AD/AS

Question 1

Formula for AD

Answer 1

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

Question 2

Factors affecting Autonomous Consumption (C)

Answer 2

(PAIGE)
Preference of households

Availability of credit (Loan)

Interest Rate (Lower interest rate, Higher C)
- Borrower + Saver

Govt. Policy

Expectation of future (Economic outlook, inflation)

Question 3

Factors affecting Autonomous Investment (I)

Answer 3

(CEG)
Cost and efficiency of capital equipment

Expectation (Economic condition,political stability,good infrastructure, Education + No riots/strikes)

Govt. policy (Grants)

Question 4

Factor affecting Government Expenditure (G)

Answer 4

Level of Govt. Debt (Higher Debt,Lower G)

Question 5

Factors affecting Net Exports (X-M)
X: eXports
M: iMports

Answer 5

(FERG)
Foreign Income Level: Higher NY, More trade, More (X-M)

Exchange Rate (e.g. Depreciation)

• Px of X decrease in other country, increase Qty DD, increase export (X)
• Px of M increase in home country, decrease Qty DD, decrease import (M)
• Increase (X-M)

Realtive quality of G+S

Governments’ trade policies

Question 6

Axes for AD/AS curve?

Three parts of AS curve?

Answer 6

General price level, Real GDP

Spare capacity (Flat line), Nearing full capacity (Curve), Full capacity (Vertical line)

Question 7

Framework for shift in AD qns.

Answer 7

1. Initial state of economy (Deduce from extract, not given assume is near full)
2. Factors affecting AD,explain
3. Adjustment process to end pts (GPL, RGDP)

Question 8

Adjustment process for GPL

Answer 8

[Similar to price adjustment process]

Rightward/Leftward shift in AD from AD1 to AD2.

Shortage/surplus occurs at original GPL, (consumers bid up prices for G+S) / (Producers reduce price to get rid of excess clear).

GPL increases/decreases from P1 to P2.

Question 9

Adjustment process for RGDP

Answer 9

Increase/Decrease demand for G+S

Unplanned decrease/increase in stock level, hence firms increase/decrease output which increases/decreases GDP.

Activates multiplier process, increase/decrease in AD causes multiplied increase/decrease in GDP from Y1 to Y2. (Near full employment) Effect is dampened due to increase/decrease in GPL

Question 10

Factor that affects SRAS?

What to note about the SRAS curve?

Answer 10

Cost of a significant factor of production

Leftward shift –> Decrease
Rightward shift –> Increase

Question 11

Economic analysis for SRAS (e.g. decrease)

Answer 11

Increase COP for every level of output for all industries , fall in SRAS across economy.

SRAS curve shifts leftwards from SRAS0 to SRAS1.

GPL increases from Pe to P1, RGDP decreases from Ye to Y1.

Question 12

Factors that affect LRAS?

End points for LRAS

Answer 12

(QQT)
Quality + Quantity of FOP
Technology

1. GPL
2. RGDP (Actual economic growth)
3. Full employment level (Potential economic growth)

Question 13

Economic analysis for LRAS. (e.g. increase)

Answer 13

Explain factor affecting LRAS

Increase productive capacity of economy. AS curve shifts rightwards from LRAS1 to LRAS2.

(Read off the graph)
GPL falls from P2 to P3.

RGDP increases from Y2 to Y3. [Actual economic growth]

Full employment level increases from Yf1 to Yf2. [Potential economic growth]