Aggregate Demand and Supply Concepts

Questions and Answers

What does the aggregate demand curve show?

the relationship between the aggregate price level and the aggregate quantity of output demanded by households, businesses, the government, and the rest of the world.

Why does the aggregate demand curve slope downward?

because as the price level falls, the ability of households and firms to borrow cheaply increases.

What happens if the economy is at Y1 and the price level decreases?

a downward movement along the AD1 curve will take place, reflecting a decrease in the price level.

What happens to the aggregate demand curve if consumer assets and wealth lose value while prices remain constant?

the aggregate demand curve will undergo a shift to the left. Signup and view all the answers

When will aggregate demand shift to the right?

if government purchases increase. Signup and view all the answers

What could cause a movement from point A on AD1 to point C on AD2?

an increase in the total quantity of consumer goods and services demanded. Signup and view all the answers

What does the aggregate supply curve show?

the relationship between the aggregate price level and the aggregate output supplied. Signup and view all the answers

What will firms in imperfectly competitive markets do when the price level decreases?

decrease output and decrease the price. Signup and view all the answers

What does the short-run aggregate supply curve illustrate?

the positive relationship between the aggregate price level and aggregate output supplied. Signup and view all the answers

A change in _____ would cause a shift in the short-run aggregate supply curve.

commodity prices Signup and view all the answers

When will the short-run aggregate supply curve shift to the left?

if nominal wages increase. Signup and view all the answers

What is potential output?

the level of output that the economy would produce if all prices, including nominal wages, were fully flexible. Signup and view all the answers

Which of the following is TRUE with respect to short-run and long-run aggregate supply?

The economy can be on both curves simultaneously. Signup and view all the answers

What does a positive demand shock lead to?

higher prices and higher employment. Signup and view all the answers

An increase in aggregate demand will generate _ in real GDP and _ in the price level in the short run.

an increase; an increase Signup and view all the answers

In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _ and potential output to _.

rise; remain stable Signup and view all the answers

What does the intersection of AD with SRAS in the Inflationary and Recessionary Gaps figure indicate?

a short-run equilibrium. Signup and view all the answers

In an inflationary gap in the short run, what happens in the long run?

the economy's self-correcting mechanism will restore GDP to its potential level. Signup and view all the answers

Study Notes

Aggregate Demand Curve

Illustrates the relationship between the aggregate price level and the total output demanded by households, businesses, government, and foreign entities.
Slopes downward as lower price levels increase borrowing capacity for households and firms.
A decrease in price level results in a movement down the curve, indicating a rise in output demanded.

Factors Influencing Aggregate Demand

Loss of consumer assets and wealth causes the aggregate demand curve to shift leftward.
Government purchases increase aggregate demand, shifting the curve rightward.
An increase in the total quantity of consumer goods and services demanded results in movement from one point on the demand curve to another.

Aggregate Supply Curve

Shows the relationship between the aggregate price level and the total output supplied by firms.
Decrease in price level leads firms in imperfectly competitive markets to reduce output and prices.
The short-run aggregate supply curve reflects a direct correlation between aggregate price level and output supplied.

Shifts in Aggregate Supply

Changes in commodity prices can result in shifts in the short-run aggregate supply curve.
An increase in nominal wages leads to a leftward shift of the short-run aggregate supply curve.
Potential output reflects the economy's output capability when all prices are flexible.

Short-run vs. Long-run Dynamics

The economy can simultaneously exist on both short-run and long-run aggregate supply curves.
A positive demand shock elevates both prices and employment levels.
An increase in aggregate demand results in higher short-run real GDP and price levels.

Long-run Adjustments

In the long run, as the economy corrects itself, aggregate demand increases typically leads to higher prices while potential output remains stable.
The intersection of aggregate demand with short-run aggregate supply signifies a short-run equilibrium.
If an economy is in an inflationary gap in the short run, it naturally self-corrects to restore GDP to its potential level over time.

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Description

This quiz covers essential concepts related to the aggregate demand and supply curves. It explores the relationships between price levels, output demanded by various sectors, and factors that influence these economic models. Test your understanding of how these curves interact and their implications in economics.