Aggregate demand and aggregate supply

Question 1

Why is the AD curve downward sloping?

Answer 1

When prices fall consumers experience a wealth effect, they feel better off because their incomes will buy more goods or services, leading to more consumption

Question 2

What causes the AD curve to shift?

Answer 2

C I G X M

Question 3

What factors affect the decision to invest? (3)

Answer 3

The rate of interest
Expectations
Technical progress

Question 4

How do interest rates cause greater investment? Why?

Answer 4

A fall in interest rates = more investment

Because borrowing will be cheaper

Question 5

How do expectations cause greater investment? Why?

Answer 5

Positive expectations = more investment

Because businesses will expect more sales

Question 6

How does technical progress cause greater investment?

Answer 6

Better equipment = more investment

Question 7

What is the accelerator effect?

Answer 7

The relation between the change in new investment and the rate of change of national income

Question 8

What is privatisation?

Answer 8

Sale of government owned assets to the private sector

Question 9

If EU economies are fast growing, how will this affect the demand for UK exports? What will happen to AD?

Answer 9

UK exports will increase, AD will shift to the right

Question 10

What happens to UK exports, if the value of the pound depreciates against the euro? What happens to AD?

Answer 10

WPIDEC, exports will increase

AD will shift right

Question 11

What happens to UK exports, if the value of the pound appreciates against the euro? What happens to AD?

Answer 11

SPICED, exports will decrease

AD will shift left

Question 12

If the UK economy is growing and incomes are rising, what will happen to UK imports? What happens to AD?

Answer 12

Imports will increase

AD will shift to the left

Question 13

What does the AS curve show us?

Answer 13

The total output that the economy can produce using available factors of production at a given price level

Question 14

What are the factors that affect the SRAS curve? (1)

Answer 14

Any factor that changes the firms costs

Question 15

What are the factors that affect the SRAS curve? (3)

Answer 15

Money wages
Price of raw materials
Corporation tax

Question 16

What is long-run AS?

Answer 16

The economy’s productive potential

Question 17

Why does the AS curve become vertical?

Answer 17

All factors of production are fully employed and the productive capacity has been reached

Question 18

What is the natural rate of unemployment?

Answer 18

The rate of unemployment that is consistent with a stable rate of inflation

Question 19

What are the factors that influence the LRAS curve? (5) (CTAPP)

Answer 19

Capital equipment
Technology 
Attitudes 
Policies 
Productivity

Question 20

How does capital equipment affect the LRAS curve?

Answer 20

Increase in capital equipment = rightward shift in the LRAS curve

Question 21

How does technology affect the LRAS curve? Why?

Answer 21

Better technology = rightward shift in the LRAS curve

More productive

Question 22

How does attitudes affect the LRAS curve?

Answer 22

Better attitude = more likely to open firm = rightward shift in the LRAS curve

Question 23

How do policies affect the LRAS curve?

Answer 23

Policies that persuade a larger proportion of the labour force will reduce the natural rate of unemployment and shift the LRAS curve to the right

Question 24

How does productivity affect the LRAS curve?

Answer 24

Increase productivity = increase in output over time = rightward shift in the LRAS curve

Question 25

Who are the monetary policy committee?

Answer 25

A committee of economists and central bankers who meet monthly and decide whether or not to change the rate of interest

Question 26

What are supply-side shocks?

Answer 26

Something that will increase or reduce the costs, hence the supply-side of all firms in the economy

Question 27

What does an increase in the LRAS curve represent? (2)

Answer 27

An increase in economic growth | A shift in the PPF