AD/AS model

Question 1

AD

Answer 1

Total amount of spending in the economy

Question 2

Why is AD downward sloping

Answer 2

Income effect - rise in price levels = drop in purchasing power
Interest rate effect - increased demand for borrowed funds = increase in interest rate
Open economy effect - increased inflation = decreased net exports as Australia less competitive

Question 3

Shifts of AD caused by:

Answer 3

changes in C, I, G and NX

Question 4

SRAS

Answer 4

Total production of goods and services

Question 5

Why is SRAS upwards sloping

Answer 5

As production increases, labour and capital prices increase

Question 6

Shift of SRAS caused by

Answer 6

Labour, electricity and petrol

Question 7

LRAS

Answer 7

Economy’s potential level of GDP when all resources are fully utilised and full employment
Moves right by 3.25% every year

Question 8

Shifts for LRAS

Answer 8

Size of workforce, quantity of capital, productivity and migration

Question 9

What is stagflation

Answer 9

Stagnant economy and high inflation

Question 10

Increase in Oil Prices on ADAS

Answer 10

AD - decrease due to reduced real incomes for other consumption
SRAS - decrease due to higher cost of production

Question 11

Decrease in FDI on ADAS

Answer 11

AD - decrease due to fall in planned investment

SRAS - decrease due to loss of efficiency and business knowledge

Question 12

Decrease in ER on ADAS

Answer 12

AD - increase due to rise in net exports

SRAS - decrease due to rise in cost of imported components (intermediate goods)

Question 13

Trade War on ADAS

Answer 13

AD - decrease due to fall in exports to China

SRAS - decrease due to rise in costs of intermediate goods

Question 14

Rise in TOT

Answer 14

AD - increase due to rise in real incomes and net exports

SRAS - fall due to rise in domestic inflation and cost of wages

Question 15

Economic Indicators to mention when discussing ADAS

Answer 15

• Real GDP
• Unemplyment
• Infaltion / Price Levels (if economt is struggling PL drops besides for stagflation)
• Confidence
• Exchange rates, trade balance, XPI, MPI

Question 16

How to return to LRE

Answer 16

1. Cost of labour causes first shift (cost for labour increases income, competition for jobs decreases income)
2. Business and Consumer confidence (impacts C and I)
3. Economy can fix itself, but government speeds it up with monetary and discretionary fiscal policy
   Monetary Policy - impacts cost of borrowing, servicing costs and operation costs for businesses (C+I)
   Fiscal Policy - AD is infrastructure and G2 spending, SRAS is company tax rate

Question 17

Targets for:
GDP growth rate
Unemployment
Inflation

Answer 17

3-4% real GDP growth rate
4.5%-5% unemployment
2-3% long term average CPI