AD/AS

Question 1

Definition of Aggregate Demand (AD)

Answer 1

AD curve gives the total demand for a country’s output at various general price levels, c.p..

Question 2

Factors of AD [C]

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

Answer 2

Consumption expenditure;
is spending by households on consumer G&S. This spending covers non-durable goods (e.g. food), durable goods (e.g. cameras and cars) and services (e.g. entertainment, transport).

Question 3

Factors of AD [I]

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

Answer 3

Investment expenditure;
is the acquisition of new fixed capital assets (including housing, plants and machinery) and accumulation of inventory stock (raw materials, semi-finished goods and finished goods held by the producer).

Question 4

Factors of AD [G]

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

Answer 4

Government expenditure;
constitutes government spending on final G&S. These include spending on public goods like defence for the nation, for economic growth (e.g. spending on education), for social needs of the population (e.g. building of community centres and homes for the aged).

Question 5

Factors of AD [(X-M)]

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

Answer 5

Net export revenue
X: export revenue
M: import expenditure

Exports are G&S produced within a country but sold abroad (to foreign households, firms and governments)
Imports are G&S produced abroad but sold within the country to domestic firms and households.

Question 6

Definition of Aggregate Supply (AS)

Answer 6

AS refers to the total value of domestic G&S produced within the economy at every general price level.

Question 7

Shift of AD curves

left and right

Answer 7

Shift left → decrease in AD

Shift right → increase in AD

Question 8

What is the shift of AD curve not associated with?

Answer 8

General Price Level

Question 9

The range of AS curve that corresponds to a point within PPC

Answer 9

Horizontal (Keynesian) range

Question 10

The range of AS curve that corresponds to a point within and close to PPC

Answer 10

Intermediate range

Question 11

The range of AS curve that corresponds to a point on PPC

Answer 11

Vertical (Classical) range

Question 12

Factors that affect LRAS [Q(s)]

QQT (productive capacity)

Answer 12

Quality and Quantity of factors of productions

Question 13

Factors that affect LRAS [T]

QQT (productive capacity)

Answer 13

Technology

Question 14

Which range of curve does LRAS affect?

Answer 14

Vertical (classical) range

Question 15

Shift of LRAS curve

left and right

Answer 15

Shift left → Decrease in LRAS

Shift right → Increase in LRAS

Question 16

Which range of curve does SRAS affect?

Answer 16

Horizontal (Keynesian) range

Question 17

Shift of SRAS curve

up and down

Answer 17

Shift up → Decrease in SRAS (COP increases)

Shift down → Increase in SRAS (COP decreases)

Question 18

Factors of SRAS

Answer 18

Changes to cost of production

Question 19

Factors affecting both SRAS & LRAS

Answer 19

Government policies

Question 20

How do govt policies (e.g. lowering of GST, provision of subsidies and grants) affect SRAS?

Answer 20

Lower COP → increase SRAS

in the case of e.g. provided

Question 21

How do govt policies (e.g. reduction in corporate tax rate) affect LRAS?

Answer 21

Increases post-tax profits → likely to increase Investment → increase in QQ of capital goods → increase productive capacity
(in the case of e.g. provided)