2 - AD + AS

Question 1

What does AD curve show?

Answer 1

The relationship between the level of real planned expenditure and the general price level in an economy

Question 2

AD =

Answer 2

C+1+G+ (X-M)

Question 3

What’s the real income effect?

Answer 3

As P falls, real value of income rises, consumers can buy more, higher consumption

Question 4

Balance of trade effect

Answer 4

Fall in relative price level of a country can make foreign export goods more £
- rise in exports
- fall in imports

Question 5

Interest rate effect

Answer 5

Low price inflation can lead to reduction in interest rates
- less incentive to save (low MPS)
- increased consumption (high MPC)
Exchange rate could depreciate and improve net exports (X-M)

Question 6

Factors that shift AD curve

Answer 6

Changes in:
- real income and employment
- consumer and business confidence (Keynes animal spirits)
- wealth effect
- monetary policy
- fiscal policy
- exchange rate could depreciate

Question 7

What does SRAS show?

Answer 7

The total planned output when GPL can change but prices and productivity of factor inputs are held constant
- upward sloping

Question 8

What does LRAS show?

Answer 8

Total planned output when both prices and average wage rates can change
- measure off country’s potential output
- vertical

Question 9

Factors that shift SRAS

Answer 9

Changes in:
- wage costs
- productivity
- unit labour costs (labour cost per unit of output)
- commodity, energy and raw material costs
- education/skills
- indirect taxes and subsidies
- exchange rate
- regulation

Question 10

Factors that shift LRAS

Answer 10

• change in quantity and quality of resources
• technology

Question 11

Difference in shape between classical and Keynesian AS

Answer 11

It’s curved
- no distinction between LR and SR

Question 12

Shifts in K’s AS curve
- with no change in full employment income Yfe

Answer 12

Any change that causes costs of production to fall/rise (same factors that cause SRAS to shift)
- no increase in productive potential of economy

Question 13

Shifts in K’s AS curve
- where full employment income Yfe increase

Answer 13

Any change that causes productive potential of economy to rise will shift AS right and vice versa
- same factors that cause LRAS to shift

Question 14

What do classical economists believe?

Answer 14

In the self-adjusting nature of markets
- wages and prices are flexible
- economy naturally tends towards full employment
- gov intervention is counterproductive

Question 15

What do Keynesian economists believe?

Answer 15

Emphasise role of AD
- argue that markets wont always self-adjusting efficiently especially during recessions
- advocate for gov intervention, eg. Fiscal policies to manage demand and stabilise economy

Question 16

Key factors that shift LRAS

Answer 16

Factors that increase economy’s productive potential or full employment level of output (same factors that shift PPF right)
- technological advances
- changes in productivity
- changes in education/skills
- changes in gov regulations
- demographic changes and migration
- competition policy