4.10.2 - Aggregate Demand and Aggregate Supply Analysis Flashcards

1
Q

What are reflationary policies?

A

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

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2
Q

What is aggregate demand?

A

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

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3
Q

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

A

AD/AS.

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4
Q

What is the equation for AD?

A

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

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

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5
Q

What is the difference between aggregate demand and national expenditure?

A

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

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6
Q

Why does the AS curve slope upwards?

A
  • Assumption that all firms aim to maximise profits.
  • The cost of producing extra units of output increases as firms produce more output.
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7
Q

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

A

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.

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8
Q

What happens if AD shifts right?

A

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

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9
Q

What happens if AD shifts left?

A

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

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10
Q

What happens if AS shifts right?

A

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

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11
Q

What happens if AS shifts left?

A

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

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12
Q

Why will an AD curve shift?

A

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

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

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13
Q

What is the AS curve contstructed under the assumption of?

A

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

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14
Q

What actually happens when the AS curve shifts rightwards?

A

Inflation in the economy is falling.

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15
Q

What causes the AS curve to shift?

A
  • Price level
  • Cost of labour
  • Cost of raw materials
  • The level of taxes and subsidies
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16
Q

What is long-run aggregate supply?

A

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.

17
Q

Why is LRAS vertical?

A

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.

18
Q

What is short-run growth mostly affected by?

A

Temporary fluctuations in aggregate demand.

19
Q

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

A

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

20
Q

What is an economic shock?

A

An unexpected event hitting the economy.

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

21
Q

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

A

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.

22
Q
A
23
Q

What is long-run growth mostly affected by?

A
  • 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.

24
Q

What is aggregate supply?

A

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