Question 1 

Fill in the blanks to make the following statements correct.

1.1 In a short-run macro model, it is assumed that factor prices are ___________ and the level of potential output is ______________. Changes in real GDP are caused by fluctuations in ____________ and __________.  

1.2 When actual GDP is higher than potential GDP, we say that there is a(n) __________ gap. When actual GDP is less than potential GDP we say there is a(n) __________ gap.

 

 

1.3 The downward adjustment of wages in response to a recessionary gap is much  __________ than the upward adjustment of wages in response to a(n) ___________ gap. Economists refer to this phenomenon as ______________.

1.4 Beginning with output equal to potential, suppose there is a drop in business confidence and investment falls. This is a ________ shock to the Canadian economy, which shifts the ___________curve to the left and creates a(n) gap. Unit costs will start to ____________and the ____________ curve will shift ___________. Long-run equilibrium will (slowly) be restored at _________ output and ____________ price level.       

 

 

1.5 In the long run, total output is determined only by __________. In the long-run, aggregate demand determines the _____________.

1.6 A reduction in corporate income tax is likely to make __________ more attractive and thus shift the _____________ curve to the right. The result is a(n) ____________ in the short-run level of real GDP. In the long run, the greater rate of ____________ by firms will lead to a greater level of ___________.