Deck 16: Long-Run Macroeconomic Adjustments

Question 1

What is the long-run equilibrium in the aggregate demand-aggregate supply model?

Answer 1

The equilibrium real GDP and price level in the long run are found at the intersection of the aggregate demand curve,the long-run aggregate supply curve,and the short-run aggregate supply curve.Real GDP will be at the full-employment level of output.

Question 2

Suppose the potential level of real GDP for a hypothetical economy is $160 and the price level (P)initially is 200.Use the following short-run aggregate supply schedules to answer the questions.

Answer 2

(a)What will be the short-run level of real GDP if the price level rises unexpectedly from 200 to 210 because of an increase in aggregate demand? Falls unexpectedly from 200 to 190 because of a decrease in aggregate demand? Explain each situation.
(b)What will be the long-run level of real GDP when the price level rises from 200 to 210? Falls from 200 to 190? Explain each situation.
(a)In the short run,real GDP will rise to $190 when the price level rises from 200 to 210.If the price level were to fall unexpectedly from 200 to 190,then the real GDP would fall to $130 temporarily.The changes in the short-run are only temporary responses to changes in aggregate demand.
(b)In the long-run,wages and resource prices adapt to the changes in the price level.Therefore,if the price level rises to 210,wages and resources prices in the long-run will rise by the same percentage as the price level and the aggregate supply will shift from AS (P = 200)to AS (P = 210).Business profits will fall to their original level and the motivation to expand or contract output will disappear.The long-run real GDP will be $160,its potential level.On the other hand,if the price level falls to 90,wages and resources prices in the long-run will fall by the same percentage as the price level and the aggregate supply will shift from AS (P = 100)to AS (P = 90).Business profits will rise to their original level and real GDP returns to $160,its potential level.

Question 3

Explain the Phillips Curve concept and construct an example of the curve on the below graph.

Answer 3

The Phillips Curve concept shows a stable inverse relationship between the rate of unemployment and the rate of inflation.It is based on the idea that as aggregate demand increases when real GDP is relatively low,unemployment will decline and real GDP will rise with little or no inflationary effect.However,as aggregate demand continues to grow and the unemployment rate approaches full-employment,the price level and real GDP will increase.See graph below.

Question 4

Differentiate between "demand-pull" and "cost-push" inflation using the aggregate demand-aggregate supply model.

Question 5

What are three significant generalizations regarding the inflation-unemployment relationship that are supported by results from the long-run AD-AS model?

Question 6

What is stagflation and what was one of its causes in the 1970s and early 1980s?

Question 7

Explain what happens in the long-run aggregate demand-aggregate supply model when there is a recession.Assume that the economy is initially at the full-employment level of real GDP.

Question 8

Describe the process that occurs with demand-pull inflation in the long-run aggregate demand-aggregate supply model.Assume that the economy is initially at the full-employment level of real GDP.

Question 9

What contributed to stagflation's demise between 1982 and 1989? How did these events affect aggregate supply and the Phillips Curve?

Question 10

Describe the characteristics of the short-run aggregate supply curve.Explain what happens to: (1)nominal wages; (2)real wages profits as the price level increases from the full-employment level of output.Then explain what happens to these variables as the price level decreases from the full-employment-level of output.

Question 11

Suppose the potential level of real GDP for a hypothetical economy is $250 and the price level (P)initially is 100.Use the following short-run aggregate supply schedules below to answer the questions.

Question 12

Describe the characteristics of the long-run aggregate supply curve.Explain how changes in the price level affect the short-run aggregate supply curve and the long-run aggregate supply curve.

Question 13

If the Phillips Curve exists in reality,what dilemma does this create for fiscal and monetary policies? Explain.

Question 14

What is the basic difference between the short run and long run as these terms relate to macroeconomics? Why does this difference occur?

Question 15

(a)Using a graph showing aggregate demand,short-run aggregate supply,and long-run aggregate supply,illustrate an economy that faces an inflationary gap.

Question 16

If the long-run supply curve is fixed in place,can there be persistent inflation?

Question 17

In general,the Canadian economy has experienced ongoing inflation.Explain how this is possible.

Question 18

Describe cost-push inflation in the long-run aggregate demand-aggregate supply model.Explain the policy dilemma for government policy if no action is taken and if monetary and fiscal policies are used to counter the cost-push inflation.Assume that the economy is initially at the full-employment level of real GDP.

Question 19

Compare and contrast the short-run Phillips Curve and the long-run Phillips Curve.

Question 20

(a)Using a graph showing aggregate demand,short-run aggregate supply,and long-run aggregate supply,illustrate an economy that faces a recessionary gap.

Question 21

What are three severe criticisms of the Laffer Curve?

Question 22

Why is the difference between the actual and expected rates of inflation important for explaining rising inflation?

Question 23

Use the following diagram to answer the next three questions.

Question 24

Explain the basic arguments for supply-side economics.

Question 25

Answer the questions based on the following diagram.

Question 26

Why is the difference between the actual and expected rates of inflation important for explaining falling inflation?

Question 27

What is the Laffer Curve? Explain the relationship that is shown in the curve.