2.2 Aggregate Demand and Aggregate Supply

Question 1

Define aggregate demand

Answer 1

The total amount of real output (real GDP) that consumers, firms, the government and foreigners want to buy at each possible price level, over a particular time period

Question 2

Why does the AD slope downwards?

Answer 2

1. The wealth effect (as prices go up, real value of wealth decreases and spending decreases. as prices go down, real value of wealth increases and spending increases) 2. The interest rate effect (as prices go up, interest rates increases and spending decreases) 3. The international trade effect (as prices go up, export decreases, X is smaller. as prices go up, imports increase and M is bigger)

Question 3

Draw a diagram of AD shifting and explain what happen

Answer 3

• change in consumer confidence
• change in interest rate
• change in wealth, not income
• change in income tax
• level of household indebtedness
• change in business confidence
• change in technology
• change in corporate tax
• change in political and economical priorities
• change in national income of other countries
• change in trade protection
  *

Question 4

Dfine aggregate supply

Answer 4

The total quantity of goods and services produced in an economy (real GDP) over a particular time period at different price levels

Question 5

What are the shifts in SRAS?

Answer 5

1. Change in wages
2. Change in raw materials / commodities prices
3. Change in oil price
4. Change in taxes / subsidies
5. Change in import prices
6. Supply shocks

Question 6

What is assumed in the SRAS shift curve?

Answer 6

Costs of production is assumed to be constant along a curve

Question 7

Draw the SRAS interacting with AD equilibrium

Answer 7

Question 8

What are the three types of short run equilibrium?

Answer 8

• inflationary gap (too much demand in economy, huge demand of resources, employment increases, outwards pressure on prices, output beyond the full employment level)
• recessionary gap (not enough demand in economy, not worthwhile to produce at capacity, more unemployment than natural state)
• full employment equilibrium (

Question 9

Draw the Inflationary gap diagram

Answer 9

Question 10

Draw the recessionary gap diagram

Answer 10

Question 11

Draw the full employment equilibrium

Answer 11