Exam 24: From the Short Run to the Long Run: the Adjustment of Factor Prices

Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will

Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will

If the short-run macroeconomic equilibrium occurs with real GDP greater than potential output, the economy is

FIGURE 24-1 -Refer to Figure 24-1. If the economy is currently producing output of Y0 and wages are sticky downwards, then the

The table below shows data for five economies of similar size. Real GDP is measured in billions of dollars. Assume that potential output for each economy is $340 billion. TABLE 24-1 -Suppose the economy is initially in a long-run macroeconomic equilibrium. A shock then hits the economy and we observe that the unemployment rate decreases and the price level increases. We can conclude that has increased and there is now an) gap.

If an economy is experiencing neither a recessionary gap nor an inflationary gap, the real output of the economy will be reflected by

Consider the basic AD/AS diagram. The vertical line at Y* shows the relationship between the price level and the amount of output have adjusted to output gaps.

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short -run equilibrium at point A. FIGURE 24-7 -Refer to Figure 24-7. The government could close the existing output gap by