Topic 1.4 - The Interaction Of Aggregate Supply And Aggregate Demand Flashcards
What is macroeconomic equilibrium?
State of national economic activity wherein aggregate demand is equal to aggregate supply
If nothing changes then firms and households won’t have any reason to alter their behaviour
Any significant movement would effect price, employment and resources
Show using a diagram macroeconomic equilibrium in short run (increase in AD (shift))
Show using a diagram macroeconomic equilibrium in short run (fall in SRAS)
Show using a diagram macroeconomic equilibrium - surplus capacity in short run more than YFE
What is macroeconomic equilibrium in the long run?
Level of real output cannot be higher than YFE (can only be lower on Keynesian assumptions)
Using a diagram, show 1. economy at full capacity 2. Nearing full capacity 3. Lots of spare capacity (Keynesian)
Evaluate the impact of changes in AD and AS on macroeconomic indicators
How may an increase in demand impact inflation?
Increase in AD would increase prices but the output would remain the same - neoclassical
It depends if there is spare capacity, an increase in AD may not increase prices but use unemployed resources - Keynesian
Evaluate the impact of changes in AD and AS on macroeconomic indicators
How a fall in AD may impact unemployment?
Less demand causes unemployment - Keynesian
If economy is already at YFE, people still keep jobs however the price still falls - neoclassical
Evaluate the impact of changes in AD and AS on macroeconomic indicators
How an increase in LRAS may impact economic growth?
There would be a fall in price, increase in YFE - more output and production in economy - neoclassical
Won’t change/effect economic growth if there’s a lack of demand - Keynesian
When to use an SRAS curve?
Changes in costs of production (wages, raw materials)
When to use an LRAS curve?
Analysing changes impacting productive potential - quality/quantity of FOP
