ECON 2102 Exam 1 Questions With Complete Solutions
What is long-run growth in GDP determined by?
Technological Progress
Short run movements in GDP are strongly correlated with...
the utilization of the economy's labor force
Difference between short and long run economies
- Time horizon matters in economics
- In the long run --> prices are flexible, it responds to changes in
supply and demand
- In the short run --> prices are sticky at some pre-determined
level, does not respond to changes in supply and demand
quickly
Aggregate Demand (AD)
the total quantity of output (real GDP) demanded at alternative
price levels in a given time period. Quantity of all goods and
services (Y) demanded at any given price level (P)
Quantity Theory of Money Equation
Money Supply (M) x Velocity (V) = Price (P) x Real output (Y);
MV = PY
velocity of money
the rate at which money changes hands
Shifts in AD --> Fed reduces M
,- MV = PY
- If M decreases (V assumed constant), then nominal value of
output (PY) decreases
- For any given P, Y demanded is lower, so AD shifts IN
Shifts in AD --> Fed increases M
- MV = PY
- If M increases (V assumed constant), then nominal value of
output (PY) increases
- For an given P, Y demanded is higher, so AD shifts OUT
Shifts in AD --> Changes in V
- MV = PY
- This has the same effect on AD as changes in M
- Holding M constant, increase in V shifts AD out, decrease in V
shifts AD in
Aggregate Supply (AS)
- quantity of all goods and services (Y) supplied at any given
price level (P)
- AS relationship depends on the time horizon
- Price is flexible in the long run and sticky in the short run
Long Run Aggregate Supply (LRAS)
The level of output to which an economy will always return in
the long run. The LRAS curve intersects the horizontal axis at
the full employment or potential level of output.
- Productive capacity is constrained in the long run --> Hence
,production depends on available resources (K and L) and how
well we utilize them (technology), not on P
How do we graph LRAS if there is no relationship between Y
and P?
Economic growth can be captured by changes in potential output
(shift of LRAS)
How do we graph SRAS if we assume complete price
stickiness?
P is fixed at some level P in the short run, so SRAS is flat at P
The Frequency of Price Adjustment
Approximately 50% of firms do not change their prices more
than 1x a year
Theories of Price Stickiness
- Coordination Failure
- Cost-based pricing with lags
- Delivery lags, service, etc
- Implicit contracts
- Nominal contracts
- Costs of price adjustment (menu costs)
- Procyclical elasticity
- Pricing points
- Inventories
- Constant Marginal Cost
- Hierarchical Delays
- Judging quality by price
, Coordination Failure (Theories of Price Stickiness)
Firms hold back on price changes, waiting for others to go first.
60.6% of managers accepted this theory!
Cost-based pricing with lags (Theories of Price Stickiness)
price increases are delayed until costs rise. 55.5% of managers
accepted this theory
Delivery lags, service, etc. (Theories of Price Stickiness)
Firms prefer to vary other product attributes, such as delivery
lags, service, or product quality. 54.8% of managers accepted
this theory
Implicit contracts (Theories of Price Stickiness)
Firms tacitly agree to stabilize prices, perhaps out of "fairness"
to customers. 50.5% of managers accepted this theory
Nominal contracts (Theories of Price Stickiness)
Prices are fixed by explicit contracts. 35.7% of managers
accepted this theory
Costs of price adjustment (menu costs): Theories of Price
Stickiness
Firms incur costs of changing prices. 30% of managers accepted
this theory
Procyclical elasticity (Theories of Price Stickiness)
Demand curves become less elastic as they shift in. 29.7% of
managers accepted this theory
Pricing points (Theories of Price Stickiness)
What is long-run growth in GDP determined by?
Technological Progress
Short run movements in GDP are strongly correlated with...
the utilization of the economy's labor force
Difference between short and long run economies
- Time horizon matters in economics
- In the long run --> prices are flexible, it responds to changes in
supply and demand
- In the short run --> prices are sticky at some pre-determined
level, does not respond to changes in supply and demand
quickly
Aggregate Demand (AD)
the total quantity of output (real GDP) demanded at alternative
price levels in a given time period. Quantity of all goods and
services (Y) demanded at any given price level (P)
Quantity Theory of Money Equation
Money Supply (M) x Velocity (V) = Price (P) x Real output (Y);
MV = PY
velocity of money
the rate at which money changes hands
Shifts in AD --> Fed reduces M
,- MV = PY
- If M decreases (V assumed constant), then nominal value of
output (PY) decreases
- For any given P, Y demanded is lower, so AD shifts IN
Shifts in AD --> Fed increases M
- MV = PY
- If M increases (V assumed constant), then nominal value of
output (PY) increases
- For an given P, Y demanded is higher, so AD shifts OUT
Shifts in AD --> Changes in V
- MV = PY
- This has the same effect on AD as changes in M
- Holding M constant, increase in V shifts AD out, decrease in V
shifts AD in
Aggregate Supply (AS)
- quantity of all goods and services (Y) supplied at any given
price level (P)
- AS relationship depends on the time horizon
- Price is flexible in the long run and sticky in the short run
Long Run Aggregate Supply (LRAS)
The level of output to which an economy will always return in
the long run. The LRAS curve intersects the horizontal axis at
the full employment or potential level of output.
- Productive capacity is constrained in the long run --> Hence
,production depends on available resources (K and L) and how
well we utilize them (technology), not on P
How do we graph LRAS if there is no relationship between Y
and P?
Economic growth can be captured by changes in potential output
(shift of LRAS)
How do we graph SRAS if we assume complete price
stickiness?
P is fixed at some level P in the short run, so SRAS is flat at P
The Frequency of Price Adjustment
Approximately 50% of firms do not change their prices more
than 1x a year
Theories of Price Stickiness
- Coordination Failure
- Cost-based pricing with lags
- Delivery lags, service, etc
- Implicit contracts
- Nominal contracts
- Costs of price adjustment (menu costs)
- Procyclical elasticity
- Pricing points
- Inventories
- Constant Marginal Cost
- Hierarchical Delays
- Judging quality by price
, Coordination Failure (Theories of Price Stickiness)
Firms hold back on price changes, waiting for others to go first.
60.6% of managers accepted this theory!
Cost-based pricing with lags (Theories of Price Stickiness)
price increases are delayed until costs rise. 55.5% of managers
accepted this theory
Delivery lags, service, etc. (Theories of Price Stickiness)
Firms prefer to vary other product attributes, such as delivery
lags, service, or product quality. 54.8% of managers accepted
this theory
Implicit contracts (Theories of Price Stickiness)
Firms tacitly agree to stabilize prices, perhaps out of "fairness"
to customers. 50.5% of managers accepted this theory
Nominal contracts (Theories of Price Stickiness)
Prices are fixed by explicit contracts. 35.7% of managers
accepted this theory
Costs of price adjustment (menu costs): Theories of Price
Stickiness
Firms incur costs of changing prices. 30% of managers accepted
this theory
Procyclical elasticity (Theories of Price Stickiness)
Demand curves become less elastic as they shift in. 29.7% of
managers accepted this theory
Pricing points (Theories of Price Stickiness)
