Aggregated Demand and Supply

Q: What does the AD–AS model show?

A: The relationship between total spending (AD) and total production (AS) in the entire economy.

Q: What is Aggregate Demand (AD)?

A: Total spending on domestic goods and services: C + I + G + (X − M).

Q: Why does the AD curve slope downward?

A: Wealth effect, interest rate effect, and exchange rate effect.

Q: What is Aggregate Supply (AS)?

A: Total quantity of goods and services firms are willing to produce at different price levels.

Q: What is SRAS?

A: Short-run Aggregate Supply — upward sloping because input prices are sticky.

Q: What is LRAS?

A: Long-run Aggregate Supply — a vertical line at potential GDP (full employment GDP).

Q: What is Potential GDP?

A: The maximum sustainable output when the economy is at full employment.

Q: What does Say’s Law say?

A: “Supply creates its own demand.” More relevant in the long run.

Q: What does Keynes’ Law say?

A: “Demand creates its own supply.” More relevant in the short run.

Q: Which zone of the SRAS does Keynes’ Law best apply to?

A: The Keynesian zone, where the SRAS curve is flat.

Q: What is the Keynesian Zone?

A: Deep recession; SRAS nearly flat; output changes with no inflation.

Q: What is the Intermediate Zone?

A: SRAS upward-sloping; output and price levels both change.

Q: What is the Neoclassical Zone?

A: SRAS steep/vertical; economy at or near potential GDP; output cannot increase much.

Q: In which zone does an increase in AD mostly raise prices, not GDP?

A: Neoclassical Zone.

Q: Name three things that shift AD to the right.

A: ↑ consumer confidence, ↑ investment, ↑ government spending, ↓ taxes, ↑ exports.

Q: What shifts AD to the left?

A: ↓ consumer confidence, ↓ investment, ↓ G, ↑ taxes, ↓ exports.

Q: What shifts SRAS to the right?

A: ↓ input prices, technology improvements, ↑ productivity.

Q: What shifts SRAS to the left

A: ↑ input costs (oil, wages), supply shocks, natural disasters.

Q: What shifts LRAS?

A: Long-term changes in labor force, capital, technology, or institutions.

Q: What is stagflation?

A: ↓ GDP + ↑ prices + ↑ unemployment (usually caused by SRAS shifting left).

Q: If equilibrium output is left of LRAS, what does that indicate?

A: A recession; high unemployment.

Q: If equilibrium output is right of LRAS, what does that indicate?

A: Inflationary gap; economy overheating.

Q: AD shifts right. What happens to GDP, unemployment, and prices?

A: GDP ↑, unemployment ↓, price level ↑.

Q: AD shifts left. What happens to GDP, unemployment, and prices?

A: GDP ↓, unemployment ↑, price level ↓.

Q: SRAS shifts left. What happens?

A: GDP ↓, unemployment ↑, prices ↑ (stagflation).

Q: SRAS shifts right. What happens?

A: GDP ↑, unemployment ↓, prices ↓.

Q: What fiscal policy can close a recessionary gap?

A: ↑ government spending or ↓ taxes (shifts AD right).

Q: What fiscal policy can reduce inflationary pressures?

A: ↓ G or ↑ taxes (shifts AD left).

Q: When does demand-pull inflation occur?

A: When AD shifts right near full employment.

Q: When does cost-push inflation occur?

A: When SRAS shifts left (higher production costs).

Q: Prices rise while GDP falls. Which curve shifted?

A: SRAS shifted left.

Q: GDP rises and prices fall. What curve shifted?

A: SRAS shifted right.

Q: GDP falls and prices fall. What curve shifted?

A: AD shifted left.

Q: GDP rises and prices rise. What curve shifted?

A: AD shifted right.

Q: Which curve shifts with long-run changes in technology?

A: Both SRAS and LRAS shift right.