Topic 5 & 6 Aggregate Demand & Aggregate Supply

What are the 3 factors that make AD curve slope downwards?

• Wealth effect, Interest rate effect, exchange rate effect

• Business confidence, Government spending, Wealth

• Trade Protection, Tariffs, Quotas

• Consumption, Investment, Government Spending, Net Exports

Answer explanation

The AD curve slopes downwards due to the wealth effect (higher prices reduce purchasing power), interest rate effect (higher prices lead to higher interest rates, reducing investment), and exchange rate effect (higher prices make exports more expensive).

What could have caused this shift?

• Price of oil falls

• increase in technology

• decrease in company taxes

• Increase in wages

Answer explanation

Increase in wages can lead to higher consumer spending, driving demand for goods and services. This shift in demand can significantly impact the economy, making it the most relevant cause among the options provided.

What could have caused this increase in supply?

• Reduced regulation for firms

• Increase in corporate tax rates

• Increase in the price of oil

• The wealth effect

Answer explanation

Reduced regulation for firms can lead to lower barriers to entry and increased production capabilities, resulting in a higher supply. The other options would likely decrease supply or have no direct effect.

What could have caused this shift?

• A war in the country

• A increase in wage rates

• Increase in education spending

• An increase in the price of oil

Answer explanation

Increase in education spending can lead to a more skilled workforce, boosting productivity and economic growth. This shift is less likely caused by war, wage increases, or oil prices, which have different impacts.

What has caused an increase in AD?

• Decrease in Interest rates

• Decrease in disposable income due to tax increase on workers

• Consumers pessimism

• Increase in interest rates

Answer explanation

A decrease in interest rates lowers borrowing costs, encouraging spending and investment, which increases aggregate demand (AD). The other options would either decrease AD or have no positive effect.

In the AD/AS model what is "full employment"?

• 0% unemployment

• unemployment when the economy is producing at its potential

• some unemployment

• when the economy is at the "peak".

Answer explanation

In the AD/AS model, "full employment" refers to the level of unemployment when the economy is producing at its potential output, meaning not all unemployment is eliminated, as some is natural or frictional.

What could have caused this situation?

• Increased interest rates on borrowings

• Appreciation of the currency (exports will decrease as more expensive)

• Increase in government spending

• Consumer confidence is low

Answer explanation

Increase in government spending can stimulate economic activity, leading to higher demand and potential inflation. This contrasts with the other options, which may not directly cause a similar situation.

What could lead to a decrease in aggregate demand?

• Increase in consumer confidence

• Decrease in government spending

• Decrease in interest rates

• Increase in exports

Answer explanation

A decrease in government spending reduces overall demand in the economy, leading to a decrease in aggregate demand. In contrast, increased consumer confidence, lower interest rates, and higher exports typically boost demand.

Which factor is most likely to cause a leftward shift in the supply curve?

• Improved labor productivity

• Decrease in raw material prices

• Increase in production costs

• Technological advancements

Answer explanation

An increase in production costs makes it more expensive for suppliers to produce goods, leading to a decrease in supply. This results in a leftward shift of the supply curve, unlike the other options which would increase supply.

Identify the lines in the graph.

a

b

c

d

Macro Equillb

AD/AS Model

Aggregate supply

Aggregate demand