Aggregate Supply and Demand Quiz
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Questions and Answers

What condition must be met for long run macroeconomic equilibrium to occur?

  • Real GDP demanded is greater than Real GDP supplied
  • AD curve is below the LAS curve
  • Real GDP demanded equals Real GDP supplied (correct)
  • The price level is increasing indefinitely

At what point does long run macroeconomic equilibrium occur on a graph?

  • At the intersection of the AD and SRAS curves
  • At the highest point on the LAS curve
  • At the intersection of the AD and LAS curves (correct)
  • Where the AD curve shifts to the right

Which of the following statements is true regarding the LAS curve?

  • It fluctuates based on demand shifts
  • It remains vertical in the long run (correct)
  • It is downward sloping
  • It represents short-term equilibrium

Which scenario indicates a deviation from long run macroeconomic equilibrium?

<p>Real GDP demanded exceeds Real GDP supplied (A)</p> Signup and view all the answers

What can cause a shift in the Aggregate Demand (AD) curve leading to a new long run equilibrium?

<p>Changes in consumer confidence (D)</p> Signup and view all the answers

What is the primary focus of Real GDP when comparing production levels over time?

<p>It indicates the amount of goods produced without price influence. (A)</p> Signup and view all the answers

Which factor does NOT directly influence Long Run Aggregate Supply?

<p>Current market prices of goods. (D)</p> Signup and view all the answers

How does the quantity of Real GDP supplied typically respond to changes in price level?

<p>It increases when price levels increase. (B)</p> Signup and view all the answers

In the long run, what primarily remains unchanged despite fluctuations in the price level?

<p>Potential GDP. (A)</p> Signup and view all the answers

What defines the concept of 'potential GDP'?

<p>The total production capacity under fully employed resources. (D)</p> Signup and view all the answers

What is NOT a determinant of Aggregate Supply in the long run?

<p>Import tariffs on goods. (C)</p> Signup and view all the answers

What happens to the quantity of Real GDP supplied when wages and prices increase at the same rate?

<p>It remains unchanged at potential GDP. (D)</p> Signup and view all the answers

Which aspect does Aggregate Demand primarily focus on?

<p>The total expenditure in an economy at various price levels. (D)</p> Signup and view all the answers

What is one effect of lowering taxes on the economy?

<p>It increases aggregate demand. (B)</p> Signup and view all the answers

How does an increase in government expenditure affect aggregate demand?

<p>It increases aggregate demand. (B)</p> Signup and view all the answers

What happens when interest rates are increased?

<p>Aggregate demand typically decreases. (A)</p> Signup and view all the answers

What is the result of a fall in the foreign exchange rate for domestic goods?

<p>Domestic goods become cheaper for foreign buyers. (D)</p> Signup and view all the answers

How does an increase in foreign incomes affect aggregate demand for a country's exports?

<p>It usually increases demand for the country's exports. (D)</p> Signup and view all the answers

What occurs if Real GDP is above Equilibrium GDP?

<p>Firms will decrease production and lower prices. (C)</p> Signup and view all the answers

Which of the following is a primary purpose of monetary policy?

<p>To manage the supply of money and interest rates. (A)</p> Signup and view all the answers

What is the likely effect of increasing the quantity of money in the economy?

<p>It increases purchasing power. (C)</p> Signup and view all the answers

If Canadian goods become cheaper for Americans due to changes in the foreign exchange rate, what is a likely outcome?

<p>Canadian exports will increase. (A)</p> Signup and view all the answers

What can be concluded if the intersection of the AD curve and SAS curve represents short-run equilibrium?

<p>The quantity of Real GDP demanded matches the quantity supplied. (B)</p> Signup and view all the answers

What typically happens if the government cuts interest rates?

<p>Aggregate demand and expenditure usually increase. (C)</p> Signup and view all the answers

What is a potential consequence of too much money in the economy?

<p>Inflation may occur. (D)</p> Signup and view all the answers

During a recession, which fiscal policy would most likely be implemented to stimulate the economy?

<p>Increase government spending. (C)</p> Signup and view all the answers

How does a higher foreign income impact aggregate demand for domestic goods?

<p>It increases demand for domestic exports. (C)</p> Signup and view all the answers

What happens to the quantity of Real GDP supplied when the price level increases, assuming no change in wages or other factors?

<p>It increases along the aggregate supply curve. (D)</p> Signup and view all the answers

What does potential GDP represent in an economy?

<p>The maximum amount of goods and services that can be produced efficiently. (B)</p> Signup and view all the answers

Which of the following would cause the short-run aggregate supply (SAS) curve to shift leftward?

<p>An increase in the money wage rate. (B)</p> Signup and view all the answers

What effect does a decrease in the price level have on the quantity of Real GDP demanded?

<p>It increases due to higher real wealth. (B)</p> Signup and view all the answers

What is one reason that can increase aggregate demand?

<p>A rise in expected future income. (B)</p> Signup and view all the answers

How do changes in the quantity of capital affect potential GDP?

