1、True, False, or Uncertain? Explain with words and graphs Study Guide ECON 301 Intermediate Macroeconomics Aggregate Demand, Aggregate Supply, Short Run and Medium Run Every statement on this Study Guide is TRUE (as far as I can tell). In the Quiz, you will have a bunch of True/False questions. See t
2、he longer study guide for tons of examples of seeminglytrue statements that are false. Aggregate Demand 1. To obtain the Aggregate Demand curve, we find the level of output that yields equilibrium in the money market (LM curve) and the goods market (IS curve) simultaneously, and then allow actual in
3、flation (null) to change exogenously to yield different levels of equilibrium output. The resulting inflationoutput combinations are graphed as the AD curve. 2. The aggregate demand curve is a relation between the inflation rate and output demanded: higher inflation, for a given rate of growth of no
4、minal money supply, pushes down the real money supply, increases interest rates, reduces investment and output demanded, so that the AD curve is downward sloping. 3. The aggregate demand curve shifts to the left when money supply falls (if inflation is unchanged) because in that case the real money
5、supply falls, raising interest rates, and lowering investment and output. 4. Any increase in spending that is not caused by changes in inflation shifts the AD curve to the right. 5. A reduction in any variable, other than inflation, that shifts the IS or LM curves to the left causes a shift of the A
6、D curve to the left. 6. Lower inflation causes the LM curve to shift down (because the real money supply expands), raising output and lowering interest rates. Aggregate Supply 1. To derive the aggregate supply curve, we find the combinations of output and inflation that make workers decisions consis
7、tent with firms decisions, resulting in labormarket equilibrium. True, False, or Uncertain? Explain with words and graphs 2. The aggregate supply curve is a relation between output and inflation: higher output reduces unemployment, which allows workers to demand faster raises at a given expected inf
8、lation rate. Higher wages means higher costs of production, which raises inflation. 3. Because the AS curve has to go through the nullnullnull,nullnullnull point, higher expected inflation raises inflation at any level of output, which is represented as a shift up of the AS curve. The Short Run 1. I
9、n the short run, the AS curve must go through the nullnullnull,nullnullnull point. 2. Shortrun equilibrium is determined by the combination of the inflation rate and the level of output that is consistent with simultaneous moneymarket equilibrium, goodsmarket equilibrium, and labormarket equilibrium
10、. 3. If the economy is in shortrun equilibrium, it is where both the AD and the AS curves intersect; this may happen away from the nullnullnull,nullnullnull point or at the nullnullnull,nullnullnull point. 4. If in shortrun equilibrium nullnullnullnull, then it must be true that nullnullnullnull. Th
11、e Medium Run 1. All three markets (goods, money, and labor) must be in equilibrium both in the short run and in the medium run. 2. If the economy is in mediumrun equilibrium, it is where both the AD and the AS curves intersect, at the nullnullnull,nullnullnull point. 3. The medium run is defined as
12、the time when expected inflation has fully adjusted, and is now equal to actual inflation. 4. The medium run is defined as the time when actual output equal to the natural level of output. 5. The economy may be away from its mediumrun equilibrium for a while because expected inflation rates take a w
13、hile to adjust; but adjustments in the expected inflation rate bring output back to the natural level of output. True, False, or Uncertain? Explain with words and graphs The Opening of an Output Gap 1. If AD shifts left, output will fall, leading to lower inflation. 2. If AS shifts left, output will
14、 fall, leading to higher inflation. 3. Suppose the economy starts from the nullnullnull,nullnullnull point. A leftward shift of either AD or AS opens a recessionary output gap, which means higher inflation if it is AS that shifted, and lower inflation if it is AD that shifted. 4. A monetary expansio
15、n raises equilibrium output in the short run. Because this is represented by a shift of the AD curve, the economy moves along the AS curve (higher output, lower unemployment, demands for larger wage raises, higher inflation). Higher inflation (shift up of the LM curve) counteracts the effect of the
16、monetary expansion (larger shift down of the LM curve), but not fully, so that real money supply increases in the shortrun (net shift down of the LM curve), but by less than the increase in nominal money supply. 5. Suppose the economy starts from the nullnullnull,nullnullnull point. A shock that inc
