AD and AS diagrams

Question 1

Aggregate demand formulae

Answer 1

C + G + I + ( X - M )

Question 2

Why is the AD curve downward sloping

Answer 2

Falling real incomes - as price level rises, the value of real income decreases.

Balance of trade - as price level rises, foreign produced goods and services are cheaper.
Exports more expensive.

Question 3

National income

Answer 3

Total value of goods and services produced by a country.

Question 4

National output

Answer 4

Measures actual output of goods and services by the economy.

Question 5

National expenditure

Answer 5

Measures spending of incomes on goods and services.

Question 6

What does LRAS aim to do?

Answer 6

Aims to improve the GDP of a country

Question 7

What causes changes to LRAS GDP?
(long run economic growth)

Answer 7

Changes in Labour supply available for production.
Changes in stock of capital inputs such as from foreign direct investment.
Improvements in productivity of inputs such as UK 5G network.

Question 8

Output gap

Answer 8

Output gap is the difference between actual GDP level and its estimated potential level. If the equilibrium is right of LRAS it is positive, if it’s left its negative.

Question 9

Supply side shocks

Answer 9

Steep rise in oil & gas prices
Political strikes
Breakthrough in production technnology

Question 10

Demand side shocks ( Short run economic growth )

Answer 10

Downturn in a major trading partner
Tax increases and cuts to welfare benefits
Rise in unemployment rate