ECO 105 Chapter Notes - Chapter 9: Aggregate Demand, Potential Output, Loanable Funds
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5 May 2016
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Chapter 9: short-run keynesian policy model: demand side. So fall in aggregate economy creates cycle that feeds on itself & can develop into vicious downward spiral. In as/ad model: eventually toward cycle of aggregate demand & production ends, settling @ an equilibrium lower than original income (might not be at economy"s potential output). Equilibrium output: level of output toward which economy gravitates in short run b/c of cumulative cycles of declining/increasing production (and potential output). Keynesians believed @ certain times economy needed some help in reaching its potential output. Deflation: overall decline in price level in the economy. If prices are falling > profits decline > entrepreneurs hesitant to start businesses > slowing growth of economy. Since asset prices are much more volatile than goods prices, asset price deflation is much more common than deflating in general price level of goods & services. Paradox of thrift: increase in saving can lead to decrease in expenditures.
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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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