Closed Economy AD - AS Model

The aggregate demand curve shows the relationship between

• Price and Quantity

• Inflation and Unemployment

• Price and Output

• Interest rate and Output

Ceteris paribus assumption, an increase in government spending will cause the Aggregate Demand curve

• No Shift

• Shift to the left

• Shift down

• Shift to the right

Ceteris paribus assumption, expansionary monetary policy causes the aggregate demand curve

• Shift to the right

• Shift to the left

• Shift down

• No shift

Factors that shift the AD Curve to the right, except

• An increase in government purchases

• An increase in taxes

• An increase in money supply

• An increase in wealth

A fall in aggregate demand in short run will

• Lower price & lower output

• Lower price & raises output

• Raises price & raises output

• Price sticky & lower output

An increase in aggregate demand will

• Lower price in the short run

• Raises price in the short run

• Raises output in the long run

• Raises output in the short run

A reduction in aggregate demand will

• Lower price in the short run

• Lower output in the short run

• Raises price in the long run

• Raises output in the long run

An adverse supply shock shifts

• Short run aggregate supply curve upward

• Short run aggregate supply curve down

• Long run aggregate supply to the left

• Long run aggregate supply to the right