Economics - AD/AS

Question 1

AD

Answer 1

aggregate demand

Question 2

aggregate demand AD

Answer 2

equal to the sum of net exports, consumption, investment and government spending at a given price level

price level , real national output ad p1 y1

Question 3

AD curve

Answer 3

downwards sloping

• consumption will fall as the price level rises
• a moment not a shift along the AD curve

Question 4

equation of AD

Answer 4

AD=C+I+G+(X-M)
AD=consumption+investment
+gov spending+ net trade/exports -imports

Question 5

shifts in AD

Answer 5

AD shifts because of a change in any of consumption, investment, gov spending, exports or imports
-can be cause by changes in behaviour or changes in gov policy

Question 6

demand ‘shocks’

Answer 6

a demand side shock is anything +/- that causes AD to change

i. e.interest rate rise/collapse in the housing market etc
- a fall in real GDP knock on effect

Question 7

movements along the AD curve

Answer 7

caused by a change in the average price level

i. e.a rise in the average price level leads to a contraction of AD
- leads to real incomes dropping as of a rise in PL
- if average PL rises there will be inflation

Question 8

Consumption C

Answer 8

• wealth levels
• income levels
• future expectations of inflation
• unemployment levels

Question 9

Investment I

Answer 9

expenditure that increases the capital stock of a country

• in a physical capital, expenditure by firms on plant machinery
• in a human capital, expenditure by firms on the skills of workers e.g.training

Question 10

factors affecting investment I

Answer 10

• interest rates
• future growth and demand
• profitability
• gov. policies e.g.subsidies and corporate tax
• efficiency of financial system

Question 11

types of government spending G

Answer 11

could be on current spending or capital spending

• current spending, benefits or salaries/utility bills
• capital spending, long term spending that increases the productive capacity of the economy e.g. infrastructure projects

Question 12

factors that effect government spending

Answer 12

• cost of borrowing
• fiscal deficit or debt targets
• levels of national debt
• state of the economy
• confidence in the economy
• political bias

Question 13

factors that effect exports and imports

Answer 13

• exchange rate determines relative prices of X+M
• the quality effects competitiveness
• how much spare capacity there is to supply resources, the less there is the more raw materials will need to be imported

Question 14

AS

Answer 14

aggregate supply

Question 15

aggregate supply AS

Answer 15

measures the volume of goods and services produced each year
-represents the ability of an economy to deliver goods and services to meet demand

Question 16

LRAS

Answer 16

long run aggregate supply

Question 17

LRAD

Answer 17

long run aggregate demand

Question 18

key factors affecting LRAS in the long run

Answer 18

• higher productivity of labour and capital
• increased labour market participation
• gains from innovation and enterprise
• capital investment

Question 19

Keynesian LRAS curve

Answer 19

shows that AS curve is significantly horizontal implying that the firm will supply whatever amount of goods is demanded at a particular price level during an economic depression

shows the AS curve is upward sloping because wages and prices are less flexible in the short-run