4.10.2 - Aggregate Demand and Aggregate Supply Analysis

Question 1

What are reflationary policies?

Answer 1

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

Question 2

What is aggregate demand?

Answer 2

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

Question 3

What is aggregate supply?

Answer 3

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

Question 3

What is the preferred economic model that most economists use to explain macroeconomics?

Answer 3

AD/AS.

Question 4

What is the equation for AD?

Answer 4

AD = C + I + G + (X - M)

C = Planned Consumption
I = Investment
G = Government Spending
X = Exports
M = Imports

Question 5

What is the difference between aggregate demand and national expenditure?

Answer 5

National expenditure measures total spending.
Aggregate demand measures planned spending.

Question 6

Why does the AS curve slope upwards?

Answer 6

• Assumption that all firms aim to maximise profits.
• The cost of producing extra units of output increases as firms produce more output.

Question 7

How can output rise above the average output level of Y₁?

Answer 7

To produce a higher output of Y₂, the price level must rise to P₂.

Because higher prices are needed to offset the increased costs of production that firms incur as they increase output.

Question 8

What happens if AD shifts right?

Answer 8

The level of income increases.
The price level of the economy rises.
The real national output rises.

Question 9

What happens if AD shifts left?

Answer 9

The level of income falls.
The price level of the economy falls.
The real national output falls.

Question 10

What happens if AS shifts right?

Answer 10

The level of income falls.
The price level of the economy falls.
The real national output rises.

Question 11

What happens if AS shifts left?

Answer 11

The level of income rises.
The price level of the economy rises.
The real national output falls.

Question 12

Why will an AD curve shift?

Answer 12

If there is any change to any of the variables in the equation of:

AD = C + I + G + (X - M)

Question 13

What is the AS curve contstructed under the assumption of?

Answer 13

That all the determinants of aggregate supply other than the price level remain unchanged.

Question 14

What actually happens when the AS curve shifts rightwards?

Answer 14

Inflation in the economy is falling.

Question 15

What causes the AS curve to shift?

Answer 15

• Price level
• Cost of labour
• Cost of raw materials
• The level of taxes and subsidies

Question 16

What is long-run aggregate supply?

Answer 16

The real output that can be supplied when the economy is on its production possibility frontier.

When all of the available factors of production are employed and producing at their normal capacity level of output.

Question 17

Why is LRAS vertical?

Answer 17

It is the maximum level of output that the entire economy can produce, so it is unaffected by changes in the price level.

It will produce Y₁ no matter what.

Question 18

What is long-run growth mostly affected by?

Answer 18

• Changing the available factors of production.
• New technology that changes productivity.

Essentially, the LRAS shifts outwards for the same reasons that the PPF shifts outwards.

Question 18

What is short-run growth mostly affected by?

Answer 18

Temporary fluctuations in aggregate demand.

Question 19

What are the two ways of approaching the concept of equilibrium national income?

Answer 19

Using the circular flow of income theory.
Where AD = AS.

Question 20

What is an economic shock?

Answer 20

An unexpected event hitting the economy.

They can either be demand-side or supply-side.

Question 21

As an economic shock what does effect does a war in the Middle East hold over the UK economy?

Answer 21

As a demand-side shock, consumer and business confidence may collapse.

As a supply-side shock, there will be a change in the supply and price of crude oil.