AS/AD

Question 1

An Increase in Aggregate Supply could be because of:

Answer 1

• A decreased cost of raw materials (power, rent, resources, etc)
• An investment in human capital (more training, education) leading to an increase in the productivity of workers
• An investment in human capital (more training, education) leading to an increase in productivity of workers.
• A decrease in indirect tax such as GST
• An appreciation of the exchange rate that leads to a decrease in the cost of imported raw materials e.g. oil etc.

Question 2

An increase in Aggregate Demand could be because of:

Answer 2

• An increase in consumer spending/decrease in savings
• An increase in investment
• An increase in government spending
• An increase in export receipts
• An increase in income or decrease in income tax
• An increase in transfer payments
• A decrease in interest rates which will lead to an increase in investment and consumption and less savings
• An increase in money supply
• Inflationary expectations (People expect prices to rise and so buy now).
• An increase in optimism about the future e.g. increase in house prices.

Question 3

A Boom Period is:

Answer 3

A period of high economic growth in an economy. A percentage increase in Real GDP measures this. During a Boom, the economy is producing close to or on the PPF and is near full employment.

A recession occurs if there are two quarters (6 months) of negative growth. In a recession, the economy is producing inside the PPF and there is a lot of unemployment.