aggregate demand/aggregate supply

Question 1

definition of aggregate demand

Answer 1

aggregate demand is the total amount of spending in the economy

Question 2

what does the AD curve show?

Answer 2

total amount of all goods and services that”

- consumers, producers, the govt and foreign consumers all want to purchase at different price levels

Question 3

why is the AD curve downward sloping?

Answer 3

the wealth effect
the interest rate effect
the interest rate effect

Question 4

what are the external factors that may have an effect on the AD?

Answer 4

the factors affecting the components of aggregate expenditure

Question 5

what does the AS curve show?

Answer 5

the sum of all goods and services produced in the economy at different price levels

Question 6

why does the AS curve slope upwards?

Answer 6

because firms are willing and able to produce more goods and higher price levels

Question 7

what are the three ranges of the AS curve?

Answer 7

keynesian, intermediate and classical

Question 8

what is the keynesian range?

Answer 8

firms can increase production without placing too much pressure on prices. output and price level remain constant. the economy is operating below capacity

Question 9

what is the intermediate range?

Answer 9

as the economy gets closer to full employment prices will rise

Question 10

what is the classical range?

Answer 10

if firms employ all resources they can only produce at Yfe. This is the level of full employment. the price level rises steeply here as scarce resources become more expensive and thus producers raise prices higher

Question 11

what factors cause changes in the AS curve?

Answer 11

• wage levels
• price of other resources
• changes in technology
• increases in productivity
• changes in business regulations, taxes or laws

Question 12

what is the wealth effect?

Answer 12

when inflation rises the real purchasing power declines, leads to a fall in C and I, causing a contraction in AD

Question 13

what is the interest rate effect?

Answer 13

when the inflation rate rises, interest rates are also raised, this increases the cost of borrowing, lowering C and I causing a contraction in AD

Question 14

what is the international effect?

Answer 14

when inflation rises the competitiveness of our exports declines, lowering exports and causing a contraction in demand

Question 15

what is macroeconomic equilibrium?

Answer 15

by combining the economy’s aggregate demand curve with the AS curve we can now show the economy’s equilibrium level of real GDP and the price level

Question 16

what happens every year due to an increase in economic activity?

Answer 16

the curves tend to shift to the right but they may not shift at the same rate which means that at any point in time the economy’s equilibrium may be above or below full employment

Question 17

what is a contractionary gap?

Answer 17

when the equilibrium is below the full employment level of real gdp

Question 18

what happens in a contractionary gap?

Answer 18

higher levels of cyclical unemployment, lower inflation, a fall in company profits and a reduction in investment and consumption

Question 19

what is an expansionary gap?

Answer 19

when the equilibrium is above the full employment level of real gdp

Question 20

what happens in an expansionary gap?

Answer 20

high inflation, low levels of cyclical UE, a rise in profits, increased investment