1.4 The Interaction Of Aggregate Demand And Supply Flashcards
What are the assumptions made for the AD curve
It is assumed that the supply of money available for borrowing is fixed
What assumptions are made about the vertical shape of the LRAS curve
That the economy is operating at full employment, and that the price level and production costs change proportionally, so the economy maintains the level of full employment
When does the economy reach a state of equilibrium
Where AD = AS
What happens if the economy is at a price above the equilibrium
There will be excess supply
What happens if the economy is at a price below equilibrium
There will be excess aggregate demand
Explain the shifts in this AS curve and
Why might AD shift inwards
If firms have less confidence or is a recession
What happens if AD shifts inwards
This causes the price level to fall and National output to fall
What happens if AD increases
The price level and level of National output both increase
Explain the shifts in this AD curve
Explain this diagram
What are demand-side policies designed to do
To increase consumer demand, so that total production in the economy increases
How can negative output gaps be decreased
With the use of demand-side policies
What can supply-side policies be used for
To increase the productive potential of the economy
This is depicted by a rightward shift in the LRAS curve
