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What is a result of a demand shock in the short run?
Demand-pull inflation is caused by a decrease in aggregate demand.
False
What type of inflation results from rising production costs?
Cost-Push Inflation
__________ policies involve fiscal measures such as government spending and taxes to manage inflation and unemployment.
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Match the following policies with their descriptions:
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Which type of inflation is characterized by higher input prices leading to lower output?
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Incomes policy strictly allows for free market adjustments without any intervention.
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What is the main goal of supply-side policies?
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Demand shocks lead the economy back to potential GDP with __________ prices over time.
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What does fiscal policy primarily influence?
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What does the Aggregate Demand (AD) formula C + I + G + (X - M) represent?
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A shift in the Aggregate Demand curve is caused by changes in the quantity of goods demanded due to price level changes.
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Which curve represents the relationship between price levels and quantity of goods supplied in the short run?
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The __________ curve is vertical in the long run, indicating that price levels do not affect the quantity of real GDP supplied.
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Match the economic factors with their influences on the Aggregate Supply (AS) curves:
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What happens during a supply shock?
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Short-run equilibrium in an economy occurs when AD and LRAS intersect.
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List one factor that could cause a shift in the Aggregate Demand curve.
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In the short run, firms produce more when __________ rise due to the upward sloping nature of the SRAS curve.
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Which of the following is NOT a factor that shifts the LRAS curve?
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Study Notes
Aggregate Demand (AD) and Aggregate Supply (AS)
- The AD-AS model explains short-run fluctuations in real GDP and price levels.
- The intersection of the AD curve and the short-run aggregate supply (SRAS) curve determines real GDP and price levels.
Aggregate Demand (AD)
- Represents the total quantity of goods and services demanded by households, businesses, government, and foreign buyers at various price levels.
- AD is expressed as: C + I + G + (X - M), where:
- C: Consumption
- I: Investment
- G: Government purchases
- X: Exports
- M: Imports
Shifts and Movement Along the AD Curve
- Movement along the AD curve is caused by changes in the price level, while holding other factors constant.
- Shifts in the AD curve are caused by changes in external factors such as:
- Changes in government policies (e.g., taxes, spending)
- Interest rate changes by the central bank (RBA)
- Changes in expectations of households and firms
- Changes in foreign variables (e.g., exchange rates)
Short-Run Aggregate Supply (SRAS)
- The SRAS Curve shows the relationship between price levels and the quantity of goods and services supplied in the short run.
- The SRAS curve is upward sloping because firms produce more when prices rise, as input costs tend to adjust more slowly than product prices.
- Factors influencing SRAS shifts:
- Expected changes in future prices
- Adjustments due to errors in past price expectations
- Unexpected changes in natural resource prices (e.g., oil)
- Natural disasters
Long-Run Aggregate Supply (LRAS)
- The LRAS Curve is a vertical line representing the long-run relationship between price levels and real GDP.
- In the long run, increases in price levels do not affect the quantity of real GDP supplied.
- Factors that shift the LRAS curve:
- Increase in labor force and capital stock
- Technological advancements
- Increase in resources
Macroeconomic Equilibrium
- Short-run equilibrium is determined by the intersection of AD and SRAS.
- Long-run equilibrium occurs when AD and SRAS intersect along the LRAS curve, bringing the economy to its potential GDP.
Economic Shocks and Adjustments
- Supply Shock: A sudden increase in production costs (e.g., oil prices) shifts the SRAS curve to the left, leading to lower real GDP and higher prices (stagflation).
- Demand Shock: An increase in AD raises both the price level and real GDP in the short run. Over time, adjustments bring the economy back to potential GDP with higher prices.
Inflation Types
- Demand-Pull Inflation: Driven by an increase in aggregate demand, leading to higher prices and output.
- Cost-Push Inflation: Caused by rising production costs (e.g., higher input prices) that reduce supply, leading to higher prices and lower output (stagflation).
Policies to Address Inflation and Unemployment
- Demand-side policies:
- Fiscal policy (government spending and taxes)
- Monetary policy (control of interest rates and money supply)
- Supply-side policies: Structural reforms and policies to increase productivity
- Incomes policy: Control over wages and prices to manage inflation
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Description
This quiz explores the fundamentals of the Aggregate Demand (AD) and Aggregate Supply (AS) model, highlighting how they explain short-run economic fluctuations. Participants will engage with key concepts such as the components of AD, shifts in the AD curve, and the factors that influence it.