<p>They increase potential GDP. (C)</p> Signup and view all the answers

What does a leftward shift in the short-run aggregate supply curve typically indicate?

<p>Higher production costs leading to less output. (D)</p> Signup and view all the answers

Which of the following best describes the wealth effect?

<p>Decreased prices raise real wealth and consumption. (B)</p> Signup and view all the answers

Which of the following factors does NOT typically influence aggregate demand?

<p>Changes in the money wage rate. (C)</p> Signup and view all the answers

What does the aggregate demand curve illustrate?

<p>The relationship between the price level and the total quantity of Real GDP demanded. (D)</p> Signup and view all the answers

Why would an increase in technology typically shift the aggregate supply curve?

<p>It decreases business costs significantly. (C)</p> Signup and view all the answers

Under what conditions is Real GDP said to be less than potential GDP?

<p>The economy is not fully utilizing its resources. (C)</p> Signup and view all the answers

What typically occurs to the aggregate demand if there is an expectation of future inflation?

<p>It increases as consumers buy goods now before they get more expensive. (B)</p> Signup and view all the answers

If money wage rates increase, what is the short-term effect on the short-run aggregate supply curve?

<p>It shifts leftward, indicating decreased supply. (A)</p> Signup and view all the answers

Flashcards

Short Run Aggregate Supply (SAS)

The total quantity of goods and services that all firms in the economy are willing and able to produce at each price level in a given time period.

Potential GDP

The amount of goods and services that an economy can produce when all resources are fully employed. It represents the maximum potential output.

Equilibrium Price Level

The price level at which the Short Run Aggregate Supply (SAS) curve intersects the Long Run Aggregate Supply (LAS) curve. This is the point where the economy is producing at its potential GDP.

Short Run Aggregate Supply Curve

The relationship between the price level and the quantity of real GDP supplied. It's typically upward sloping.

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Aggregate Demand (AD)

The total amount of spending on goods and services in the economy.

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Aggregate Demand Curve

The relationship between the price level and the quantity of real GDP demanded.

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Long Run Equilibrium

A situation where the economy is producing at its potential GDP, with all resources efficiently employed.

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Increase in Short Run Aggregate Supply

A shift in the Short Run Aggregate Supply (SAS) curve to the right, caused by factors that increase potential GDP.

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Decrease in Short Run Aggregate Supply

A shift in the Short Run Aggregate Supply (SAS) curve to the left, caused by factors that decrease potential GDP.

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Aggregate Demand Shocks

A factor that shifts the Aggregate Demand (AD) curve either to the right (increase) or to the left (decrease).

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Wealth Effect

When people's demand for goods and services increases because they feel wealthier due to a decrease in the price level, allowing their money to stretch further.

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Intertemporal Substitution Effect

When people choose to buy more goods and services today because they anticipate higher prices or an increase in their income in the future..

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Fiscal Policy

Policies that directly manipulate government spending and taxation to influence Aggregate Demand.

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Monetary Policy

Policies that control the money supply and interest rates to influence Aggregate Demand.

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The World Economy

The combined economic conditions of the rest of the world, which can affect domestic Aggregate Demand.

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What is Real GDP?

Real GDP is a measure of the total value of goods and services produced in an economy, adjusted for inflation. It uses constant prices from a base year to eliminate the impact of price changes and focus on the actual quantity of goods and services produced.

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What is Aggregate Supply?

Aggregate Supply (AS) is the total amount of goods and services that businesses in an economy are willing and able to produce at different price levels.

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What is Long Run Aggregate Supply (LRAS)?

Long Run Aggregate Supply (LRAS) represents the maximum output level an economy can achieve when all its resources (labor, capital, technology) are fully utilized.

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Why is LRAS vertical?

The LRAS curve is vertical because it represents the economy's maximum output potential, which is not affected by changes in the price level in the long run.

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What determines the position of the LRAS curve?

The LRAS curve is determined by factors that affect the economy's long-term productive capacity - like the size and skill of the workforce, the amount of capital available, and the level of technology.

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What happens to the quantity of real GDP supplied in the long run when the price level changes?

In the long run, the quantity of Real GDP supplied remains at potential GDP even when the price level changes, as long as the money wage rate adjusts by the same percentage. This is because the supply of goods and services is determined by factors like the size of the workforce, the level of technology, and the amount of capital available, not by the price level.

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What is Nominal GDP?

Nominal GDP measures the total value of goods and services produced in the economy using current prices. It includes the effects of both price changes and changes in the quantity of goods and services produced.

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What is Aggregate Demand (AD)?

Aggregate Demand (AD) is the total demand for goods and services in an economy at different price levels. It represents the sum of spending by households, businesses, governments, and foreigners.

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Changing Taxes (Fiscal Policy)

Adjusting tax rates to influence people's spending and businesses' investment.

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Transfer Payments (Fiscal Policy)

Government payments to individuals or households to support specific needs (e.g., unemployment benefits).

