AD and AS L9

Question 1

Factors that Shift AD

Answer 1

1. Change is consumer confidence or income: positive correlation
2. Interest rates and monetary policy: negative correlation
3. Changes in fiscal policy outlook: positive correlation
4. Exchange rates and foreign demand: depreciation cause increased AD

Question 2

Transmission Mechanism- AD

Answer 2

1. Wealth Effect: P rises -> depreciation of AUD -> real wealth falls -> C falls -> AD falls
2. IR Effect: P rises -> depreciation of AUD -> increased borrowing -> increased demand for borrowing -> rise in IR’s -> discourages investment spending -> AD falls
3. Exchange Rate Effect: P rises -> higher IR’s -> attracts foreign investment -> NX fall -> AD falls

Question 3

AD Shifts

Answer 3

1. Consumption
2. Investment
3. Government Spending
4. Net Exports

Question 4

LRAS Shifts

Answer 4

1. Changes in Natural Rate of UE
2. Changes in Natural Rate of Output
3. Changes in physical/human capital
4. Changes in natural resources
5. Changes in tec

Question 5

Sticky Wage Theory

Answer 5

Fixed wages based on Pe -> Actual P greater than Pe -> real wages fall -> labour gets cheaper -> firms hire more -> output (Y) rises

Question 6

Sticky Price Theory

Answer 6

Prices set by Pe -> MS increases -> Actual P rises -> firms w/o menu costs increase P immediately -> firms w/ menu cost keep P low temporarily -> their goods are cheaper -> demand for their goods rise -> increase output and workers

Question 7

Misperception Theory

Answer 7

Actual P rise above Pe -> firms mistakenly think their P rise due to rise in demand -> they increase output -> rise in employment