Aggregate demand and supply

Question 1

what do aggregate demand and supply models explain?

Answer 1

short-run fluctuations in real GDP and the price level.

Question 2

explain the aggregate demand curve and the relationship between the price level and GDP

Answer 2

The aggregate demand curve slopes downwards, showing the inverse relationship between the price level, the quantity of real GDP demanded by households, firms and governments, plus net exports

Question 3

why is there an inverse relationship between the price level and GDP?

Answer 3

• the wealth effect
• the interest rate effect
• the international trade effect

Question 4

explain the wealth effect

Answer 4

an increase in the price level reduces wealth, which in turn reduced consumption

Question 5

explain the interest rate effect

Answer 5

an increase in price level increases the need for cash/funds which increases interest rates and decreases consumption

Question 6

explain the international trade effect

Answer 6

an increase in the price level means exports become more expensive and imports cheaper. Exports therefore fall and imports rise.

Question 7

what does the aggregate demand curve show?

Answer 7

all combinations of inflation and real growth that are consistent with a rate of spending growth

Question 8

an increase in nominal GDP will cause the aggregate demand curve to…

Answer 8

shift to the right

Question 9

decrease in nominal GDP will cause the aggregate demand curve to…

Answer 9

shift to the left

Question 10

what does the short run aggregate supply curve look like ?

Answer 10

upward sloping (ski jump)

Question 11

what does the long run aggregate supply curve look like ?

Answer 11

a vertical line

Question 12

what does the short run aggregate supply curve show ?

Answer 12

the relationship in the short run between the price level and the quantity or real GDP supplied

Question 13

what does the Long run aggregate supply curve show ?

Answer 13

The long-run aggregate supply curve shows that in the long run, increases in the price level do not affect Real GDP

Question 14

what are 3 main variables that will shift an aggregate demand or short-run aggregate supply curve

Answer 14

1. Changes in government policies
   
   2. Changes in the expectations of households and firms. e.g. consumer confidence
      increase
      
      3. Changes in foreign variables e.g. exchange rates

Question 15

what causes the long-run aggregate supply curve to shift ?

Answer 15

because potential GDP increases over time. Increases in potential GDP (or economic growth) are due to
- An increase in resources
- An increase in machinery and equipment
- New technology

Question 16

what variable Does the LRAS curve represent

Answer 16

potential GDP

Question 17

what effect will an increase in aggregate demand from a faster growth rate have on the AD curve and the SRAS curve?

Answer 17

the AD curve shifts out and the economy expands along the short run aggregate supply curve

Question 18

what effects does inflation have on the AD, SRAS & LRAS curves and the equilibrium

Answer 18

As expectations adjust to the inflation rate the SRAS curve will shift up and to the left, the inflation rate increases and the growth rate declines, moving the long-run equilibrium upward

Question 19

what effects do a positive shock have on the growth rate and inflation rate

Answer 19

a positive shock shifts the LRAS to the right thereby reducing the inflation rate and increasing GDP

Question 20

what effect will a change in price level have on LRAS?

Answer 20

it does not affect the level of aggregate supply in the long run.

Question 21

The short-run aggregate supply curve has a ________ slope because as prices of ________ rise, prices of ________ rise more slowly.

Answer 21

positive; final goods and services; inputs

Question 22

Workers expect the rate of inflation to fall from 4 per cent to 1 per cent next year. As a result, this should:

Answer 22

shift the short run aggregate supply curve to the right