4.2.2 Aggregate demand and aggregate supply analysis

• Aggregate supply (AS) represents the total amount of goods and services firms are willing to produce at different price levels
• The long-run aggregate supply (LRAS) curve is vertical because it shows potential output when all resources are fully employed.

  True
• What factors can shift the aggregate demand (AD) curve?

  Changes in consumer confidence
• Order the steps of how economic fluctuations are explained using the AD-AS model:

  1️⃣ Identify a shift in the AD or AS curve

  2️⃣ Analyze the impact on price level and output

  3️⃣ Determine the new macroeconomic equilibrium
• The SRAS curve can shift due to changes in costs of production
• Match the aggregate supply (AS) type with its sensitivity to price levels:

  Short-Run Aggregate Supply (SRAS) ↔️ Sensitive

  Long-Run Aggregate Supply (LRAS) ↔️ Insensitive
• The long-run aggregate supply (LRAS) curve is vertical because it shows potential output when all resources are fully employed.


  True
• Investment spending by businesses is influenced by interest rates, business confidence, and expected returns
• Why is the long-run aggregate supply (LRAS) curve vertical?

  All resources are fully employed
• What type of spending does investment refer to?

  Business spending on capital goods
• Net exports are calculated as the difference between exports and imports.


  True
• What assumption underlies the SRAS curve?

  Fixed wages and resource prices
• Order the factors influencing the SRAS curve based on their impact on output:

  1️⃣ Increase in production costs

  2️⃣ Decrease in productivity

  3️⃣ Improvement in technology
• Aggregate demand (AD) represents the total demand for goods and services
• Business confidence and expected returns drive business investment
• Exchange rates affect the net exports component of aggregate demand.

  True
• Match the component of aggregate demand with its key driver:

  Consumption (C) ↔️ Consumer confidence

  Investment (I) ↔️ Expected returns

  Government spending (G) ↔️ Fiscal policy

  Net exports (X-M) ↔️ Foreign demand
• What type of spending is influenced by interest rates and business confidence?

  Investment
• Order the factors influencing the LRAS curve based on their long-term impact on output:

  1️⃣ Technological advancements

  2️⃣ Increased resource availability

  3️⃣ Improvements in institutional factors
• What does aggregate demand (AD) refer to?

  Total demand for all goods
• What are the four main components of aggregate demand (AD)?

  Consumption, investment, government spending, net exports
• Match the aggregate supply (AS) type with its description:

  Short-Run Aggregate Supply (SRAS) ↔️ Relationship between price level and output with fixed wages

  Long-Run Aggregate Supply (LRAS) ↔️ Shows potential output when all resources are fully employed
• The SRAS curve can shift due to changes in costs of production
• Why is the aggregate demand (AD) curve downward-sloping?

  Higher prices lower real incomes
• The LRAS curve is vertical because it shows potential output when all resources are fully employed.


  True
• What does short-run aggregate supply (SRAS) assume about wages and resource prices?

  They are fixed
• What are key factors influencing consumption in aggregate demand (AD)?

  Income, confidence, interest rates
• Match the aggregate demand (AD) component with its definition:

  Consumption (C) ↔️ Spending by households on goods and services

  Investment (I) ↔️ Spending by businesses on capital goods

  Government spending (G) ↔️ Spending by the government on public goods

  Net exports (X-M) ↔️ Exports minus imports
• Consumption refers to spending by households on goods and services
• Government spending includes funding education, healthcare, and infrastructure
• Match the type of aggregate supply with its characteristic:

  Short-Run Aggregate Supply (SRAS) ↔️ Upward slope

  Long-Run Aggregate Supply (LRAS) ↔️ Vertical slope
• The LRAS curve is vertical because output is determined by productive capacity, not the price level.

  True
• What is the primary difference between SRAS and LRAS in terms of slope?

  SRAS is upward, LRAS is vertical
• What are the four main components of aggregate demand?

  Consumption, investment, government spending, net exports
• What is fiscal policy used for in the context of government spending?

  Determining government expenditures
• Household spending on goods and services is referred to as consumption
• Government spending is determined by fiscal policy decisions.

  True
• The LRAS curve is vertical because potential output is determined by productive capacity
• Firms can increase output in the short run by using existing resources more intensively
• Improvements in productivity shift the SRAS curve to the right.

  True