3.2 - Aggregate Demand and Supply

What is the difference between micro demand and aggregate demand?

Micro demand refers to demand for a single product by an individual or group; aggregate demand is the total demand for all goods and services in an economy.

Why is the AD curve downward sloping?

Due to the wealth effect, interest rate effect, and net export effect.

What are the components of AD?

Consumption, investment, government spending, and net exports (exports - imports).

What causes a shift in the AD curve?

Changes in consumption, investment, government spending, or net exports due to factors like confidence, taxes, interest rates, or foreign income.

What is aggregate supply?

The total quantity of goods and services produced in an economy at different price levels.

Why is the SRAS curve upward sloping?

Because input prices like wages are sticky in the short run, firms produce more when the price level rises.

What shifts the SRAS curve?

Changes in resource prices, taxes/subsidies, and supply shocks.

Why is the monetarist LRAS vertical?

In the long run, all prices are flexible and output is determined by resources and productivity, not the price level.

Why does the Keynesian AS curve have three sections?

Because of spare capacity and sticky wages/prices at low output levels, and inelasticity at full employment.

What shifts the LRAS curve?

Changes in the quantity or quality of factors of production, including tech and institutional reforms.

How is short-run macro equilibrium determined?

Where AD intersects SRAS.

What happens if SRAS shifts?

Changes the equilibrium output and price level in the short run.

Where is long-run equilibrium in the monetarist model?

Where AD = SRAS = LRAS at full employment.

What happens in the long run after a demand shock in the monetarist model?

The economy self-corrects back to full employment via flexible wages and prices.

What is a recessionary gap in the Keynesian model?

When AD intersects AS at a level of output below full employment.

Why can the economy remain stuck in a recession in the Keynesian model?

Because wages and prices are sticky, preventing SRAS from adjusting.

What is an inflationary gap in the Keynesian model?

When AD increases and intersects the AS curve in the vertical range, causing higher prices with little output gain.

Why aren't all increases in AD inflationary in the Keynesian model?

Because if the economy is below full employment, AD can rise without causing much inflation.