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Dynamic AD-AS Model: Introduction quiz

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  • What are the two main unrealistic assumptions of the standard AD-AS model?
    The standard AD-AS model assumes there is no long-run inflation and no long-run economic growth.
  • Why does the standard AD-AS model struggle with long-term economic predictions?
    Because it assumes economies return to the same equilibrium and ignores ongoing growth and inflation.
  • How does the standard AD-AS model incorrectly predict recessions?
    It predicts that recessions are often accompanied by falling prices, which rarely happens in reality.
  • What is the main improvement of the dynamic AD-AS model over the standard model?
    The dynamic model allows all curves to shift over time, reflecting real-world changes in the economy.
  • Why is the dynamic AD-AS model called 'dynamic'?
    Because it allows the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves to change over time.
  • What does the long-run aggregate supply (LRAS) curve represent?
    It represents the potential GDP of the economy if it is operating at full employment.
  • Why does the LRAS curve shift to the right over time in the dynamic model?
    Because population growth and technological improvements increase the economy's productive capacity.
  • What causes the short-run aggregate supply (SRAS) curve to shift to the right in the dynamic model?
    The same factors as LRAS: population growth and technological advancements.
  • Why does the aggregate demand (AD) curve shift to the right each year in the dynamic model?
    Because increases in population, income, and government spending boost overall demand.
  • How does economic growth affect aggregate demand in the dynamic AD-AS model?
    Economic growth leads to higher consumption, investment, and government spending, shifting AD to the right.
  • What happens to the equilibrium in the dynamic AD-AS model each year?
    A new equilibrium is reached with a higher potential GDP, reflecting economic growth.
  • In the dynamic AD-AS model, what typically happens to the price level if AD and AS shift at the same rate?
    The price level remains roughly the same, indicating balanced growth.
  • What real-world economic phenomena does the dynamic AD-AS model better explain compared to the standard model?
    It better explains ongoing inflation, long-term growth, and more realistic recession scenarios.
  • What will future lessons on the dynamic AD-AS model focus on?
    They will explore recessions, inflation, and the effects of fiscal and monetary policies.
  • Why is it important for macroeconomic models to allow for shifting curves over time?
    Because real economies experience growth and inflation, so static models fail to accurately reflect reality.