ECON 110 Chapter Notes - Chapter 24: Phillips Curve, Output Gap, Potential Output
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24 Dec 2016
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From the short run to the long run. Potential output is the total output that can be produced when all productive resources (land, labour, and capital) are fully employed: when a nation"s actual output diverges from potential output, the difference is the output gap. When real gdp exceeds potential, firms are producing beyond normal capacity output: there is an excess demand for all factor inputs and labour shortages will emerge in some industries. Firms will try to bid workers away from other firms so they can maintain high levels of output and sales. Workers have considerable bargaining power with employers due to the excess demand in factor markets there is upward pressure on wages. The boom that is associated with an inflationary gap (high profits for firms and excess demand for labour) generates a set of conditions that tend to cause wages (and other factor prices) to rise. Firms will have below-normal sales and may seek wage reductions.
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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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