AS/AD

Question 1

AD definition

Answer 1

The total planned expenditure of goods and services produced in the UK

Question 2

Why AD slopes downwards

Answer 2

1) the net exports effect
2) the real wealth effect
3) the interest rate effect

Question 3

What is the net exports effect (downwards slope)?

Answer 3

Lower prices mean higher international competitiveness, meaning net exports are higher at lower prices

Question 4

What is the real wealth effect

Answer 4

Let w = nominal wealth
Then w/p = real wealth
As price falls, real wealth rises and people purchase more goods and services

Question 5

What is the interest rate effect

Answer 5

At higher prices, interest rates are likely to be raised by the monetary authorities
Higher interest = less spending

Question 6

Aggregate demand formula

And what do the letters stand for

Answer 6

AD = C + I + G + (X-M)
C = consumption
I = investment
G = government expenditure 
(X-M) = value of net exports

Question 7

What are the relative importance of CIG and (X-M) to AD

In percentages

Answer 7

C =60%
I =15%
G =25%
(X-M) =1%

Question 8

What are the influences on investment? (6)

Answer 8

Confidence future sales
Interest rates
Demand of exports
Access to credit
Accelerator effect (GDP increase so increase in capital investment)
Animal spirit (confidence = too many risks)
Gov. policy+regulations

Question 9

What happens to gov spending (G) when there is high economic growth?

Answer 9

G falls:
Less money on benefits
More tax revenue

Question 10

Influences on net exports (X-M)? (3)

Answer 10

Domestic income
Changes in exchange rates : weaker £ = more expensive exports = less demand of imports (M) and more demand of exports (X)
Protectionism (tax, restrictions, embargos)

Question 11

How does ‘animal spirit’ effect C&I

Answer 11

High spirits lead to increased C & I

Question 12

AS definition

Answer 12

The total value of output of the economy at a given price level at a given point in time

Question 13

Why is the SR curve upward sloping

Answer 13

When firms increase output the have to increase the rate of production so the cost of production will be more so they’ll increase their prices

Question 14

Assumptions of SR aggregate supply

Answer 14

All factors of production are fixed

The only exception being more labour or making existing labour work harder

Question 15

Factors effecting SRAS (shifts)

Answer 15

Changes in cost of raw materials and energy (increased cost = reduced SRAS)
Changes in exchange rates (importing materials)
Changes in tax rates (incresed tax = increase cost of production = reduced SRAS)

Question 16

Determinants of SRAS

Answer 16

Anything effecting cost of production or productivity

Question 17

Assumptions of the neo-classical LRAS

Answer 17

Money wage rates and all other factor input prices are fully variable. The economy always produces at the full capacity level of output, as wages will self-adjust to ensure that this is the case

Question 18

Shape of classical LRAS

Answer 18

Straight vertical line

Question 19

What is Yfe?

Answer 19

It is output with full employment.

Question 20

What are sitcky downward wages?

Answer 20

As output goes down it is harder to reduce wages of labour

Question 21

What is the assumptions with Keynesian LRAS

Answer 21

Money wage rates and all other factors input prices are sticky downwards. Wages may find it hard to fall, due to national minimum wage, trade union disputes, and reluctance to do so by firms due to negative impacts on worker productivity

Question 22

Factors effecting LRAS

Answer 22

Technological advances
Changes in education and skills
Changes in relative productivity
Changes in government regulations
Demographic changes and migration
Competition policy

Question 23

What are the 4 main ways to evaluate AD/AS

Answer 23

Time Lags
Magnitude
Significance
Relaxing ‘ceteris paribus’ assumptions