Transcript theoretically, that is.

Macroeconomics – Unit 3 – part 6
some questions for review
What’s on this
axis?
PL
2 of 17
What’s on this
axis?
Q=realGDP=Y
some questions for review
PL
LRAS
SRAS
AD
Y
What are the
3 curves drawn
in the AS / AD
model?
Why is LRAS
vertical...what
does it
represent?
Q=realGDP=Y
some questions for review
PL
LRAS
SRAS
AD
YF
In this particular
drawing is the
economy in a
recession,
inflationary period
or at equilibrium?
What is LRAS
frequently labeled?
Explain why.
Q=realGDP=Y
some questions for review
PL
LRAS
SRAS
AD
YF
What factors could
cause the LRAS to
shift?
We also saw that
some factors could
cause the AD or
SRAS to shift
called
________
supply
shock
_______.
Q=realGDP=Y
some questions for review
In this particular
drawing is the
economy in a
recession, inflationary
period, or at
equilibrium?
PL
LRAS
SRAS
PL1
YP Y 2
AD
What is the value of the
______________
gap
inflationar
ony this graph?
Q=realGDP=Y
6 of 17
Y 2 – YP
some questions for review
PL
In this particular
drawing is the
economy in a
recession, inflationary
period, or at
equilibrium?
SRAS
LRAS
PL1
AD
Y1 YP
What is the value
of the
recessionary gap
on this graph?
Y –Y
Q=realGDP=Y
1
P
Recessionary Gap – could be fixed by...
(1) shift in SRAS – b/c economy is
below
producing at
a level _______ potential
output,
resources
__________
are
PL
SRAS
sitting around unused
LRAS
SRAS2  costs and wages
tend to fall
_____ 
price level falls and
PL1
SRAS right
shifts _____
AD until equilibrium.
theoretically, that
is....
Y1 YP
Q=realGDP=Y
When there is an inflationary or recessionary
gap, the government oftenfiscal
uses ________
monetary
policy
or _________ policy to causeAD
a shift in
_____ curve until the economy is at
equilibrium.
PL
Fiscal policy –
SRAS
deliberate change
LRAS
PL2
in taxes
PL1
AD2
AD
Y1 YP
(1)spending
_________ or
(2) __________
to expand or
contract AD.
Q=realGDP=Y
You may have a different sort of problem where you
start with the economy at equilibrium, but then
there’s a demand or supply shock taking the economy
out of equilibrium. Say the economy is at full
PL0 and output Y
employment...price is ___
isF___.
PL
LRAS
SRAS
PL1
AD1
PL0
AD
YF Y 1
The exchange rate
falls dramatically
increase
making exports
________
_____
AD
right
rises
shifts
______  PL
increases& output
_______
_________.
Q=realGDP=Y
10 of 17
But next you have long-term adjustment ... (assuming
the gov’t hasn’t stepped in with fiscal or monetary
policy)
There is a huge demand
for __________
resources &
with a higher PL labor
PL
LRAS
SRAS2 pushes for higher
wages
_______ costsrise
and
SRAS
PL2
wages _____  price
left
level rises and
SRAS
PL1
AD1 shifts _____ until
equilibrium. But now
PL0
new
equilibrium is at the
same
AD
______
higher output, but
______ Price Level.
YF Y 1
Q=realGDP=Y
Remember that you may be asked about a
variety of economic changes from the same
axis.
When AD
shifted to AD2,
PL
LRAS
what happened
to ….Output? 
SRAS
PL2
GDP? 
PL1
Unemployment?
AD2
Real Income? 
AD
Employment? 

Price
Y1 Y 2 YF
Level
Inflation? 
Q=realGDP=Y
alternative format to draw AS/AD
model....
PL
label?
Single Aggregate
Supply curve
consists of 3
parts...
Classical Range
Intermediate Range
Keynesian Range
label?
AD
Y = Reallabel?
GDP =Q
alternative format to draw AS/AD
model....
What is
represented if the
economy is at this
point?
Intermediate Range
PL
Classical Range
Keynesian Range
AD
14 of 17
Full employment income..which
5
is ____%
unemployment.
YF
Y = Real GDP =Q
Look at these ranges, in one range prices &
wages are sticky and in a different range
they are fully flexible. Which one?
Classical Range
PL
label?
Single Aggregate
Supply curve
consists of 3
parts...
Intermediate Range
Keynesian Range
Here prices
change fully
with changes
in AD.
label?
AD
Y = Reallabel?
GDP =Q
Where would you draw AD curve to show
unemployment at 10%?
PL
AD
Y1 YF
Y = Real GDP =Q
Where would you draw AD curve to show
a recessionary gap?
PL
AD
The end
Y1 YF
17 of 17
Y = Real GDP =Q