Lecture 13

Question 1

What happens when the SRAS and AD intersect to the right of the LRAS curve? (Higher GDP and Inflation than normal)

Answer 1

The labor market gets too tight, workers are hired and unemployment falls. But if this remains the same, inflation is too high, workers are overworked, wage will adjust upward eventually due to labor market pressure, then SRAS shifts leftward as wage adjusts upward due to persistent inflation. Causes even higher inflation rate and GDP shrinks to the level of starting point A

Question 2

What can we do to prevent wage-price spiral?

Answer 2

Monetary and fiscal policies; using monetary policies raises interest rates, so we are back at the same GDP but at lower inflation rate

Question 3

Is there an alternative to the wage price spiral?

Answer 3

Inflation high, unemployment too low, due to increased demand side of the economy; Solution is to raise interest rate; Reduce the aggregate demand, relieve labor market of pressure

Question 4

Money Supply

Answer 4

Total amount of dollar equivalent available and ready for economic activities;
Currency in circulation+ Checking A/C + Saving A/C

Question 5

Monetary Base

Answer 5

High powered liquidity injected by the federal reserve; Currency in circulation + reserves (liquidity) in the banking system

Question 6

MBS

Answer 6

Mortgage-Backed Securities; ‘bond’; Pays interest from what mortgage borrowers paying back; only valuable as long as there are mortgages payment paying it