AD and AS analysis

• What is aggregate demand?

  Aggregate demand is the total demand in the economy.
• What does aggregate demand measure?

  It measures spending on goods and services by consumers, firms, the government, and overseas consumers and firms.
• What happens to demand when the price level falls from P1 to P2?


  Demand expands from Y1 to Y2.
• What occurs when the price level rises from P2 to P1?

  Demand contracts from Y2 to Y1.
• What causes movements along the demand curve?

  Changes in the price level cause movements along the demand curve.
• Why does the AD curve slope downwards?

  Higher prices lead to a fall in the value of real incomes, making goods and services less affordable.
• How does high inflation in the UK affect aggregate demand?

  High inflation makes foreign goods seem relatively cheaper, increasing imports and potentially decreasing aggregate demand.
• What is the relationship between high inflation and interest rates?

  High inflation generally leads to higher interest rates, which discourages spending.
• What does the long run aggregate supply curve (LRAS) represent?

  LRAS shows the potential supply of an economy in the long run.
• Why is the LRAS curve vertical?

  The LRAS curve is vertical because supply is assumed not to change as the price level changes.
• What does a rightward shift in the LRAS curve indicate?

  A rightward shift in the LRAS curve indicates economic growth.
• What causes the short run aggregate supply (SRAS) curve to shift?

  The SRAS curve shifts when there are changes in the conditions of supply.
• What factors can change the cost of employment affecting the SRAS curve?

  Factors include wages, taxes, and labor productivity.
• What inputs can affect the SRAS curve?

  The cost of raw materials, commodity prices, and the exchange rate can affect the SRAS curve.
• What is the effect of government regulation on the SRAS curve?

  Government regulation or intervention can shift the SRAS curve.
• How does the short run aggregate supply curve (SRAS) differ from the long run aggregate supply curve (LRAS)?

  SRAS only covers the period immediately after a change in the price level, while LRAS shows potential supply in the long run.

  
• Why is the SRAS curve upward sloping?

  The SRAS curve is upward sloping because supply is assumed to be responsive to a change in aggregate demand.