Ad/as Model

Question 1

Ad/As Model

Increase in Consumption
Higher Productivity
Oil Price Increase
Government Spending Cuts

Answer 1

• Factor: Increase in Consumption
Shift: AD shifts right
Impact on Output: Higher (short-run)
Impact on Price Level: Higher (inflation)
Examples: Tax cuts, wage growth

• Factor: Higher Productivity
Shift: LRAS shifts right
Impact on Output: Higher
Impact on Price Level: Stable or lower
Examples: Technological advancements

• Factor: Oil Price Increase
Shift: SRAS shifts left
Impact on Output: Lower (short-run)
Impact on Price Level: Higher (cost-push inflation)
Examples: Energy crises

• Factor: Government Spending Cuts
Shift: AD shifts left
Impact on Output: Lower (short-run)
Impact on Price Level: Lower (deflation)
Examples: Austerity policies

Question 2

Monetary Policy

Answer 2

• Definition: Actions by a central bank to control the money supply and interest rates to influence the economy.
• Tools: Open Market Operations, Reserve Requirements, Discount Rate, Interest on Reserves.
• Types:
1. Expansionary: Lowers interest rates or increases the money supply to boost AD and stimulate growth.
2. Contractionary: Raises interest rates or reduces the money supply to control inflation.

Question 3

Fiscal Policy

Answer 3

• Definition: Government decisions on spending and taxation to influence the economy.
• Types:
1. Expansionary: Increases spending or decreases taxes to boost AD (used during recessions).
2. Contractionary: Decreases spending or increases taxes to reduce inflation or budget deficits.
• Automatic Stabilizers: Tools like unemployment benefits and progressive taxes that adjust automatically based on economic conditions.