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ECON 4550 Chapter : Chapter 17

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azuremammoth471
15 Mar 2019
School
LSU
Department
Economics
Course
ECON 4550
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All

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Document Summary

Chapter 17/5: output and the exchange rate in the short run. Previous analysis: y is treated as an exogenous variable in exchange rate determination. In reality both y and e are determined simultaneously: purpose: to develop a short-run model where e and y are determined simultaneously. Determination of y in the short run: the goods (output) market is in equilibrium when real output (y) equals aggregate demand, the equality of y and d determines the short-run equilibrium output level. Increases in ep*/p, y-t, i, and g increases d. Equilibrium in the output market (the dd schedule), Equilibrium in the asset market (the aa schedule). Output market equilibrium and the dd schedule: an increase in e, holding p and p* constant, increases ep*/p, which increases d. that is, d shifts up and y increases. The positive correlation between e and y is shown by the upward sloping dd curve.

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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.
decreases; decreases; falls short of
increases; decreases; equals
decreases; increases; exceeds
decreases; increases; equals
increases; decreases; exceeds
b) The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that
Y* is independent of the price level and that actual output Y > Y* in the long run
Y* equals actual output (Y) in the long run
Y* is independent of the price level and that actual output Y = Y* in the long run
Y* is independent of the price level
Y* is independent of the price level and that actual output Y < Y* in the long run
c) Stagflation arises in the context of the AD-AS model when some external factor causes
the LRAS curve to shift to the right
the AD curve to shift leftwards
the SRAS curve to shift downwards
the SRAS curve to shift upwards
the AD curve to shift rightwards
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.
either an increase or a decrease
no change
an increase
a decrease
an initial increase, and then a decrease
e) Which of the following will shift the aggregate demand curve to the right?
Consumers become pessimistic about the future
A new technology is developed that will increase profits
Income taxes are raised
Foreign economies fall into recession, reducing their demand for domestic exports
The government reduces purchases to balance the budget
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?
A leftward shift the AD curve
There will be no movement of the AD curve
A movement down the AD curve
A movement up the AD curve
A rightward of the shift the AD curve
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
100
110
120
90
105
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.
recessionary; recessionary
recessionary; expansionary
expansionary; expansionary
output; output
expansionary; recessionary
i) The aggregate demand curve shows
the amount of planned aggregate expenditure (and output) at the current price level
the amount of planned aggregate expenditure (and output) at an average price level
the amount of planned aggregate expenditure (and output) at a constant price level
the amount of planned aggregate expenditure (and output) at various price levels
the amount of planned aggregate expenditure (and output) at last year's price level
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 __________.
an increase; left; Y = Y*
a decrease; right; Y > Y*
an increase; right; Y = Y*
a decrease; left; Y > Y*
no change; left; Y = Y*

Suppose that the economy of Freedonia obeys the following relationships:

C = 100 + 0.6(Y � T)

IP = 150

G = 250

NX = 120

T = 200

a. Find the numerical equation relating to planned aggregate expenditure (PAE) to output (Y).

b. Calculate short-run equilibrium output, showing all calculations. What is the government budget balance? Does Freedonia�s government have a budget surplus or a budget deficit?

c. What is the effect of an increase in government purchases from G = 250 to G = 300 on GDP (Y)? Solve for the new level of equilibrium output. What is the multiplier? Show your work.

d. Suppose that the government simultaneously increases net taxes by 50 (that is, continue to assume that government purchases have increased by 50, as in part (c)). Calculate the new level of equilibrium output, showing your work. What is the new government budget balance? How has it changed from (b)? Does Freedonia�s government have a budget surplus or a budget deficit?

e. Assume that the equilibrium output found in (b) above is the potential output (Y*) of this economy. After the rise in both government purchases (in (c)) and net taxes (in (d)), what is the output gap in percentage terms? Is this an expansionary gap or a recessionary gap? If the natural rate of unemployment is 6%, use Okun�s law to calculate what the actual unemployment rate must be.

1) As the unemployment rate rises:

A) the separation rate decreases.

B) the young and unskilled experience lower-than-average increases in unemployment.

C) the young and skilled experience larger-than-average increases in unemployment.

D) the young and unskilled experience larger-than-average increases in unemployment.

E) the proportion of the unemployed finding a job increases.

2) The natural level of employment will increase when which of the following occurs?

A) a decrease in the markup of prices over costs

B) an increase in the natural level of output

C) an increase in the actual unemployment rate

D) an increase in unemployment benefits

E) an increase in the markup of prices over costs

3) Suppose workers and firms expect the overall price level to increase by 4%. Given this information, we would expect that:

A) the real wage will decrease by 4%.

B) the real wage will increase by 4%.

C) the nominal wage will increase by less than 4%.

D) the nominal wage will increase by more than 4%.

E) the nominal wage will increase by exactly 4%.

4) An increase in the minimum wage will cause:

A) a reduction in the equilibrium real wage.

B) an increase in the natural rate of unemployment.

C) an increase in the equilibrium real wage.
D) a decrease in the natural rate of unemployment.

E) no change in the natural rate of unemployment.

5) In the aggregate demand relation, a reduction in the price level causes output to increase because of its effect on:

A) firms' markup over labor costs.

B) the nominal wage.

C) the interest rate.

D) the expected price level.

E) government spending.

6) The short-run aggregate supply curve (AS) is upward sloping because:

A) an increase in output causes an increase in employment, a reduction in unemployment, an increase in the nominal wage, and an increase in the price level.

B) a reduction in the aggregate price level causes a reduction in nominal money demand and a reduction in the interest rate.

C) a reduction in the aggregate price level (P) will cause a reduction in the interest rate and an increase in output.

D) an increase in the aggregate price level will cause an increase in the interest rate and a reduction in output.

E) an increase in the nominal wage causes a reduction in the amount of output that firms are willing to produce.

7) Assume that the economy is initially operating at the natural level of output. A simultaneous expansionary monetary policy and an increase in oil prices will cause which of the following?

A) an increase in output and a reduction in the interest rate in the short run

B) a reduction in output and an increase in the interest rate in the short run

C) a reduction in output and a reduction in the interest rate in the short run

D) an ambiguous effect in output and an increase in the price level in the short run

E) an ambiguous effect in output and a reduction in the price level in the short run

8) Assume that the economy is initially operating at the natural level of output. A one-time 4% reduction in the nominal money supply will cause:

A) a 4% increase in the price level in the medium run.

B) a 4% reduction in the price level in the medium run.

C) a 4% increase in the real money supply in the medium run.

D) a 4% increase in the interest rate (i) in the medium run.

E) a 4% reduction in investment in the medium run.

9) The original Phillips curve implied that:

A) the markup over labor costs is zero.

B) the expected inflation rate is equal to last year's inflation rate.

C) a lower rate of unemployment causes an increase in the rate of inflation.

D) the inflation is always zero.

E) the expected inflation is always zero.

10) In the Phillips curve equation, which of the following will NOT cause a rise in the current inflation rate?

A) a rise in the minimum wage

B) a rise in the expected inflation rate

C) a rise in the employment insurance

D) a drop in the markup

E) a fall in the unemployment rate

2. Using the AS and AD, WS and PS, and IS-LM graphs, illustrate and explain the short run and medium run effects of less stringent enforcement of existing antitrust legislation (Monopolist market power increased) . Explain what happens to P, Y, I, W/P, I and u.