AS & AD [D]

Question 1

What is Quantity Supplied ?

& Aggregate Supply ?

Answer 1

QS -
The quantity of real GDP supplied is the total quantity that firms plan to produce during a given period.
AS -
Aggregate supply is the relationship between the quantity of real GDP supplied and the price level.

Question 2

Define Aggregate Supply Time Frames and name the two ?

Answer 2

two time frames associated with different states of the labour market :

• long-run
• short- run

Question 3

What is long-run aggregate supply [ LAS ] ?

Answer 3

LAS = Vertical at potential GDP

• is the relationship between the quantity of real GDP supplied and the price level when the money wage rate changes in step with the price level to maintain full employment.
• the quantity of real GDP supplied at full employment equals potential GDP [ GDP* ] and this quantity is independent of the price level.

Question 4

What is Short-run aggregate Supply [ SAS ]

Answer 4

SAS = upward sloping

• is the relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources and potential GDP [ GDP* ] remain constant.
• a rise in the price level with no change in the money wage rate and other factor prices increase the quantity of real GDP supplied.

Question 5

What influenced Aggregate supply to change?

Answer 5

1. changes in potential GDP.

2. changes in money wage rate [ also called the nominal wage rate ] and other resources price.

Question 6

1. Change in Potential GDP ?

Answer 6

1. when potential GDP increases both LAS & SAS curves shift rightward.
   increase for 3 reasons :
   i ] An increase in the full-employment quantity of labour.
   ii ] An increase in the quantity of capital [physical or human ]
   iii ] An advantage in technology.

Question 7

2. Changes in the Money [ or nominal ] Wage Rate and other Resources Prices ?

Answer 7

An increase in the money wage rate or an increase in the price of other productive resources will shift the SAS to the left.
but LAS does not change.

Question 8

Aggregate Demand [ AD ] Formula ?

Answer 8

The quantity of real GDP demanded [ Y ],is the total amount of final g/s produced in Ireland that people, govt. foreigners plan to buy.

Y = C + I + G + NX or Y = C + I + G + X - M

C = tax cuts
I = investment
G = govt.
X - M or NM = exports

Question 9

Define the Aggregate Demand Curve ?

& two reasons why it can slope downwards ?

Answer 9

AD curve =
is the relationship between the quantity of real GDP demanded and the price level.

Slope downwards :

1. Wealth effect.
2. Substitution effects

Question 10

Downward slope :

1. Wealth effect

Answer 10

A rise in the price level, other things remain the same , decreases the quantity of real wealth.
To restore their real wealth, people increase savings and decrease spending , so the quantity of real GDP demanded decreases.

Question 11

Downwards Slope :

2. Substitution Effects :
   i ] Intertemporal Substitutions Effect.

Answer 11

i ] Intertemporal substitutions effect =

A rise in the price level, other things remaining the same, decreases the real value of money and rises the intrest rate.

When the interest rate rises, people borrow and spend less so the quantity of real GDP demanded decreases.

Question 12

Downwards Slope :

2. Substitution Effects :
   ii ] International Substitution Effect

Answer 12

ii ] International Substitution Effect =

A rise in the price level, other things remaining the same increases the price of domestic goods relative to foreign goods, so imports increase and exports decrease, which decreases the quantity of real GDP demanded.

Question 13

What Changes in Aggregate Demand ?

Answer 13

Changes in AD :

• Expectations
• Fiscal policy and Monetary policy
• The world economy

Question 14

Define Expectations ?

Answer 14

Expectations about future income, future inflation and future profit change aggregate demand.

Question 15

Define Fiscal Policy and Monetary Policy ?

Answer 15

Fiscal Policy = is the govt. attempt to influence the economy by setting and changing taxes, making transfer payments and purchasing g/s

Monetary Policy = is changing in interest rates and the quantity of money in the economy

Question 16

Explain short- run Equilibrium ?

Answer 16

SR =

occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the SAS curve.

Question 17

Explain Long-run Equilibrium ?

Answer 17

LR =

occurs when real GDP equals potential GDP - when the economy is on its LAS curve.

occurs at the intersection of the AD and LAS curves.

Question 18

The Business Cycle in AS-AD Model ?

Answer 18

occurs because aggregate demand and the SR AS fluctuate but the money wage does not change rapidly enough to keep real GDP at potential GDP.

• Above full employment equilibrium is an equilibrium in which real GDP exceeds potential GDP
• Below the line is an equilibrium in which potential GDP exceeds real GDP.
• A full employment equilibrium is an equilibrium in which real GDP equals potential GDP.

Question 19

Ware the 3 Macroeconomists Schools of Thought ?

Answer 19

1. The Classical View.
2. The Keynesian View.
3. The Monetarist View.

Question 20

1. The Classical View

Answer 20

A classical macroeconomist believes that the economy is self-regulating and always at full employment.

A new classical view is that business cycle fluctuations are the efficient responses of a well-functioning market economy that is bombarded by shocks that arise from the uneven pace of tech change.

Question 21

2. The Keynesian View

Answer 21

A Keynesian macroeconomist believes that left alone the economy would rarely operate at full employment and that to achieve and maintain full employment active help from fiscal policy and monetary policy is required.

A new Keynesian view holds that not only is the money wage rate sticky but also are the prices of good sticky.

Question 22

3. The Monetarist View

Answer 22

A monetarist is a macroeconomist who believes that the economy is self-regulating and that it will normally operate at full employment provided that monetary that money is not erratic and that the pace of money growth is kept steady.