Aggregate Demand-Aggregate Supply Model

Question 1

Inflation Shock

Answer 1

A sudden change in normal behaviour of inflation, unrelated to nations output gap

Question 2

Self-correcting Property

Answer 2

Fact that output gaps will not last forever and will be closed by rising or falling inflation

Question 3

Aggregate Supply Shock

Answer 3

Either inflation shock or shock to Potential output, adverse aggregate supply shocks of both types decrease output and increase inflation

Question 4

Disinflation

Answer 4

A substantial decrease in the rate of inflation

Question 5

Aggregate Demand Curve

Answer 5

ADC shows relation between Y(output) and inflation
- Y=planned spending
Downward slope implies as inflation increases, output decreases

Question 6

Reserve bank reaction function

Answer 6

Higher inflation implies higher interest rate

Question 7

Wealth effect

Answer 7

Consumers decrease their spending when they experience a decrease in their wealth’s purchasing power

Question 8

Distributional effects

Answer 8

The poorer spend a greater percentage of their income than the wealthy

Question 9

Uncertainty

Answer 9

Consumers and firms spend less in an uncertain environment

Question 10

Exports effect

Answer 10

Increase in the prices of domestic goods sold abroad