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ECO102 Lecture 08
ECO102 Lecture 08 Raw
ECO102 Lecture 08 Flashcards
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Completed Notes Status
- Completed insertions: 65
- Ambiguities left unresolved: 3
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Lecture Summary
- Central objective: Understand the long-run adjustment process for the AS/AD model following fiscal, foreign, and supply shocks, emphasizing that the long-run multiplier is zero.
- Key concepts:
- Output Gap Adjustment Process: Shocks that push actual GDP (
) away from potential GDP ( ) create either an Inflationary Gap or a Recessionary Gap. Wage adjustments ( ) eventually shift the Short-Run Aggregate Supply curve to restore long-run equilibrium. - Fiscal Policy: Demand-side shocks (like
or ) shift AD, temporarily changing output and prices. In the long run, wages adjust, negating the output change and leaving the economy with a permanently changed price level. - Aggregate Supply Shocks: Exogenous supply shocks move output and prices in opposite directions. The long-run self-correction mechanism alters nominal wages to reverse the shift entirely, meaning neither the long-run price level nor output changes permanently.
- Output Gap Adjustment Process: Shocks that push actual GDP (
- Connections:
- The lecture connects the Solow Model (which determines long-run potential output,
) to the Keynesian AD/AS framework. The intersection of AD and AS determines short-run fluctuations, while anchors the Long-Run Aggregate Supply.
- The lecture connects the Solow Model (which determines long-run potential output,
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TK Resolutions
- #tk: flashcard this and line above (referencing Solow model and vertical LRAS)
- Answer: Created standalone flashcards verifying that the Solow model determines equilibrium
and that LRAS is vertical at .
- Answer: Created standalone flashcards verifying that the Solow model determines equilibrium
- #tk: fix the graph, professors notes on the graph are not good and nonsensical curve which don't match the points.
- Answer: The algebraic derivation of the budget balance is
. At , , which correctly intersects the x-axis. Review the specific slope in Desmos to ensure it matches the 0.25 multiplier.
- Answer: The algebraic derivation of the budget balance is
- #tk: graph below (missing NX and Savings graphs)
- If not answerable: Requires referring back to lecture slides or personal notes to accurately plot
and shifts. Action plan updated.
- If not answerable: Requires referring back to lecture slides or personal notes to accurately plot
- #tk: go to office hours tomorrow
- Answer: Logged in immediate review actions. Ensure you ask about the contradictory algebra around
versus in the Foreign Shock example.
- Answer: Logged in immediate review actions. Ensure you ask about the contradictory algebra around
- #tk: how do we get this (referencing
) - Answer: Derive AD by setting
. Given , substituting yields .
- Answer: Derive AD by setting
- #tk: flashcard this (supply shock variable change)
- Answer: Created flashcard verifying that in a supply shock, only the nominal wage (
) changes permanently in the long run.
- Answer: Created flashcard verifying that in a supply shock, only the nominal wage (
- #tk: exam question (AS rotation)
- Answer: The rotation from
to represents a slope change. Identified as a challenging concept below.
- Answer: The rotation from
- #tk: flashcard this and line above (referencing Solow model and vertical LRAS)
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Practice Questions
- Remember/Understand:
- What happens to the nominal wage when the economy is in a recessionary gap?
- Why is the long-run aggregate supply curve vertical?
- In the long run, what is the value of the fiscal multiplier?
- Apply/Analyze:
- If the government increases spending (
) while the economy is at , trace the sequence of events that returns the economy to its long-run equilibrium. - Explain why an exogenous shift in the SRAS curve results in no permanent change to the long-run price level.
- If the government increases spending (
- Evaluate/Create:
- Given an AS rotation shock from
to , calculate the necessary wage adjustment ( ) to restore long-run equilibrium if and AD is given by .
- Given an AS rotation shock from
- Remember/Understand:
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Challenging Concepts
- Aggregate Demand Derivation:
- Why it's challenging: Recognizing that the AD curve is derived by enforcing the goods market equilibrium condition (
) and isolating as a function of . - Study strategy: Practice substituting the given
equation into and solving for algebraically every time.
- Why it's challenging: Recognizing that the AD curve is derived by enforcing the goods market equilibrium condition (
- Long-Run Multiplier is Zero:
- Why it's challenging: It is counter-intuitive that a fiscal expansion mathematically increases GDP in the short run but ultimately yields no extra output.
- Study strategy: Remember that the
ceiling forces wage adjustments. Track the shifts visually: AD moves right, then AS moves left, canceling the real output gains but compounding the price increases.
- AS Curve Rotation:
- Why it's challenging: Most shocks are parallel shifts (changes to the intercept). A rotation changes the slope, affecting how severely prices interact with wage adjustments.
- Study strategy: Redraw the
and curves on a standard axis. Recall that is on the y-axis, meaning you must conceptually invert the function to to visualize steepness.
- Aggregate Demand Derivation:
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Action Plan
- Immediate review actions:
- Practice and application:
- Deep dive study:
- Verification and integration:
- Immediate review actions:
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Footnotes