Equilibrium levels of real national output

Question 1

when is an economy in equilibrium

Answer 1

when aggregate demand equals aggregate supply

Question 2

what are the components of aggregate demand

Answer 2

consumption (C) + investment (I) + government spending (G) + (exports - imports) ((x-m))

Question 3

how would aggregate demand increase in terms of the components

Answer 3

• fall in interest rates increases consumption and investment
• fall in exchange rate boosts exports reduces imports
• lowering income tax raises consumption as households have more disposable income

Question 4

what may cause a decrease in short-run aggregate supply

Answer 4

• wages of workers rising
• raw material prices increasing
• taxes on goods and services raised by government

Question 5

in the short run, when does equilibrium occur

Answer 5

when aggregate demand is equal to short run aggregate supply

Question 6

when does equilibrium occur in the classical model

Answer 6

where the wages are completely flexible, the economy will be in long run equilibrium at full employment

Question 7

when does equilibrium occur in the keynesian model

Answer 7

where wages are sticky downwards, the economy can be in long run equilibrium at less than full employment

Question 8

in the classical model, what will a rise in aggregate demand cause in the SR and LR

Answer 8

SR - lead to an increase in both output and prices

LR - only increase in prices

Question 9

in the keynesian model, what will a rise in aggregate demand be?

Answer 9

purely inflationary if the economy is at full employment but will lead to an increase in output if economy is below full employment and there are resources to be used

Question 10

what will a rise in LR aggregate supply in classical model do

Answer 10

increase output and reduce prices