Equilibrium Levels Of Real National Output (L6)

Question 1

Which components does a fall in interest rates raise?

Answer 1

Consumption and investment

Question 2

A fall in exchange rate with boost ______ and reduce _____

Answer 2

Exports

Imports

Question 3

What factors could bring about a fall in short run aggregate supply?

Answer 3

Wages for workers rise
Raw materials prices go up
Taxes on goods and services might be raised

Question 4

A fall in SRAS leads to a fall in ______ but a rise in _____ in the short run

Answer 4

Output

Price level

Question 5

A rise in aggregate supply, shown by a downward shift to the right of the SRAS curve, will lead to a ___ in equilibrium output and a ____ in the price level.

Answer 5

Rise

Fall

Question 6

Where does LRAS equilibrium occur

Answer 6

Where the LRAS curve intersects the aggregate demand curve

Question 7

Check classical model LRAS flashcards 
What does the movement from:
A to B 
B to C 
A to C show?

Answer 7

A to B increase in price and output
B to C over time price increases but output falls to move back to long run equilibrium.
A to C shows that in the long run increase in AD only leads to an increase in price level, inflationary.

Question 8

Rise in LRAS

Answer 8

Potential output is increased

Question 9

Classical economists argument for why increase in supply helps

Answer 9

1930s during Great Depression, unemployment benefits were cut. Keynes said it’s because of the lack of demand and it’s the govs responsibility. 1981, they reduced AD saying it’s the only way to cure unemployment through supply side of economy.

Question 10

Describe the effect of investment of AD, SRAS and LRAS when it’s not useful

Answer 10

Not all investment is good. AD will always shift right but LRAS won’t unless investment is good (increased productivity or more output is needed) so price increases because of the AD curve shifting right. Inflationary.

Question 11

Describe the effect of investment on AD, LRAS and SRAS curves if it’s useful

Answer 11

AD curve shifts right, there’s high rate of return so LRAS shifts right so does SRAS

Question 12

What’s long-run disequilibrium and what happens during it?

Answer 12

The market is out of balance (price is different to what it currently is)
When there’s excess demand, increase the price to counter it.
There’s an increase in AD and SRAS, giving a new equilibrium and LRAS has to shift to meet that equilibrium

Question 13

Explain the classical model of long-run equilibrium (hint:wage cuts)

Answer 13

Workers won’t react badly to wage cuts, producers take advantage of this and increase the amount of labour so long run equilibrium goes back to normal.

Question 14

Explain the Keynesian model of long run equilibrium (hint:wage cuts)

Answer 14

Workers would riot which leads to a recession. This means LRAS won’t be at full employment for a very long time.