Long-Run Self-Adjustment - AP Macroeconomics
- What role do flexible prices play in long-run self-adjustment?
- They help restore full employment equilibrium. Prices adjust to eliminate output gaps and restore potential GDP.
- What happens to the economy if wages are perfectly flexible?
- Quick adjustment to full employment. No wage rigidity allows immediate return to natural employment rate.
- How do expectations of future prices affect long-run self-adjustment?
- They influence wage and price adjustments. Expected price changes affect wage negotiations and production costs.
- What shifts the aggregate supply curve in the long-run self-adjustment process?
- Changes in resource prices and expectations. These factors shift SRAS to eliminate gaps between actual and potential GDP.
- What happens to unemployment in the long run after an inflationary gap?
- Unemployment returns to natural rate. Higher costs reduce employment back to the natural rate.
- What is the implication of a vertical long-run aggregate supply curve?
- Output is not affected by price changes. Long-run output depends only on resources, not price level.
- What is the effect of a decrease in aggregate demand on long-run equilibrium?
- Price level decreases; output unchanged. Lower prices restore equilibrium without affecting long-run output.
- Identify the effect of improved productivity on long-run adjustment.
- Shifts long-run aggregate supply right. Higher productivity expands economy's potential output capacity.
- What is the consequence of price stickiness on long-run self-adjustment?
- Delays return to full employment output. Rigid prices prevent quick adjustment to eliminate output gaps.
- What happens to wages in the long run if the economy is in a recession?
- Wages decrease. Lower wages reduce costs, shifting aggregate supply right toward full employment.
- What is the long-run effect of a supply-side policy on the economy?
- Increases potential output. Expands productive capacity by improving technology or resources.
- What is the role of sticky wages in delaying long-run self-adjustment?
- They slow down wage adjustments to equilibrium. Rigid wages prevent quick price adjustments needed for equilibrium.
- How does long-run self-adjustment impact potential GDP?
- Potential GDP remains unchanged. Self-adjustment only affects actual GDP, not productive capacity.
- If wages are slow to adjust downward, what is the impact on long-run adjustment?
- Adjustment to full employment is delayed. Sticky wages prevent quick cost reductions needed for supply adjustment.
- If aggregate demand decreases, what long-run adjustment occurs?
- Prices fall, increasing aggregate supply. Lower production costs shift SRAS right to restore equilibrium output.
- Identify the primary factor that adjusts in the long run to reach equilibrium.
- Price level. Changes in price level allow the economy to move toward long-run equilibrium.
- What is the relationship between short-run and long-run aggregate supply?
- Long-run is vertical; short-run is upward sloping. LRAS is vertical at potential GDP; SRAS slopes upward due to sticky prices.
- What happens to the price level in the long run if aggregate demand increases?
- Price level rises. Higher demand creates inflation but output returns to potential GDP.
- What is the role of labor market flexibility in long-run self-adjustment?
- Facilitates wage adjustments to full employment. Flexible wages enable quick adjustment to employment equilibrium.
- How does long-run self-adjustment affect inflationary expectations?
- Adjusts expectations to align with actual inflation. Adjustment process corrects expectation errors over time.
- What is the effect of long-run self-adjustment on unemployment?
- Unemployment returns to the natural rate. Wage adjustments restore equilibrium employment at the natural rate.
- What is the long-run impact of a negative demand shock?
- Output remains at potential GDP with lower prices. Self-adjustment restores potential GDP through lower price level.
- How does the self-correction mechanism adjust the economy in the long run?
- By adjusting wages and prices. Price flexibility allows economy to return to full employment equilibrium.
- What is the long-run self-adjustment mechanism in economics?
- A process where the economy returns to full employment output. Happens when wages and prices adjust to bring output back to potential GDP.
- Which curve shifts due to long-run self-adjustment in response to a recession?
- Aggregate supply curve shifts right. Lower wages reduce production costs, increasing short-run aggregate supply.
- What is the classical view on government intervention in long-run adjustments?
- It is unnecessary for achieving full employment. Classical theory assumes markets self-correct efficiently through price flexibility.
- What is the Keynesian perspective on long-run self-adjustment?
- It may be slow or ineffective without intervention. Keynes argued sticky wages prevent quick adjustment to full employment.
- Identify a factor that can shift the long-run aggregate supply curve.
- Changes in technology. Technology permanently increases economy's productive capacity.
- What is the long-run effect of a positive supply shock?
- Lower prices with potential GDP unchanged. Increased supply capacity reduces prices while maintaining full employment.
- What is the expected long-run adjustment if an economy is overheated?
- Aggregate supply shifts left. High demand creates inflation, raising costs and reducing supply.
- Find the adjustment needed if the actual GDP is below potential GDP.
- Increase aggregate supply. Lower wages and costs will shift SRAS right toward potential GDP.
- State the result of the long-run self-adjustment on output.
- Output returns to potential GDP. Self-adjustment eliminates output gaps by returning to natural level of output.
- Which economic theory emphasizes the long-run self-adjustment mechanism?
- Classical economics. Believes markets naturally adjust to full employment without intervention.
- How does long-run self-adjustment address overemployment?
- Increases in wages reduce labor demand. Higher wages from tight labor market reduce employment to natural rate.
- Identify the impact of technological advancements on long-run self-adjustment.
- Shift long-run aggregate supply rightward. Technology increases productive capacity, expanding potential GDP.
- Find the result of long-run self-adjustment on real GDP after a demand shock.
- Real GDP returns to potential output. Supply adjustments restore equilibrium at potential GDP level.
- How does long-run self-adjustment affect the aggregate demand curve?
- It does not affect aggregate demand directly. Self-adjustment works through supply shifts, not demand changes.
- In long-run self-adjustment, how does the economy respond to inflation?
- Aggregate supply decreases. Higher wages increase costs, shifting aggregate supply left to reduce output.