AD-AS Model

Question 1

Assumptions

Answer 1

Only one good is being produced/sold in the economy
The model is extremely simplified
Ceteris Paribus-“all else remains equal
Only one event happening at a time/happening in isolation

Question 2

Macroeconomic equilibrium

Answer 2

If the price level is too high, there is an excess supply of output (unsold stock)- a signal to cut back on production. If price level is below equilibrium, excess demand in the short run (stock run down)- a signal to expand production

Question 3

Changes

Answer 3

Changes in price level causes movement along the AD/AS curve (not a shift)
Changes in cost of production shifts SRAS
Changes in productive capacity shifts LRAS

Question 4

Demand Shock

Answer 4

Sudden/Considerable shifts in pattern of spending e.g. crashes in stocks or house prices

Question 5

Supply shocks

Answer 5

Makes production more difficult, disrupts supply chain and higher COP e.g. change in oil price, natural disasters, war

Question 6

Shocks

Answer 6

Sometimes a shock would affect both AD and AS. It could be favourable or unfavourable (positive or negative) e.g. global pandemic, war, floods etc

Question 7

Real living wage

Answer 7

Minimum income necessary for a worker to meet their basic needs.