The Aggregate Demand-Aggregate Supply Model - AP Macroeconomics

What is the impact of an increase in productivity on the AS curve?

AS curve shifts rightward. Higher productivity reduces per-unit production costs.
What happens to the equilibrium level when both AD and AS shift leftward?

Output decreases; price level change ambiguous. Both demand and supply declining reduces output.
What effect does a decrease in interest rates have on AD?

AD curve shifts rightward. Lower rates encourage borrowing for investment and consumption.
Identify the primary cause of cost-push inflation.

Leftward shift in the AS curve. Rising input costs push prices up from supply side.
State the formula for Aggregate Demand (AD).

AD = C + I + G + (X - M). Sum of consumption, investment, government spending, and net exports.
In the AD-AS model, what occurs when AD exceeds AS?

Inflationary gap. Excess demand creates upward pressure on prices.
What is the short-run effect of an increase in taxes on AD?

AD curve shifts leftward. Higher taxes reduce disposable income and consumption.
Identify what shifts the Aggregate Demand curve rightward.

Increase in consumer spending, investment, government spending, or net exports. These components increase total spending in the economy.
Which factor causes the AS curve to shift leftward?

Increase in input prices. Higher costs reduce firms' willingness to supply.
How does a decrease in the labor force affect the AS curve?

AS curve shifts leftward. Fewer workers reduce economy's production capacity.
What happens to the equilibrium output when AS shifts left?

Equilibrium output decreases. Reduced supply decreases production at any price level.
Identify the result of a rightward shift in both AD and AS.

Higher output; price level change ambiguous. Both curves moving right increases output definitively.
How does an increase in interest rates affect AD?

AD curve shifts leftward. Higher rates reduce investment and consumption spending.
Which policy can address a demand-pull inflation?

Contractionary fiscal policy. Reduces government spending or raises taxes to cool demand.
In the AD-AS model, what is a demand-pull inflation?

Inflation caused by a rightward shift in AD. Excess demand pulls prices higher throughout the economy.
What effect does a technological advancement have on the AS curve?

Shifts the Aggregate Supply (AS) curve rightward. Technology reduces production costs, increasing supply.
What is the impact of a leftward shift in the AD curve on the price level?

Price level decreases. Reduced demand creates downward pressure on prices.
What does a leftward shift in the long-run AS curve indicate?

Decrease in potential output. Reduced capacity means lower maximum sustainable output.
What is the short-run impact of an increase in consumer spending?

AD curve shifts rightward. Higher consumption increases total aggregate demand.
What is the effect of a subsidy on production on the AS curve?

AS curve shifts rightward. Subsidies reduce production costs for firms.
Which factor shifts the long-run AS curve to the right?

Increase in capital stock. More capital increases economy's productive capacity.
What is the equilibrium condition in the AD-AS model?

Aggregate Demand (AD) = Aggregate Supply (AS). Where quantity demanded equals quantity supplied in the economy.
Which factor leads to a leftward shift in the AD curve?

Decrease in consumer confidence. Lower confidence reduces consumption spending.
What results from a rightward shift in the AS curve?

Lower price level and higher output. Increased supply creates downward pressure on prices.
Identify the effect of a decrease in government spending on AD.

AD curve shifts leftward. Reduced government spending decreases total demand.
State the result of an increase in AD when the economy is at full employment.

Inflation increases. At capacity, higher demand only raises prices.
What effect does an increase in export demand have on AD?

AD curve shifts rightward. Higher foreign demand increases net exports component.
What happens to the equilibrium price level if AD shifts right?

Equilibrium price level increases. Higher demand creates upward pressure on prices.
Which policy is used to correct a recessionary gap?

Expansionary fiscal policy. Increases government spending or cuts taxes to boost AD.
Which option describes a stagflation scenario?

High inflation and high unemployment. Occurs when AS shifts left while AD remains stable.
Identify the impact of a decrease in resource prices on AS.

AS curve shifts rightward. Lower input costs reduce production expenses.
Which effect results from a decrease in aggregate demand?

Lower price level and lower output. Reduced demand decreases both prices and production.
Which scenario leads to a deflationary gap?

AS exceeds AD at full employment. Supply exceeds demand, creating downward price pressure.
What results from a simultaneous rightward shift in AD and leftward shift in AS?

Price level increases; output change ambiguous. Demand increases while supply decreases, raising prices.
Identify the effect of increased energy costs on the AS curve.

AS curve shifts leftward. Higher energy costs increase production expenses.
What does the vertical AS curve represent in the long run?

Full employment or potential output. Maximum sustainable output when all resources are fully utilized.
What is the effect of a foreign recession on the AD curve?

AD curve shifts leftward due to decreased exports. Reduced foreign income decreases demand for domestic exports.
Identify the effect of a decrease in AD on unemployment.

Unemployment increases. Lower demand reduces need for workers.
State the impact of improved education on the long-run AS curve.

Long-run AS curve shifts rightward. Better education increases economy's productive capacity.

Study these flashcards