Question

 

VALERIE: Hi, Shen! Are the basics of aggregate demand and aggregate supply analysis essentially the same as microeconomic demand and supply analysis?

SHEN: There are a lot of similarities but there are some very important differences. A few of the key differences are that, when dealing with aggregate demand (AD) and aggregate supply (AS) curves, the vertical axis measures the price level and not just the price for one good or service and the horizontal axis measures aggregate output, or real GDP, and not just the quantity demanded and supplied for a specific good or service. Let’s see if you understand the fundamentals of aggregate demand and aggregate supply. Why does the aggregate demand (AD) curve slope downward? What could cause it to shift?

VALERIE: The aggregate demand (AD) curve is downward sloping because as price level decreases, buyers tend to purchase (LESS OR MORE)   of all goods and services and the aggregate quantity demanded (INCREASES OR DECREASES) . A decrease in the price level also induces spending via the interest rate effect and the exchange rate effect. AD is simply the summation of all spending in the economy—the total of consumption, investment, government, and net export spending. Moreover, an increase in AD is caused by (AN INCREASE OR A DECREASE)   in consumption, investment, government, and net export spending. An increase in AD means that a quantity of the economy’s goods and services are demanded at every price level. This is represented by the AD curve shifting to the (RIGHT OR LEFT).

SHEN: Why is the long-run aggregate supply curve (LRAS) vertical at the natural rate of unemployment, or potential real GDP level? What could cause it to shift?

VALERIE: The long-run aggregate supply (LRAS) curve is a vertical line at the value of real GDP at the natural rate of unemployment because it is (UNAFFECTED OR AFFECTED) by the price level. This level of real GDP is instead determined by the productive capacity in the economy. If this productive capacity of the economy increases, the vertical (LRAS) curve will shift to the (LEFT OR RIGHT) . The productive capacity of a nation might increase if there are (FEWER OR MORE) resources like human and physical capital, natural resources and technological knowledge or (MORE OR LESS)   productive resources. If the long-run aggregate supply (LRAS) curve shifts to the right, this would illustrate (ECONOMIC GROWTH OR A RECESSION).

SHEN: Why does the short-run aggregate supply (SRAS) curve slope upward? What could cause it to shift to the right?

VALERIE: The short-run aggregate supply (SRAS) curve slopes upward because as the price level increases, firms receive a (HIGHER OR SMALLER) amount for their output and will increase production in the short run. If the SRAS curve shifts to the right, this means (LESS OR MORE) will be produced at any price level. A rightward shift of the SRAS curve could be caused by more (OPTIMISTIC OR PESSIMISTIC) expectations by businesses or (HIGHER OR LOWER) costs of production, (MORE OR FEWER) resources, like human and physical capital, natural resources and technological knowledge, or (MORE OR LESS)   productive resources.

Answer 1

1. More

2. Increases

3. An increase

4. Right

5. Unaffected

6. Right

7. More

8. More

9. Economic growth

10. Higher

11. More

12. Pessimistic

13. Lower

14. More

15. More