Exam 12: The Production Function Approach to Understanding Growth

When the self-correcting mechanism of the ADI-IA model is particularly slow,the case for active fiscal policy is considerably strengthened when

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 1%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

If the aggregate demand (ADI)curve in an economy is Y = 20,000 - 20,000 ,current inflation ( 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 )equals 0.08 (8%),and potential output (Y*)equals 19,200,then in the short run,equilibrium output equals ________ and,in the long run,the inflation rate equals ________%.

The development of a new cost-saving technology would increase

A sudden change in the normal behaviour of inflation,unrelated to the nation's output gap,is called

Recessionary output gaps are eliminated through

Starting from long-run equilibrium,a large decrease in government purchases will result in a(n)_________ gap in the short run,and ________ inflation and ________ output in the long run.

Unlike an upward inflation shock,a negative shock to potential output causes

-Based on the diagram above,starting from a long-run equilibrium at point C,an upward inflation shock that increases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________,if left to self-correcting tendencies.

At short-run equilibrium,inflation ___________ and actual output is equal to __________.

It seems likely that if the inflation rate rises above some threshold level,it may impair the productive capacity of the economy,and the damage is likely to get worse at higher rates of inflation.If so,the LRAS line would

Suppose that the aggregate demand (ADI)curve in an economy is Y = 10,000 - 10,000 ,current inflation ( 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 )equals 0.03 (3%),and potential output (Y*)equals 9,700.If,starting from long-run equilibrium,an aggregate supply shock reduces potential output to 9,500,in the short run,there will be a(n)___________ gap and,in the long run,inflation will equal _________.

The output losses from an upward inflation shock are ________,and the output losses from a fall in potential output are __________.

If the aggregate demand (ADI)curve in an economy is Y = 10,000 - 10,000 ,current inflation ( )equals 0.07 (7%),and potential output (Y*)equals 9,500,then in the short run,equilibrium output equals ________ and,in the long run,the inflation rate equals ________%

If the Bank of Canada's monetary policy rule changes from r = 0.04 + To r = 0.02 + ,this is an example of monetary __________ and will lead to a _________ the aggregate demand (ADI)curve.

Suppose that the aggregate demand (ADI)curve in an economy is Y = 20,000 - 20,000 ,current inflation ( 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 )equals 0.06 (6%),and potential output (Y*)equals 18,800.If,starting from long-run equilibrium,an aggregate supply shock reduces potential output to 18,400,in the short run,there will be a(n)___________ gap and,in the long run,inflation will equal _________.

When actual output exceeds potential output,there is ________ output gap and the rate of inflation will tend to ________.

High expected inflation leads to ________ increases in wages and costs and to ________ actual inflation.

At long-run equilibrium,inflation ___________ and actual output is equal to __________.

Because there is no single,widely-accepted calculation of the level of Canada's potential output for any given year,the LRAS curve