Th2.5: Aggregate Demand and Supply

Question 1

Output gaps can also be illustrated using…

Answer 1

AS and AD diagrams

Question 2

Refer to PP

Look at Graph 7. What does LRAS show on an AS/AD diagram?

Answer 2

full capacity output - i.e where all resources are being fully utilised, and this can be linked to output gaps between the GDP trend line and the actual GDP

Question 3

Refer to PP

Look at Graph 7. An equilibrium to the right of the LRAS shows…

Answer 3

the economy working over capacity in the short term but to the left it shows the economy working under capacity

Question 4

Refer to PP

Look at Graph 7. In the diagram, there is an equilibrium where…

Answer 4

AD = SRAS = LRAS

Question 5

Refer to PP

Look at Graph 7. Why is there a negative output gap?

Answer 5

because the SRAS equilibrium is less than the LRAS equilibrium, so the full capacity of the economy is not being met

Question 6

Refer to PP

Look at Graph 7. What is at AD2 and why?

Answer 6

a positive output gap as SRAS is higher than LRAS

Question 7

Classical economists would argue that this positive output gap would be filled by…

Answer 7

long-run economic growth moving the LRAS curve, a recession which would decrease AD or a rise in the costs of production which would decrease SRAS

Question 8

Classical economists would also argue that the negative output gap would…

Answer 8

be brought back to equilibrium by rising AD or a fall in SRAS due to lower costs of production