Aggregate demand and aggregate supply analysis

Question 1

What’s the difference between factors affecting short-run AS and long-run AS?

Answer 1

-Short-run AS is influenced by costs of production (e.g., wages, taxes, and resource prices)

-Long-run AS is influenced by factors that expand productive capacity, such as advancements in technology, increases in skilled labour, and capital investment, leading to sustained economic growth.

Question 2

How do AD/AS diagrams illustrate macroeconomic equilibrium, and how do demand-side and supply-side shocks affect the economy?

Answer 2

-Macroeconomic equilibrium occurs where AD intersects AS on an AD/AS diagram, indicating the equilibrium price level and output

-Demand-side shocks (e.g., changes in consumer confidence, government spending) shift the AD curve, affecting output and prices

-Supply-side shocks (e.g., oil price hikes, technological breakthroughs) shift the AS curve, impacting production costs and output

-Underlying economic growth is shown as a rightward shift of the LRAS curve, indicating an increase in the economy’s productive potential.

Question 3

What causes movements along and shifts in the AD and AS curves?

Answer 3

Movements along the AD and AS curves occur due to changes in the price level.
Shifts in the AD curve happen due to changes in consumption, investment, government spending, or net exports.
Short-run AS (SRAS) shifts with changes in production costs, like wages, raw materials, or taxes.
Long-run AS (LRAS) shifts with changes in factors that affect potential output, like improvements in technology, increases in labor supply, or investment in infrastructure.