ECON 250W Study Guide - Final Guide: Keynesian Cross, Money Supply, Real Interest Rate
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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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Consider a small open economy in which aggregate expenditures, AE, is the sum of consumption spending by households, investment spending by firms, government expenditures and net exports. You may assume that net exports are independent of real GDP and taxes are lumpâsum. The numbers in the table below are in billions.
Real GDP | Consumption | Investment | Gov't Expend. | Net Exports | Taxes | Aggregate Expenditures |
1000 | 1430 | 120 | 50 | -100 | 160 | A |
2000 | B | 120 | 50 | -100 | 160 | 2250 |
3000 | 2930 | 120 | 50 | -100 | 160 | 3000 |
4000 | 3680 | 120 | 50 | -100 | 160 | 3750 |
5000 | 4430 | 120 | 50 | -100 | 160 | 4500 |
a. (4 pts) For the table below, calculate the missing values, A and B. b. (2 pts) From the table above, what kind of situation is the country in with regards to the trade balance (i.e. do we have a trade surplus or deficit)? What kind of situation is the country in with regards to the domestic balance (i.e. is the government running a deficit or surplus)? c. (4 pts) Use the table above to calculate the slope of the AE curve. [Hint: Recall that the slope of the AE curve is the additional increase in aggregate expenditures arising from an increase in GDP.] d. (4 pts) Recall that the Aggregate Expenditure function is written as: AE = AE0 + (slope of AE) *Y where AE0 is Autonomous Expenditures. Use the table in part (a) and your answer to part (c) above to calculate Autonomous Expenditure AE0. [Hint: Calculate induced expenditures for any given level of GDP, and use your answer to figure out AE0] e. (2 pts) In the table above, what is the value of real GDP in equilibrium? f. (4 pts) Suppose that the government decides to spend 500 billion more. By calculating the multiplier (or any other way), calculate the value of the new equilibrium value of real GDP!
Q1. The following table shows the relationship between outside temperature (T) and number of hot drinks sold (Q).
Outside temperature (T) | Number of hot drinks sold(Q) |
0 0F | 1000 cups |
20 | 900 |
40 | 800 |
60 | 700 |
80 | 600 |
a. Graph and briefly explain the relationship. Put the number of hot drinks sold (Q) on the vertical axis and outside temperature (T) on the horizontal axis.
b. Compute the slope of the line? Y-intercept? Show your work.
c. Construct the equation that represents this line. Predict the number of hot drinks sold (Q) at 26 0F. Show your work.
Q2. Discuss the opportunity costs of the following cases, respectively.
a .Go to the movie theater and watch a movie instead of studying for a midterm exam.
b .Suppose that an economyâs PPF is a straight line, rather than a concave curve. What would this say about the nature of marginal opportunity cost as production is shifted from one good to the other?
Q3. Dreamlandâs production possibilities schedule is as follows:
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POINT | Capital Goods | Consumption Goods |
A | 0 | 30 |
B | 2 | 27 |
C | 4 | 21 |
D | 6 | 12 |
E | 8 | 0 |
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a. Draw the production possibilities frontier. Put Capital Goods on the horizontal axis and Consumption Goods on the vertical axis.
b. If this economy is at point C, what is the opportunity cost of one more capital good (i.e., marginal opportunity cost)?
c. Can Dreamland produce 6 capital goods and 21 consumption goods? Explain.
d. Suppose that Dreamland has two possible choices in the future: it devotes only 5% of its resources to producing capital goods over each of the next 10 years, whereas it devotes 20%. In which case is Dreamland likely to experience more rapid economic growth in the future? Explain your reasoning.