1) Interaction of AD and AS - MMT

Question 1

before drawing an AD curve or an AS curve we always assume…

Answer 1

ceterus paribus, that no relevant economic factors, other than the price level are changing
1) for AD we assume that the amount of money circulating in the economy stays the same
2) For SRAS, we assume that firms are able to increase output (in response to higher prices) without increasing their costs

Question 2

higher prices relate to… for firms

Answer 2

higher profits
(these assumptions don’t often hold true in the real world, but are essential to explain our model)

Question 3

when AS=AD the economy is at…

Answer 3

equilibrium

Question 4

what does the equilibrium of AS=AD mean?

Answer 4

that it is in a settled position with no outside pressures to influence change, equilibrium is not necessarily a good thing, being in equilibrium just means that at the current price level, SRAS=AD.

Question 5

How could equilibrium show a bad place for the economy?

Answer 5

eg the economy could be stuck in a rut, with lots of factors of production unemployed (LRAS is to the right of equilibrium)

Question 6

how could equilibrium show that the economy has overextend itself?

Answer 6

if LRAS is to the left of the equilibrium, factors of production are being overused

Question 7

what is the best position the whole economy could achieve?

Answer 7

it could be equilibrium at Yfe, where AD=SRAS=LRAS

Question 8

where will equilibrium occur in the short term and in the long term?

Answer 8

equilibrium: AD=AS
short run: AD=SRAS
long run: AD=LRAS

Question 9

what is a negative output gap and what does it look like?

Answer 9

also known as a deflationary gap, the triangle pointing to the left, LRAS to the right

Question 10

what is a positive output gap and what does it look like?

Answer 10

also known as a inflationary gap, the triangle pointing to the right, LRAS to the left

Question 11

what diagram represents long run equilibrium?

Answer 11

equilibrium at Yfe