Podcast
Questions and Answers
What is a result of a demand shock in the short run?
What is a result of a demand shock in the short run?
Demand-pull inflation is caused by a decrease in aggregate demand.
Demand-pull inflation is caused by a decrease in aggregate demand.
False
What type of inflation results from rising production costs?
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.
__________ 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:
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?
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.
Incomes policy strictly allows for free market adjustments without any intervention.
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What is the main goal of supply-side policies?
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.
Demand shocks lead the economy back to potential GDP with __________ prices over time.
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What does fiscal policy primarily influence?
What does fiscal policy primarily influence?
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What does the Aggregate Demand (AD) formula C + I + G + (X - M) represent?
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.
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?
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.
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:
Match the economic factors with their influences on the Aggregate Supply (AS) curves:
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What happens during a supply shock?
What happens during a supply shock?
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Short-run equilibrium in an economy occurs when AD and LRAS intersect.
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.
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.
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?
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.
