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ECO102H1 Lecture 34: Lecture 34-Inflationary-Recessionary Gap (LRAS)

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copperclam445
1 Aug 2010
School
UTSG
Department
Economics
Course
ECO102H1
Professor
Jack Carr

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Tuesday, March 2nd, 2010.
Yp: output when factors of production are utilized at normal rates
Short-Run Equilibrium: Alternative Cases
1. Y < Yp Recessionary gap
2. Y > Yp Inflationary gap
3. Y = Yp Full-employment (real GDP = potential GDP)
What will happen, in the long run, to:
1) The wage rate? FALLS (due to high unemployment)
2) The price level? FALLS (as SRAS shifts right)
3) Aggregate Demand? INCREASES (as price level falls)
4) Real GDP (Y)? INCREASES (to Yp)
Price Level
SRAS
Real GDP
AD
Y
Yp
Inflationary output gap
Price Level
SRAS
Real GDP
AD
Y
Yp
Recessionary output gap
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Recessionary Gap: Self-Correction (in Long Run)
1. Yp ± Y0 = Recessionary Gap
2. Real GDP < Potential GDP =>
8QHPSOR\PHQW9
Wage rate ;HYHQWXDOO\
3. :DJH5DWH; !65$60 shifts right to SRAS1
(As costs of production fall, firms expand output)
4. Long-Run Equilibrium occurs at Yp
Summary
Short-Run
AD and SRAS determine real GDP
Time frame: say one year
Remember: factor prices are assumed to be a constant
Long-Run
Real GDP = LRAS (Potential GDP)
Time frame: several years or more
Implications
1. $'³VKRFNV´FKDQJHUHDO*'3LQshort-run, but not in long-run
2. Fiscal policy (for example) has different short-run and long-run impacts on real GDP
Example
Government increases expenditure (G) by $20 million.
SRAS0
AD
Y0
Yp
LRAS
SRAS1
(w1 < w0)
Y< Yp
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Related Questions

A.

If membership falls in labor unions and unions become less popular, then:
production costs will increase, SRAS will shift to the left, decreasing equilibrium GDP and increasing the aggregate price level.
production costs will fall, SRAS will shift to the right, increasing equilibrium GDP and lowering the aggregate price level.
production costs will not change, AD will shift to the right, increasing equilibrium GDP and aggregate price level.
production costs will fall, there will be a downward movement along SRAS, equilibrium GDP will increase and aggregate price level will fall.

B.

If the short-run macroeconomic equilibrium is _________ of the economy's potential output, then there is a(n) ________ and the aggregate price level is expected to ________.
to the left; inflationary gap; fall
to the left; recessionary gap; fall
to the right; recessionary gap; rise
to the right; inflationary gap; fall

Choose the correct answer for the below question:

 

If the current Real GDP is less than Natural Real GDP, then the economy is:

a. in long-run equilibrium.

b. in a recessionary gap.

c. in an inflationary gap.

d. possibly in short-run equilibrium.

e. b and d

 

 

 

a. in long-run equilibrium.b. in a recessionary gap.

c. in an inflationary gap.d. possibly in short-run equilibrium.e. b and d

 

 

1. As prices fall, the value of people's existing assets rises and people increase expenditures. This occurs as a result of the:

a. international effect.

b. interest rate effect.

c. money wealth effect.

d. multiplier effect.

 

2. An increase in aggregate demand, in the long run, will change:

a. both output and the price level.

b. neither output nor the price level.

c. the price level but not output.

d. output but not the price level.

 

3. A change in which of the following will shift the long-run aggregate supply curve?

a. The price level

b. Aggregate demand

c. Available resources

d. Sales or excise taxes

 

4. If potential output exceeds actual output, the economy:

a. is experiencing a recessionary gap.

b. is in neither a short-run nor long-run equilibrium.

c. may be in a long-run equilibrium but is not in short-run equilibrium.

d. is experiencing an inflationary gap.

 

5. Keynes believed the economy was:

a. always moving toward potential income.

b. always at potential income.

c. always moving away from potential income.

d. fluctuating around potential income.