1.4 Interaction of AD + AS

Question 1

What are the assumptions underlying the aggregate demand and aggregate supply models?

Answer 1

Assumptions include:
* Prices are flexible in the long run
* Output is determined by productive capacity
* Aggregate demand influences output and price levels in the short run
* Expectations about the future influence consumption and investment decisions

These assumptions help to explain the behavior of the economy under different conditions.

Question 2

What is equilibrium in the macroeconomy?

Answer 2

Equilibrium occurs when aggregate demand equals aggregate supply, resulting in stable price levels and output.

This balance indicates a state where there are no inherent forces pushing for change in output or prices.

Question 3

How do changes in aggregate demand affect macroeconomic indicators?

Answer 3

Changes in aggregate demand can lead to:
* Fluctuations in output
* Changes in employment levels
* Variations in price levels

An increase in aggregate demand typically results in higher output and employment but can also lead to inflation.

Question 4

How do changes in aggregate supply affect macroeconomic indicators?

Answer 4

Changes in aggregate supply can impact:
* Overall production capacity
* Price levels
* Employment rates

A decrease in aggregate supply can lead to stagflation, characterized by rising prices and falling output.