Chapter 12

Question 1

Aggregate Demand =

Answer 1

The level of demand across the whole economy.

When prices rise, aggregate demand falls.

Aggregate means: the sum of

Question 2

The aggregate demand curve:

Answer 2

• it’s inverse, lower price means higher demand and vice versa

Question 3

What are the elements of aggregate demand (AD):

Answer 3

• C - Consumption
• I - Investment
• G - Government expenditure
• X - Exports
• M - Imports

AD = C + I + G + X - M

Question 4

How is Aggregate Demand effected by government spending

Answer 4

• it shifts the inverse curve out.
• so if the price stays the same of a product the quantity demanded will increase, because there is more money available in the economy.

Question 5

Other factors that effect Aggregate Demand:

Answer 5

• government spending
• economic conditions in other countries
• expectations about the future
• competitiveness in the export market
• government policy

Question 6

The Aggregate Supply curve =

Answer 6

• slopes upwards
• it’s the total supply of goods and services in a national economy
• curve moves out to the right, if the economy grows.

Question 7

What factors effect Aggregate Supply?

Answer 7

• Factors affecting suppliers’ ability to produce
• changing costs

Question 8

The long run of Aggregate Supply

Answer 8

At some point the Quantity supplied will be at its maximum. The price can go up, but the supply won’t increase further.

Question 9

Short run Equilibrium:

Answer 9

The equilibrium point is where the price of the quantity supplied matches the price of the quantity demanded

Question 10

Aggregate quantity =

Answer 10

The same as the National Income (Y), on the Aggregate Demand and Aggregate Supply diagram

Question 11

Equilibrium in the long run

Answer 11

LRAS = long run aggregate supply, this is when supply is at its maximum, it means full employment, the economy is working at its full capacity

This doesn’t usually happen. Often demand and supply reach an equilibrium before maximum supply has been reached.

Question 12

Inflationary gap::

Answer 12

Is when LRAS has reached its maximum, and AD hasn’t, which pushes the price up.

Question 13

Government policy to manage Inflationary gap:

Answer 13

• increase taxes to reduce demand

Question 14

Deflationary gap:

Answer 14

• when demand is lower than LRAS and therefore pushing prices down
• the economy is below the full employment output level; there are spare resources

Question 15

Government policy to manage deflationary gap:

Answer 15

• reduce taxes to increase demand

Question 16

Movements to the right in the AS curve - what are the effects:

Answer 16

• national income increases
• deflation; prices are falling
• rising employment