AP Review - Aggregate Supply and Demand

Question 1

Aggregate Demand

Answer 1

Demand for all goods and services in the economy

Question 2

Why is the AD graph downward sloping?

Answer 2

1. Wealth Effect: price levels up = quantity of expenditures down
2. Interest Rate Effect: price levels up = lenders’ interest rates up
3. Foreign Trade Effect: US prices up = foreigners buy less US goods + Americans buy more foreign goods

Question 3

What causes shift in AD?

Answer 3

1. Change in consumer spending: up = higher incomes or lowering taxes, down = consumer debt up or recession fears
2. Change in investment spending: up = positive business expectations or new technology or lowered interest rates, down = business taxes or increased interests rates
3. Change in government spending: government expenditures
4. Change in net exports: exchange rates (ex. dollar depreciates relative to euro), national income vs abroad (recession = no imports)

Question 4

Aggregate Supply

Answer 4

Amount of goods and services (Real GDP) that firms produce n an economy at different price levels

Question 5

Short Run Aggregate Supply (SRAS)

Answer 5

Wages + resource $ sticky, no change as price changes

Question 6

Long Run Aggregate Supply (LRAS)

Answer 6

Wages + resource $ flexible, change as price changes

Question 7

What causes shift in SRAS?

Answer 7

1. Change in resource prices: $ value of domestic + imported goods, supply shocks, inflationary expectations (prices up = wages up = supply down)
2. Change in actions of government: taxes on producers, subsidies for domestic producers, governmental regulations
3. Change in productivity: technology

Question 8

Positive output gap (on SRAS, AD, LRAS graph)

Answer 8

SRAS shifts to the left to get back to the LRAS line

Question 9

What happens to workers when a recession happens and no government intervention?

Answer 9

Workers take wage cuts

Question 10

Capital stock

Answer 10

Machinery and tools purchased shifts PPC outward and thus shift the LRAS rightward