Aggregate Demand and Equilibrium Quiz

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Questions and Answers

What does the equation AD = C + I + G + (X - M) represent?

Total demand for goods and services (correct)

Total savings in an economy

Total supply of goods and services

Total revenue generated by government

Which factor does NOT influence consumption (C) in aggregate demand?

Interest rates

MPS & MPC

Distribution of income

Government grants (correct)

What condition indicates economic disequilibrium?

S + T + M < I + G + X (correct)

AD > Y

I + G + X = S + T + M

AD = Y

Which of the following represents the multiplier effect?

The number of times initial expenditure increases final national income Signup and view all the answers

In the calculation of real GDP, what does CPI stand for?

Consumer Price Index Signup and view all the answers

Which method is used to measure economic growth?

Changes in real gross domestic product (GDP) Signup and view all the answers

If an economy experiences S + T + M > I + G + X, what is the likely economic outcome?

Economic recession Signup and view all the answers

What happens to the nominal GDP if prices rise but real output remains unchanged?

Nominal GDP will increase Signup and view all the answers

What does the Annual economic growth rate measure?

The percentage change of GDP from one financial year to the previous financial year Signup and view all the answers

Which formula correctly represents Aggregate Supply?

AS = Y = C + S + T Signup and view all the answers

Which of the following is NOT a method to increase Aggregate Supply?

Population decline Signup and view all the answers

What does Technical/Productive Efficiency aim to achieve?

Producing maximum output at minimum cost Signup and view all the answers

What is the significance of the business cycle in economics?

It shows fluctuations in the level of real GDP over time Signup and view all the answers

How is Year on Year Growth calculated?

Measuring the percentage change in GDP between one quarter and the corresponding quarter of the previous year Signup and view all the answers

What does Dynamic Efficiency focus on within microeconomic reforms?

Adapting to changes in demand and technology Signup and view all the answers

What is typically used to represent the total productive capacity of an economy?

Y Signup and view all the answers

Study Notes

Aggregate Demand (AD)

AD is the total demand for goods and services.
Calculated as: AD = C + I + G + (X - M)
- C: Consumption by households (influenced by MPS, MPC, interest rates, confidence, income distribution)
- I: Investment by households (influenced by interest rates, government policies, labor rates, productivity, confidence)
- G: Government expenditure (influenced by the state of the economy)
- X: Export expenditure (influenced by domestic and overseas income & currency value)
- M: Import expenditure (influenced by domestic and overseas income & currency value)

Injections and Withdrawals

Equilibrium occurs when AD = Y (aggregate demand equals income).
Alternative equilibrium condition: I + G + X = S + T + M (injections = leakages)
Disequilibrium:
- S + T + M > I + G + X: Y falls (recession)
- S + T + M < I + G + X: Y rises (boom)

The Simple Multiplier

Changes with injections/leakages.
Multiplier: Final income increase is a multiple of initial expenditure increase.
Real economy: Y = C + S + T + M
1 = MPC + MPS

Economic Growth

Increase in the value of goods/services produced over time.
Measured by changes in real GDP over time.
Real GDP = Nominal GDP × 100 / CPI
Economic Growth (%) = [(Real GDP current year - Real GDP previous year) / Real GDP previous year] × 100
Different time periods to measure Australia's growth:
- Quarterly rate (ABS calculates GDP every three months)
- Year-on-year growth (comparison between quarters of consecutive years)
- Annual economic growth rate (comparison between financial years)

Aggregate Supply (AS)

AS is the economy's productive capacity (represented by Y, total income).
Y = output (E) = total income (O).
Y = C + S + T (consumption, savings, taxation)
Increases to AS: new resources, population growth, efficiency improvements, new skills, government policy, technology adoption.

Improvements in Efficiency and Technology

Microeconomic reforms improve resource allocation.
Reforms include: reducing trade barriers, relaxing investment restrictions, tax reforms, competition policy, financial/labour/product adjustments.
Efficiency types:
- Technical/Productive: maximum output with minimum cost and resources.
- Allocative: resources allocated to reflect consumer preferences and prices aligning with production costs.
- Dynamic: adapting to changes in demand and technology.

Trends in the Business Cycle

Business cycle: fluctuations in real GDP over time.
Trough of cycle: lowest point of output and activity.

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Description

Test your understanding of Aggregate Demand, its components, and the equilibrium conditions. This quiz covers concepts like injections, withdrawals, and the simple multiplier. Ideal for students studying economics.