CH11: Aggregate Demand & Aggregate Supply Flashcards
Why is it politically difficult to raise VAT in South Africa?
Due to the high number of poor households who would be disproportionately affected.
What model is commonly used in modern macroeconomics for policy analysis?
The Aggregate Demand–Aggregate Supply (AD-AS) model.
What does the AD curve represent?
Total demand for goods/services at various price levels.
What does the AS curve represent?
Total supply of goods/services at various price levels.
What causes the AD curve to slope downward?
Wealth effect, interest rate effect, and international trade effect.
What is the wealth effect?
Lower prices increase real income, raising demand.
What is the interest rate effect?
Lower prices reduce interest rates, increasing investment and demand.
What is the international trade effect?
Lower prices weaken currency, increasing exports and reducing imports.
How does SRAS differ from LRAS?
SRAS is upward sloping; LRAS is vertical.
What determines the position of the LRAS curve?
Quantity and productivity of factors of production.
What happens when AD shifts right due to expansionary policy?
Higher output and higher price levels (inflation).
