AD-AS Model

Front

If we are in long-run equilibrium, what impact will it have if taxes rise?

Back

AD will shift left

Answer explanation

AD moves if any component of GDP changes (C + I + G + NX). If taxes rise, Consumption will decrease

Front

If we are in long-run equilibrium, what impact will it have if exports go down?

Back

AD will shift left

Answer explanation

AD moves if any component of GDP changes (C + I + G + NX). A decrease in exports would mean there is a decrease in Net Exports.

Front

If we are in long-run equilibrium, what impact will it have if wages rise?

Back

SRAS will shift left

Answer explanation

SRAS moves if there is a change in the factors of production (land, labor, capital, technology) or input prices. Wages are an input, so higher wages decrease SRAS.

Front

If we are in long-run equilibrium, what will happen if the price of oil drops?

Back

SRAS will shift right

Answer explanation

SRAS moves if there is a change in the factors of production (land, labor, capital, technology) or input prices. Oil is an input.

Front

If we are in a positive output gap, how will we return to long-run equilibrium if the government does nothing?

Back

SRAS will shift left

Answer explanation

If the government does not intervene, wages will eventually rise (since employers have to really fight to keep their workers), and SRAS will fall since wages are an input price.

Front

If we are in a negative output gap, how will we return to long-run equilibrium if the government does nothing?

Back

SRAS will shift right

Answer explanation

If the government does not intervene, wages will eventually fall (since we're in a recession and people are desperate for work, so firms can pay them less without worrying about losing workers). This will cause SRAS to increase since wages are an input price.

Front

If we are in a positive output gap, what can we assume will happen to wages?

Back

Wages will rise

Answer explanation

If the government does not intervene, wages will eventually rise, since employers have to really fight to keep their workers. This will cause SRAS to decrease since wages are an input price.

Front

If we are in a negative output gap, what can we assume will happen to wages?

Back

Wages will fall

Answer explanation

If the government does not intervene, wages will eventually fall, since we're in a recession and firms can pay their workers less without worrying about them quitting (since everyone is desperate for work). This will cause SRAS to increase since wages are an input price.

Front

If we are in a positive output gap and the government does nothing, what will eventually happen to employment?

Back

It will fall

Answer explanation

Y₁ represents a high level of employment (or a low level of unemployment). If the government does not intervene, wages will rise and SRAS will decrease, bringing us back to Y_FE. Thus, unemployment will be higher, and employment will be lower.

Front

If we are in a negative output gap and the government does nothing, what will eventually happen to employment?

Back

It will rise

Answer explanation

Y₁ represents a low level of employment (or a high level of unemployment). If the government does not intervene, wages will fall and SRAS will increase, bringing us back to Y_FE. Thus, unemployment will be lower, and employment will be higher.