10.2 Aggregate Demand And Aggregate Supply Analysis

Question 1

What is aggregate demand?

Answer 1

Total planned spending on real output in the economy at different price levels

Question 2

What is aggregate supply?

Answer 2

The level of real national output that producers are prepared to supply at different price levels

Question 3

What are reflationary policies?

Answer 3

Policies that increase aggregate demand with the intention of increasing real output and employment

Question 4

Diagram for aggregate demand

Answer 4

Question 5

What are the four sectors that make up aggregate demand?

Answer 5

-households
-firms
-gov sector
-overseas sector (exports-imports)

Question 6

Aggregate supply diagram

Answer 6

Question 7

Why is the aggregate supply curve upwards sloping?

Answer 7

All firms aim to maximise profit

In the short run, the cost of producing extra units or output increases as firms produce more output

Question 8

Explain this increasing slope

Answer 8

At p1 the economy’s firms are willing to sell y1

To persuade firms to sell y2 the price level must rise to p2

-higher prices are needed to create higher sales revenues needed to offset the higher production costs that firms incur as they increase output

Question 9

As the price level in the economy falls what happens to aggregate demand?

Answer 9

It increases

Question 10

As price level in the economy falls what happens to aggregate supply?

Answer 10

It decreases

Question 11

Diagram for AD moving right

Answer 11

Real national output increases

Question 12

Diagram for AS moving left

Answer 12

Real national output decreases

Question 13

When will the AD curve shift?

Answer 13

If there is a shift in he value in any of the components of AD

(Consumption, investment, gov spending, exports and imports)

Question 14

What is the AS curve constructed under?

Answer 14

The assumption that all the determinants of AS other than the price level remain unchanged

Question 15

What does a decrease in AS lead to

Answer 15

Inflation

Question 16

What is long-run aggregate supply?

Answer 16

The real output that can be supplied when the economy is on its PPF. This is when all the available factors of production are employed and operating at their ‘normal capacity’ level of output

Question 17

Diagram for a shift of AD along a LRAS curve

Answer 17

Question 18

In the short run, what does the aggregate supply or real output demand on?

Answer 18

The average price level in the economy

Question 19

Is aggregate supply affected by price level in the long run?

Answer 19

No, it reflects the economy’s production potential

Question 20

Diagram for increasing AD when the economy is operating at full capacity

Answer 20

Question 21

What does short run growth result from?

Answer 21

Temporary fluctuations in aggregate demand

Question 22

What is the underlying rate of growth?

Answer 22

The long-run average growth rate for a country over a period of time,

Question 23

What is underlying growth caused by?

Answer 23

The same factors that determine the position of the economy’s PPF (the quantities of capital and labour and other factors of production in the economy and technical progress

(These also determine the position of the LRAS)

Question 24

Two diagrams to show increasing underling growth

Answer 24

Question 25

What shifts the economy’s PPF outwards?

Answer 25

Increase in the quantity of available factors of production including labour, improvements of tech that increase the productivity of labour

Question 26

Diagram for equilibrium national outcome

Answer 26

Question 27

What is an economic shock ?

Answer 27

An unexpected event hitting the economy. They can be demand or supply side (sometimes both) being favourable or unfavourabl

E.g war on Ukraine negative supply shifts I