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Government Spending (Fiscal Policy)

Government purchases of goods and services (e.g., infrastructure, education) to stimulate the economy.

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Interest Rates (Monetary Policy)

The cost of borrowing money, expressed as a percentage of the amount borrowed.

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Money Supply (Monetary Policy)

The total amount of money available in an economy.

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Foreign Exchange Rate Fall

A decrease in the value of a currency relative to other currencies.

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Aggregate Demand Increase (Foreign Exchange Rate)

The increase in demand for domestically produced goods and services when the exchange rate falls.

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Foreign Income Increase

When people in other countries have more money to spend, they may buy more imported goods.

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Aggregate Demand Increase (Foreign Income)

The increase in demand for domestically produced goods and services when foreign incomes rise.

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Real GDP

The amount of goods and services produced in a country.

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Short-Run Equilibrium GDP

The specific level of real GDP where the quantity of goods and services demanded equals the quantity supplied.

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Short-Run Aggregate Supply (SAS) Curve

The curve that shows the relationship between the price level and the quantity of real GDP supplied.

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Short-Run Equilibrium

The point where the Aggregate Demand (AD) curve and the Short-Run Aggregate Supply (SAS) curve intersect.

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Long Run Macroeconomic Equilibrium

The level of output where the quantity of real GDP demanded equals the quantity of real GDP supplied.

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Long Run Aggregate Supply (LAS)

A curve that represents the potential output of an economy, given its resources and technology.

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Equilibrium Point of AD and LAS

The intersection of the aggregate demand (AD) and long-run aggregate supply (LAS) curves, representing the level of output where the economy is at full employment and potential.

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Full Employment Equilibrium

The state of the economy where all available resources are fully employed, and the economy is producing at its potential output.

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Study Notes

Aggregate Supply and Demand

  • Real GDP is the total output of goods and services using base year prices (e.g., 2012). Nominal GDP, using today's prices, can look larger due to inflation. Real GDP only considers quantity produced.
  • Aggregate real GDP supplied is the total output businesses are willing to produce at different price levels. Higher prices usually lead to increased production.
  • Long Run Aggregate Supply (LRAS) represents the economy's maximum potential output when all resources are fully employed. It is unaffected by price level changes.
  • Factors determining LRAS include labor, technology, and resource quality.
  • Short-Run Aggregate Supply (SRAS) shows the relationship between the price level and the quantity of output supplied when the money wage rate and other factor prices are fixed. SRAS slopes upwards. A price level increase means firms are willing to sell more products because they will earn more money. A price decrease means firms make less output.
  • Potential GDP is the output at full employment on the graph when SAS and LRAS meet. Real GDP is the actual output. If real GDP is lower than potential GDP, the economy is operating below its capacity.

Changes in Aggregate Supply

  • Changes in aggregate supply result from factors other than price level.
  • Changes in potential GDP shift both LRAS and SRAS. Potential GDP increases with more labor, capital, and/or advanced technology.
  • An increase in the money wage rate shifts the SRAS curve leftward, reducing aggregate supply.

Aggregate Demand

  • Aggregate demand (AD) curve shows the relationship between price level and the quantity of Real GDP demanded by all sectors of the economy. The AD curve slopes downward.
  • Factors influencing AD include wealth effect, substitution effect, expectations, fiscal policy, monetary policy, and the world economy.
  • The quantity demanded is the sum of consumption, investment, government expenditure, and net exports (exports - imports).

Why the Aggregate Demand Curve Slopes Downward

  • Wealth effect: A higher price level reduces real wealth and reduces consumption expenditure. A lower price level increases real wealth and increases consumption.
  • Substitution effect: Intertemporal and international substitution effects influence the relationship between price level and quantity demanded.

Changes in Aggregate Demand

  • Any factor that influences spending decisions (other than the price level) affects aggregate demand.
  • Expectations: Increased expected future income boosts current consumption and demand. Higher expected inflation increases current demand.
  • Fiscal policy: Government spending and taxation affect aggregate demand. Higher government spending or lower taxes increase disposable income which increases consumption, thus increasing AD.
  • Monetary policy: Interest rate adjustments and money supply change consumer and business borrowing costs, influencing aggregate demand through consumption and investment. A lower interest rate increases aggregate demand. A higher money supply increases aggregate demand.
  • The world economy: Foreign exchange rates and foreign incomes impact demand for domestic goods. A weaker currency (fall in exchange rate) will increase aggregate demand, while increased foreign incomes increase consumer spending on domestic products.

Equilibrium

  • Short-run equilibrium occurs when the quantity of real GDP supplied equals the quantity of real GDP demanded. This is the intersection of the AD and SRAS curves.
  • Long-run equilibrium happens when AD intersects LAS.

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Test your understanding of key concepts related to Aggregate Supply and Demand, including Real GDP, Long Run Aggregate Supply (LRAS), and Short-Run Aggregate Supply (SRAS). This quiz will challenge your knowledge of how these factors interact within an economy and their implications for production levels.

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