AD/AS Model

Question 1

Aggregate demand

Answer 1

-total demand (spending) in economy
AE=C+I+G+(X-M)

Question 2

Aggregate supply

Answer 2

Total output - GDP

Question 3

Ad reflects…

Answer 3

-change in output (real GDP) when change in inflation (price level)
-inverse relationship bc: wealth effect, interest rate effect, international effect

Question 4

SRAS reflects..

Answer 4

-Change in inflation when there is a change in output in short run
-positive relationship bc: increased GDP leads to increased inflation: (inflati9on increase, D increase, Price increase )
-model assumes firms can’t react to changes in availabilit6y of resources in SR (e.g. wages can’t change)
-as output increased prices will change in short run, market won’t have time to react to these changes

Question 5

LRAS reflects…

Answer 5

-real gDP not affected by price level change over long runs
-in LR supply will react to change in wages bc this changes production costs
-LRAS is at full employment level

Question 6

Shifting AD

Answer 6

-any change in autonomous spending (C+I+G+(X-M))
-imports r odd one out (increased M= decreased AD)

Question 7

Shifting LRAS from…

Answer 7

-change in POTENTIAL GDP output
-change in full employment output
-change in 3 P’s (population, production, participation)

Question 8

Shifting SRAS from..

Answer 8

-supply shocks
-change input prices
-weather events

Question 9

Shifting BOTH long and short run AS

Answer 9

-a change in available resources
E.g. Ukraine war limited supply

Question 10

Negative supply shocks

Answer 10

-unexpected decrease in availability of key resources, decrease kin SRAS

Question 11

Positive supply shock

Answer 11

-unexpected increase in availability of key resources

Question 12

LRAS=

Answer 12

-full employment (optimal GDP)
-in theory full employment level of output is the equil level output, in ;, macro-economy will self adjust to this output level
-in reality unemployment level in Aus is roughly 4% structural and frictional

Question 13

Wages only increase input prices (SRAS)

Answer 13

-wages increasing doesn’t mean increased consumption which would shift AD, while true incomes increase and employment decrease, consumption remains constant.

Question 14

Discretionary, automatic

Answer 14

Purposeful and deliberate changes, specified in budget
Changes automatically to revenue and tax due to changes in the business cycle