EC140 Lecture Notes - Lecture 6: Diminishing Returns, Aggregate Supply, Economic Equilibrium
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Learning objecives: explain why an exogenous change in price level shits the ae curve, derive the ad curve, describe the meaning of the as curve, explain how ad and as shocks afect equilibrium price and real gdp. Change in price level changes ae curve. Equilibrium pairs of price level, real gdp. Non-price factors that shit ae curve, shit ad curve. Openness and the slope of the ad curve. Price level change has a larger efect on output. With upward sloping as curve, value of the muliplier is reduced. Increasing producion causes increases in costs, irms face diminishing returns of scale. When output is low, easy to expand. When output is high, hard to further expand. Increasing slope of the as curve afects the muliplier. When output is low the muliplier is close to the simple muliplier (in. When output is high the muliplier is smaller than the simple muliplier (maybe less than 1)
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Related Questions
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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