AD/AS Curve

Question 1

What causes shift in AD curve?

Answer 1

C, I, G, X-M

Question 2

What causes movement along AD curve/

Answer 2

Inflation

Question 3

Evaluative point about AD

Answer 3

Impact dependant on whether hawkish or dovish

Question 4

What causes shift in AS?

Answer 4

Adaptive expectations about inflation

Question 5

What causes movement along AS curve?

Answer 5

changes in output gap

Question 6

Scenario 1 - Positive demand shock (6)

Answer 6

-Positive AD shock - A to B
- AS curve adjusts to new steady state where output = potential
- economy moves from B to C as a result
-At C inflation exceeds steady state value
-Demand shocks temporary -shifts back to D
- download inflationary pressure results in AS shifting to steady state at A

Question 7

Scenario 2 - Negative demand shock (5)

Answer 7

• C to D - reccession
  -as firms adjust inflation expecatatipons, as shifts so D to A
  -inflation below target to so low rates
• AD curve recovers shifts outward a to b
  -inflation caues as curve to shift up b to c, then economy settles at d