17、reases expected inflation (and changes nothing else) leads to lower output. In the shortrun, inflation rises, but by less than expected inflation. 6. Suppose the economy starts from the nullnullnull,nullnullnull point. A shock that increases the natural level of output (and changes nothing else) lea
18、ds to lower inflation. In the shortrun, output rises, but by less than the increase in the natural level of output, so that nullnullnullnullnullnull. Adjustment to the Medium Run 1. If the economys shortrun equilibrium is away from the nullnullnull,nullnullnull point, mediumrun equilibrium will be r
19、estored by gradual adjustments in the expected inflation rate. 2. If the shortrun equilibrium inflation rate is below the expected inflation rate nullnullnullnullnullnull, mediumrun equilibrium will be restored when the expected inflation rate falls. True, False, or Uncertain? Explain with words and
20、 graphs 3. If the shortrun equilibrium inflation rate is below the expected inflation rate nullnullnullnullnullnull, equilibrium output will rise on its way back to mediumrun equilibrium. 4. If shortrun equilibrium output is above the natural level of output nullnullnullnullnullnull, then it must be
21、 true that the shortrun equilibrium inflation rate is above the expected inflation rate nullnullnullnullnullnull, so that expected inflation will rise on its way back to mediumrun equilibrium. Because the AS curve has to go through the nullnullnull,nullnullnull point, higher nullnullraises inflation
22、. 5. If shortrun equilibrium output is below the natural level of output nullnullnullnullnullnull, then it must be true that the shortrun equilibrium inflation rate is below the expected inflation rate nullnullnullnullnullnull, so that expected inflation will fall on its way back to mediumrun equili
23、brium. Because the AS curve has to go through the nullnullnull,nullnullnull point, lower nullnulllowers inflation. 6. If nullnullnullnull, unemployment will encourage workers to accept smaller raises, which allows firms to pass on smaller price increases to consumers: inflation will be below expecte
24、d inflation nullnullnullnullnullnull. Eventually, expected inflation will fall as workers revise their expectations. As expected inflation falls, workers accept smaller raises (of their wages and salaries), which allows firms to lower the inflation rate (the rate of their price increases). Lower inf
25、lation makes the real money supply larger (for any constant monetary policy), so that investment and expenditure rise: output rises. Expected inflation will keep falling as long as nullnullnullnull, raising output. The process continues until the natural level of output is reached. At this point, nu
26、llnullnullnulland the economy is in mediumrun equilibrium. MediumRun Effects of Shocks 1. In the mediumrun, inflation rises to fully offset a monetary expansion: comparing the initial point and the final mediumrun position, there is no change in real money supply, interest rates, output, or the comp
27、onents of expenditure. The only mediumrun effect of a monetary True, False, or Uncertain? Explain with words and graphs expansion (a shift right of the LM curve) is higher inflation (an identical shift left of the LM curve). 2. In the mediumrun, inflation rises to offset a fiscal expansion (a shift
28、right of the IS curve), but comparing the initial point and the final mediumrun position, inflation rises and so real money supply falls (a shift left of the LM curve). The result is that, interest rates rise but output does not change, so that there is less investment in the mediumrun after a fisca
29、l expansion. 3. There is no mediumrun effect of a shock to expected inflation on any variable (there is a shortrun effect, however). For example, a decrease in expected inflation lowers inflation, causing expenditure to rise and opening an expansionary output gap. Higher output in the short run caus
30、es unemployment to fall below the natural rate of unemployment, so that inflation does not fall as much as expected inflation. In the transition to the medium run, expected inflation begins to rise (as workers realize inflation is higher than expected). Since a shock to expected inflation does not c
31、hange any real (physical) variable, mediumrun equilibrium is regained when expected inflation returns to the original. 4. After an increase in production costs that reduces the natural level of output, inflation rises for any level of actual output. This contracts the real money supply, expenditure, and output, so that inflation does not rise by as much. As expected inflation adjusts upward to catch up with actual inflation, output keeps falling until its equal to the new, lower, level of natural output.
