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Macroeconomics: Aggregate Demand and Aggregate Supply Shifts

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  • How do government purchases affect aggregate demand?

    Government purchases are a component of aggregate demand and an increase shifts the AD curve right.

  • What is the effect of higher interest rates on aggregate demand?

    Higher interest rates raise borrowing costs for firms and households, reducing consumption and investment spending, shifting AD left.

  • How do personal income or business taxes affect aggregate demand?

    Higher personal income taxes reduce consumption, and higher business taxes reduce investment, causing AD to shift left.

  • What happens to aggregate demand when households expect higher future incomes?

    Consumption spending increases, shifting the aggregate demand curve to the right.

  • How does the growth rate of domestic GDP relative to foreign GDP affect net exports?

    If domestic GDP grows faster, imports increase faster than exports, reducing net exports and shifting AD left.

  • What is the effect of firms' expectations of future investment profitability on aggregate demand?

    Positive expectations increase investment spending, shifting the AD curve to the right.

  • How does the exchange rate affect net exports and aggregate demand?

    A higher exchange rate makes imports rise and exports fall, reducing net exports and shifting AD left.

  • What shifts the short-run aggregate supply (SRAS) curve to the right?

    An increase in the labor force or capital stock allows more output at every price level, shifting SRAS right.

  • How does increased productivity affect the short-run aggregate supply curve?

    Higher productivity lowers production costs, shifting the SRAS curve to the right.

  • What is the effect of an increase in the expected future price level on SRAS?

    Workers and firms raise wages and prices, increasing costs and shifting SRAS left.

  • How do workers and firms adjusting to previously underestimated price levels affect SRAS?

    They increase wages and prices, causing the SRAS curve to shift left.

  • What happens to SRAS when the expected price of an important natural resource rises?

    Costs of production rise, shifting the SRAS curve to the left.

  • What causes a recession in the short run according to the AD-AS model?

    A decline in investment shifts AD left, reducing real GDP and causing a recession.

  • How do firms and workers respond to a price level lower than expected in the short run?

    Costs fall, so SRAS shifts right, moving the economy back toward potential GDP.

  • What happens when firms and workers adjust to a price level higher than expected?

    Costs rise, SRAS shifts left, reducing output and increasing the price level.

  • What is the short-run effect of an increase in investment on aggregate demand?

    An increase in investment shifts AD right, causing an inflationary expansion.

  • How does an increase in oil prices affect the short-run aggregate supply curve?

    Higher oil prices increase production costs, shifting SRAS left and causing stagflation.

  • What is the adjustment process after a supply shock causes a recession and higher prices?

    Workers accept lower wages, firms lower prices, SRAS shifts right, restoring long-run equilibrium.

  • How long does it typically take to restore full employment after a supply shock?

    Adjustment can take several years, depending on the shock's severity.

  • What is the role of government intervention during recessions in the AD-AS model?

    Government spending can offset decreases in AD, stimulating the economy and shortening recessions.