an increase in real GDP
E) an increase in the price level
5. An increase in the money supply will
A) increase the demand for money at each interest rate
B) decrease the demand for money at each interest rate
C) lead people to try to exchange money for interest-bearingassets
D) lead people to try to exchange interest-bearing assets formoney
E) increase the interest rate
6. When an increase in the money supply reduces the interest rate,investment and nominal GDP increase.
A) True
B) False
7. In the short run, a decrease in the money supply will cause adecrease in Gross Domestic Product and a decrease in the pricelevel.
A) True
B) False
8. The demand curve for investment is graphed with __________ onthe vertical axis and __________ on the horizontal axis.
A) the interest rate; investment
B) investment; the interest rate
C) the price level; investment
D) investment; the price level
E) real GDP; investment
9. As the interest rate increases,
A) the demand for investment curve shifts to the right
B) the demand for investment curve shifts to the left
C) there is a movement downward along the demand for investmentcurve
D) there is a movement upward along the demand for investmentcurve
E) GDP increases
10. If the economy experiences a contractionary gap and the Fedstimulates the economy, then:
A) The money supply is increasing because the Fed prints moremoney
B) The money supply is decreasing because the Fed hoardsmoney
C) The money supply is increasing because the Fed makes open-marketpurchases
D) The money supply is decreasing because the Fed makes open-marketsales
E) There is no change in the money supply because the Fed cannotinfluence the money supply
11. If the Fed decreases the money supply, GDP
A) increases because the resulting increase in the interest rateleads to a decrease in investment
B) increases because the resulting decrease in the interest rateleads to an increase in investment
C) decreases because the resulting increase in the interest rateleads to a decrease in investment
D) decreases because the resulting increase in the interest rateleads to an increase in investment
E) decreases because the resulting decrease in the interest rateleads to an increase in investment
12. An increase in the money supply can increase the price level,real GDP, or both, but it is impossible to tell exactly what willhappen without knowing the slope of the aggregate supplycurve.
A) True
B) False
13. If the economy experiences an expansionary gap and the Fedsells US government securities in the open-market, then:
A) Money supply increases, investment increases, aggregate demandincreases
B) Money supply increases, the interest rate increases, and theaggregate demand increases
C) Money supply decreases, the interest rate decreases, and theaggregate demand falls
D) Money supply decreases, the investment decreases, and theaggregate demand decreases
E) Interest rate falls, investment falls, aggregate demandincreases
14. If the money supply equals $1,000 and nominal GDP equals$3,000, then V
A) equals 1/3
B) equals 3
C) equals 3 million
D) cannot be determined since we do not know anything aboutprices
E) cannot be determined since we do not know anything about realGDP
15. If the money supply is increasing at a constant 8 percent,velocity is constant, real GDP is increasing at 5 percent, and theinflation rate is 3 percent, which of the following is true?
A) The growth rate of GDP is too low to be maintained.
B) The inflation rate is too low to be maintained.
C) Velocity is too low to be maintained.
D) The money supply growth rate is too low to be maintained.
E) This situation can continue indefinitely.
16. If real output and velocity are stable and predictable, thenthe equation of exchange can be used to derive a simplerelationship between
A) the money supply and the price level
B) the money supply and the interest rate
C) the money supply and the foreign exchange rate
D) velocity and real GDP
E) velocity and nominal GDP
17. For the quantity theory of money to yield usefulpredictions,
A) fiscal policy must be ineffective in altering aggregatedemand
B) fiscal policy must be effective in altering aggregatedemand
C) the economy must be operating at the potential level of realGross Domestic Product
D) velocity must be stable or predictable
E) velocity must be unstable
18. A rising rate of inflation
A) makes people more willing to hold money as an asset
B) reduces the usefulness of money as a store of value and thusincreases the velocity of money
C) increases the usefulness of money as a medium of exchange andthus reduces the velocity of money
D) is usually preceded by a reduction in the money supply
E) does not, apparently, have any effect on the velocity ofmoney
19. There is considerable disagreement about whether the Fedshould
A) engage in open market operations
B) have the power to set reserve requirements
C) reduce the money supply when the economy is growing
D) allow banks to invest in the stock market
E) attempt to control interest rates or should instead attempt tocontrol the money supply
20. For interest rates to remain stable during economic expansions,the growth rate of the money supply should
A) exceed the growth in the demand for money
B) just match the growth in the demand for money
C) be less than the growth in the demand for money
D) be zero
E) just match the growth in nominal GDP


Part 1

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale.

a.The short-run aggregate supply (SAS) curve slopes upward because households spend more as their incomes increase.

b.The long-run aggregate supply curve can never shift.

c.Either a decrease in the nominal money supply by the Federal Reserve, all else held constant or an increase in the price level, all else held constant, will shift the aggregate demand (AD) curve to the left.

d.The Keynesian portion of the short-run aggregate supply (SAS) curve would be relevant during a recessionary situation.

e.Stagflation occurs when the aggregate demand (AD) curve shifts out on the upward sloping portion of the short-run aggregate supply (SAS) curve.

Part 2

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale, using graphs to support your answer. You can create graphs by hand and take pictures and upload them with your answers, or you may use Word or Excel, and upload the file created by these software packages.

a.If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.

b.The federal government's control of the money supply, which influences interest rates, is the primary tool that policymakers use to impact the macroeconomy.

c.A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.

d.The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.

e.Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.