EC140 Lecture Notes - Lecture 6: Output Gap, Potential Output, Aggregate Supply
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Chapter 24: from the short run to the long run. Real gdp determined by intersecion of supply and demand. Technology and factor supplies are assumed constant. Total output if all producive resources were fully employed independent of price level: fully employed resources does not mean unemployment is zero. Changes in potenial output are long-run, not short-run. If real gdp < potenial output: recessionary gap. If real gdp > potenial output: inlaionary gap. Potenial gdp as an anchor economy returns to potenial gdp ater a shock. This causes the as curve to shit let. Inlaionary gap resources are used beyond capacity. Labour shortages emerge irms ofer increased wages to atract/keep workers. Higher wages lead to higher costs for all inputs. This causes the as curve to shit right. Shits end when real gdp equals potenial output. Labour surpluses irms ofer workers reduced wages. Lower wages lead to lower costs for other inputs.
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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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