ECON 110 Chapter Notes - Chapter 24: Large Deviations Theory, Output Gap, Nominal Rigidity
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7 Apr 2013
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Adjustment process from a short to long run model assumes instead that factor prices are flexible and adjust to output gaps, and technology and factor supplies are constant (y* constant) In long run factor prices and technology change. Potential output is total output that can be produced when resources are at normal rate of utilization. Recessionary gap when intersection between as and ad (equilibrium) is less than potential output, inflationary when it"s greater than potential output. When real gdp is above potential output, demand for factors will be high and prices will rise. Rise in factor prices will increase unit costs, and firms will have to sell at higher prices in order to cover costs at a given output, so as shifts up. Economic booms cause wages to rise rapidly, but recessions cause wages to fall slowly -> wage stickiness. Philips curve: relationship between gdp and the rate of change of money wages.
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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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