Lecture Tues 21 Sep (Week 10, lecture 1)

Question 1

What does the AD curve show the link between?

Answer 1

inflation and aggregate demand

Question 2

Because the AD curve shows the link between inflation and aggregated demand, we can write the AD curve as what?

Answer 2

π = A - αY

Question 3

What are the advantages of the AD/AS model?

Answer 3

It relates price to inflation directly without output

Question 4

Why does the AD curve slope downwards?

Answer 4

• the wealth effect
• the interest rate
• the exchange rate

Question 5

What is the LRAS curve determined by?

Answer 5

K, L, Tech, Natural resources

Question 6

What does the SRAS curve show?

Answer 6

How much producers are willing to supply at different rates of inflation, given a particular expected rate of inflation

Question 7

What is equation for the quantity of output supplied?

Answer 7

Q = natural rate of output + α[actual inflation rate - expected inflation rate]

Question 8

Why does the SRAS curve slope upwards?

Answer 8

as inflation increases, suppliers produce more due to

• sticky wage
• sticky price
• misperceptions

Question 9

What is the equation form of Quantity of output supplied = natural rate of output + α[actual inflation rate - expected inflation rate]?

Answer 9

Y = Y* + a(π – πE)

Question 10

How can we rearrange the equation Y = Y* + a(π – πE) do describe the SRAS curve?

Answer 10

π = πE +β(Y–Y*) where β =(1/a)

Question 11

What does the A stand for in the equation π = A – αY?

Answer 11

this is the autonomous components of output (C`, G, I, NX)

Question 12

Why are the roles of inflationary expectations important?

Answer 12

Because every time πa differs πe, the quantity of output supplied differs from the natural rate of output

Question 13

Using the equations Y = Y* + a(π – πE) and π = πE +β(Y–Y*) whereβ=(1/a), what happens when π = πE?

Answer 13

a(π – πE) = 0 and so Y = Y*

Question 14

Using the equations Y = Y* + a(π – πE) and π = πE +β(Y–Y*) whereβ=(1/a), what happens when π > πE? What does this mean?

Answer 14

Y > Y*

This means there is extra supply

Question 15

Using the equations Y = Y* + a(π – πE) and π = πE +β(Y–Y*) whereβ=(1/a), what happens when π < πE? What does this mean?

Answer 15

Y < Y*

This means that there will be less supply

Question 16

What are the two causes of economic fluctuations?

Answer 16

1. shifts in aggregate demand

2. as adverse shift in SR aggregate supply

Question 16

What are the two causes of economic fluctuations?

Answer 16

1. shifts in aggregate demand

2. as adverse shift in SR aggregate supply

Question 17

If AD decreases, what is the effect on inflation and output?

Answer 17

Output decreases so Y < Y* and π < πe

Question 18

If there is a shift down in aggregate demand, what happens when inflationary expectations adjust overtime?

Answer 18

SRAS shifts down so inflation shifts down until Y = Y*

Question 19

Give an examples of something that would cause a decrease in aggregate demand

Answer 19

a decrease in government spending

Question 20

What would cause an adverse shift in aggregate supply?

Answer 20

A decrease in one of the determinants of the SR aggregate supply (labour, capital, resources, technology) or an increase in inflationary expectations

Question 21

What is the effect on Y, u and π when there is an adverse shift of the supply curve?

Answer 21

Y < Y*
u increases
π increases

Question 22

When there is a decrease in aggregate demand, what is the effect on aggregate supply? Why is this?

Answer 22

A decrease in aggregate demand causes output to fall in the short run but overtime, the short run aggregate supply curve shifts (increases) because when π initially decreases, rational people would reduce their π expectations. This means that there is a shift down of the aggregate supply. When we are in recession, we are producing less that potential so there is extra unemployment in the economy so the wage demands are muted as employers will just hire new workers if you are not happy with what you are getting paid. There will then be room for expansion so there will be an increase in production without incurring too much cost. We can move to point C.

Question 23

Adverse shifts int he SR aggregate supply cause _________. What is this?

Answer 23

stagflation

this is a period of recession and inflation

Question 24

How do policymakers deal with stagflation?

Answer 24

Policymakers who influence aggregate demand cannot offset both of these adverse effects simultaneously.
If they want to decrease unemployment, they will increase inflation. If they want to decrease inflation, they will increase unemployment

Question 25

Policy makers can try and respond to a recession in one of two ways:

Answer 25

• do nothing and wait for prices and wages to adjust

- take action to increase aggregate demand by using fiscal and/or monetary policy

Question 26

What are the tools of stabilising policy? These can both either be ________ or ________

Answer 26

fiscal policy
monetary policy
expansionary
contractionary

Question 27

What is the purpose of a contractionary policy?

Answer 27

this is to decrease AD in response to expansions

Question 28

What is the purpose of an expansionary policy?

Answer 28

this is to increase AD in response to recessions

Question 29

What is fiscal policy?

Answer 29

This is using government purchases (which is a direct effect) or taxes and transfers (which are indirect effects)

Question 30

What is monetary policy?

Answer 30

The tools of monetary policy include setting the OCR and setting reserve requirements and using open market operations