AS/AD Model

Question 1

Describe the AS-AD model

Answer 1

Question 2

What is the spare capacity on this graph

Answer 2

Question 3

What is the effect on AS if income changes

Answer 3

There is no effect

Question 4

What is an evaluation you can use for the Keynsian LRAS curve

Answer 4

Draw diagram

Question 5

How does an rise in animal spirits affect AD-AS

Answer 5

Will increase investor confidence so investment will increase
Investment is a component of AD so AD shifts right
Firms will invest in new technology so the productivity will increase so LRAS will shift to the right

Question 6

What is VAT

Answer 6

An indirect tax which is paid on goods at each stage of production

Question 7

How would an increase in VAT affect AS and AD

Answer 7

Increases the amount firms have to pay to the government so firm’s costs so SRAS would shift left
If the government spends the tax revenue they have collected then AD will shift to the right