Exam 12: The Production Function Approach to Understanding Growth

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 0.04 (4%),and potential output (Y*)equals 19,200.If,starting from long-run equilibrium,an inflation shock raises inflation to 6%,in the short run,output will equal ________ and,in the long run,output will equal _________

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

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 0.04 (4%),and potential output (Y*)equals 19,200.If,starting from long-run equilibrium,an aggregate supply shock reduces potential output to 18,800,in the short run,there will be a(n)___________ gap and,in the long run,inflation will equal _________.

A monetary tightening is successful at reducing inflation because the central bank allows ___________ to develop,so firms become more reluctant to ___________ in the face of weak demand.

The aggregate demand (ADI)curve shifts to the left if,for any given inflation rate,the Bank of Canada ________ interest rates more than normal,making monetary policy _________.

The aggregate demand (ADI)curve shows the relationship between short-run equilibrium output and the __________ rate.

Which of the following is NOT a reason why the Crow disinflation of the 1990s was more controversial than the Bouey disinflation of the 1980s?

Which of the following will shift the aggregate demand (ADI)curve to the right?

The long-run aggregate supply line is

In the 1990s,while the __________ ended by 1993,a(n)__________ persisted for much of the decade.

A large increase in oil prices is an example of

An expected decline in the prices of consumer goods will

To reduce inflation in an economy at full employment,the central bank must shift the monetary policy rule

Which of the following will shift the aggregate demand (ADI)curve to the right?

If the Bank of Canada were to shift its policy reaction function rightward (i.e. ,an easing of monetary policy),the

If,at the short-run equilibrium,a recessionary gap exists,the

A decrease in the inflation rate corresponds to a _________ the aggregate demand (ADI)curve,and a decrease in autonomous aggregate demand corresponds to a _________ the aggregate demand (ADI)curve.

-The economy pictured in the diagram above has a(n)________ gap with a short-run equilibrium combination of inflation and output indicated by point ________.

-Based on the diagram above,starting from a long-run equilibrium at point C,a tax increase that decreases aggregate demand from ADI¹ to ADI will lead to a short-run equilibrium at point ________,and eventually to a long-run equilibrium at point ________,due to falling inflation and the lowering of real interest rates by the Bank of Canada.

Suppose that,starting at point A in the diagram below,the central bank wants to lower the inflation rate from = 6% per year to 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 = 3% per year.To achieve this goal,the Bank dramatically increases the real interest rate,shifting the aggregate demand line to ADI₁.In the short run,this policy will cause a recession (point B),but in the long run,the economy may be expected to return to its potential (point C).How long the transition from B to C will take,and therefore,how much output must be sacrificed to achieve the reduction in inflation will depend