Exam 3: Chapter 10

Question 1

what is the formula for potential output?

Answer 1

yp = x L(1/2) K(1/2)

Question 2

How to calculate current K?

Answer 2

current K = last years K stock + (new e+s - depreciation)

Question 3

what is Okun’s law?

Answer 3

yp-y/yp = 2[U-Un]

Question 4

Draw the Important Graph

Answer 4

draw it

Question 5

LRAS

Answer 5

Long run aggregate supply

Question 6

what exactly does long run entail?

Answer 6

3-5 years

Question 7

what does aggregate mean?

Answer 7

wholistic

Question 8

What does LRAS indicate?

Answer 8

indicates potential output

Question 9

LRAS vertical potential output is lateral at _____

Answer 9

LRAS vertical potential output is lateral at equilibrium

Question 10

LRAS assumes that there is time for any ____ to be matched by an equal ____

Answer 10

LRAS assumes that there is time for any %changeP to be matched by an equal %changeW

Question 11

What is %changeP?

Answer 11

change in inflation rate

Question 12

What is %changeW?

Answer 12

change in nominal wage rate

Question 13

Because in LRAS %changeP is matched by an equal %changeW, ________

Answer 13

the real wage rate (w/p) is constant as you move up or down the LRAS curve

Question 14

what is the real wage rate?

Answer 14

(w/p)

Question 15

Example Exam Question: Which of the following are true as the economy moves up? As the LRAS curve moves up?

Answer 15

Draw graph and figure it out

Question 16

____ = ____ on the LRAS curve

Answer 16

U = Un
unemployment = natural rate of unemployment

Question 17

_____ + _____ = natural rate of unemployment

Answer 17

frictional + structural = Un

Question 18

Why is LRAS vertical?

Answer 18

bc profit is same for (high p and high w) as it is for (low p and low w)

Question 19

3 reasons why LRAS shifts right

Answer 19

1. increase in K stock
2. increase in technology
3. increase in labor supply

Question 20

AD

Answer 20

aggregate demand

Question 21

Actually, AD =

Answer 21

CIGNx

Question 22

AD has a ______ slope

Answer 22

negative

Question 23

2 Effects on the Negative Slope

Answer 23

1. wealth effect

2. substitution effect

Question 24

Wealth Effect

Answer 24

As P rises, real wealth decreases, and C decreases

Question 25

what is the formula for real wealth?

Answer 25

nominal wealth/P

Question 26

Substitution Effect

Answer 26

As P rises, Ex decreases, Imports rise, Nx decreases

Question 27

AD shifts to the right 1:

Answer 27

M rises and/or interest rates decreases....this is called monetary policy

Question 28

monetary policy

Answer 28

M rises and/or interest rates decrease

Question 29

AD shifts to the right 2:

Answer 29

G rises and/or net tax decreases...this is called fiscal policy

Question 30

AD shifts to the right 3:

Answer 30

wealth rises via 1) stock prices rising 2) prices of houses rising....therefore leading to an increase in C

Question 31

AD shifts to the left:

Answer 31

Fear rises...this decreases C and I

Question 32

SRAS

Answer 32

Short run aggregate supply | - similiar to supply curve in microeconomics

Question 33

what exactly does short run entail?

Answer 33

approx. 1 year

Question 34

SRAS assumes that if ____ then not enough time for ___ to rise equally

Answer 34

SRAS assumes that if P rises, then there will not be enough time for W to rise equally

Question 35

what is one reasoning behind the last question?

Answer 35

one reasoning is that workers usually have contracts that fix W for a year or more

Question 36

because there is not enough time for W rise equal to P in SRAS, _____

Answer 36

Profit rises and output rises

Question 37

SRAS always shifts with _____

Answer 37

LRAS....they are bolted together

Question 38

SRAS shifts up and left if ______

Answer 38

production costs increase, as when W rises or energy costs rise (there is graph to show this)

Question 39

short run equi:

Answer 39

economy goes to where AD=SRAS | - a few months to maybe a year

Question 40

long run equi:

Answer 40

economy always goes to where AD=LRAS | - 2-5 years

Question 41

The Natural Rate Hypotheses is important

Answer 41

look at notes to see it on a graph

Question 42

know inflationary and recessionary gap

Answer 42

on a chart in the notes

Question 43

when does y=AD

Answer 43

in equilibrium