3.7 Long-Run Self-Adjustment

Why do economists use the AD-AS model?

• To represent the relationship btwn price level and aggregate output in an economy

• To illustrate how output, employment, and the price level respond to macroeconomic shocks

• To explain the relationship between trade-offs and comparative advantage

• To show that prices are sticky in the long-run.

Tags

Mod-2

In the long run, _____ and other input prices are flexible

Tags

Mod-2.I

Match the following in order

• government

• 3. _____ will revert to its natural rate after a

• prices

• 2. flexible wages and ___ will adjust to restore full employment and..

• unemployment

• 1. In the long run, in the absence of ____ policy actions

• shock

• 4. ____ to AD or SRAS

Tags

Mod-2.I

Shifts in the _____ indicate changes in the full-employment level of output and economic growth

• Long-run aggregate supply curve

• short-run aggregate supply curve

• aggregate demand curve

Tags

Mod-2.I

In the long-run, flexible wages and input prices will shift the ______ curve and return the economy to its long-run equilibrium

• LRAS

• SRAS

• AD

For each of the following draw a correctly labeled graph of AS/AD in equilibrium. Based on the scenario determine whether a change in the aggregate supply or a change in the aggregate demand has occurred. Show the short run effects of the change on the price level and the real GDP unless the question asks for the long run.

• An econ.'s UE is below NRU. Show the effect of increasing income taxes

• 
• An econ. has the NRU UE rate. Show the effect of a sudden increase in world price of oil.

• 
• An econ. is in long-run equilib. Show the effect of + productivity

• 
• The econ. is - full employment. Show the effect of + consumer confidence

• 
• The econ. is at full employment. 1) Show effect of increase in r. 2) Show economy in long-run.

• 

Refer to the graph. Given a recessionary output gap (Y1 > Yf), in the long run, flexible wages and input prices will _____. This decrease in input prices will result in an ____ in SRAS, and a return to the economy's long run equilibrium at ___

• fall

• rise

• increase

• decrease

• Yf

Match the following

• SRAS

• When short-run equilibrium is less than potential output, or LRAS

• Inflationary Output Gap

• In the long-run, this curve is what shifts to restore equilibrium.

• Recessionary Output Gap

• When short-run equilibrium is greater than potential output, or LRAS