CH12: The aggregate demand and supply model

Question 1

Definition: Aggregate demand

Answer 1

the total demand of goods and services that consumers are willing and able to purchase in a national economy during a specific time period

Question 2

What are factors , other than price, which impact aggregate demand?

ie. cause the demand curve to shift to the right/left

Answer 2

Economic conditions in other (neighbouring countries) - ie. increasing or decreasing exports

Expectations about the future - fears for the feature lead to increased savings/reduced investments and less availability of credit

Competitiveness in the export market - if suppliers abroad are making better goods then then domestic goods may become less competitive and demand for them falls

Government policy - eg. changing tax levels o gov spending, changing interest/fx rates

Question 3

Definition: aggregate supply?

Answer 3

The total supply of goods and services that firms in a national economy plan on selling during a specific time period

Question 4

What factors, other than price, affect aggregate supply

ie. cause the supply curve to shift to the right/left

Answer 4

• There is a change in factors of production - eg. availability of labour, raw materials
• There are changing costs - rising costs diminish profitability of the products, so suppliers will be more inclined to supply less and the supply curve shifts left

Question 5

What is supply limited in the long run?

Answer 5

Spare capacity and resources. Once everyone who is willing and able to work in the economy is employed or there is no more capital available for investment (to increase supply), supply will be at MAXIMUM (ie. supplyy will not change even if there is a change in price

Question 6

Where does the equilibrium point reach graphically?

Answer 6

Usually just below full capacity/max aggregate supply

Question 7

Definition: National income

Answer 7

The total amount of goods and services produced over the course of a year, which is equal to the total amount earned by all people and businesses

Question 8

Definition: Inflationary gap

Answer 8

Aggregate demand exceeds aggregate supply leading to an increase in prices

Question 9

Definition: Deflationary gap

Answer 9

Spare resources result in costs (eg. unemployment benefits) and prices being low

Question 10

definition: GDP

Answer 10

The value of goods and services being produces within a country

Question 11

Definition: GNP

Answer 11

GDP + net income received by residents from their overseas investments

Question 12

What are two main drivers of economic growth?

Answer 12

Increasing aggregate demand and

Increasing aggregate supply

Question 13

What factors drive economic growth (i.e. what are drivers of increasing aggregate demand/supply)

Answer 13

Fisca; policy
Monetary policy
Supply side policy

Question 14

What does a shift in aggregate SUPPLY curve to the RIGHT do in the long term?

(ie. increase in supply)

Answer 14

Increase in national income
Deflation
low unemployment

and visa versa if the supply curve shifts to the left.
(note. situation of rising prices and rising unemployment sometimes referred to as stagflation)

Question 15

What is the impact of increased interest rates on aggregate supply?

Answer 15

Increased interest rates make it more likely for people to save and make investments more expensive hence the suppliers/businesses are less likely to invest so aggregate supply drops

Question 16

What is a feature of the inflationary gap graphically as shown by the aggregate supply and demand model?

Answer 16

Inflationary gap can only occur when there is full utilisation of resources in the economy - ie. the demand curve intersects the supply curve at the point where the long run aggregate supply starts.

Question 17

What policy would a policy which abolishing red tape and regulation fall under?

Answer 17

Supply-side policy - reduced bureaucracy