H2 Intro to Macro: AD-AS Analysis

What is the primary purpose of the AD-AS model?

• To analyze consumer behavior

• To determine equilibrium national income

• To measure individual market prices

• To calculate government expenditure

Which of the following is NOT a component of Aggregate Demand (AD)?

• Net Savings (NS)

• Government Spending (G)

• Investment (I)

• Consumption (C)

Answer explanation

AD = C + I + G + (X-M)

Which of the following factors can cause a rightward shift in the Aggregate Demand curve?

• Increase in government spending

• Decrease in consumer confidence

• Decrease in exports

• Increase in interest rates

Answer explanation

Government expenditure (G) on final goods and services such as public road expansion and infrastructural projects is a direct component of aggregate demand (AD). When (G) rises, AD increases shifting the AD curve to the right.

What happens to the equilibrium general price level when Aggregate Demand increases, ceteris paribus?

• It remains unchanged

• It increases

• It fluctuates unpredictably

• It decreases

Answer explanation

When aggregate demand increases, firms increase output to meet the increased demand by demanding for more factors of production. As idling resources get utilised, greater competition for factors of production will result in higher factor prices and higher costs of production. As a result general price level rises.

What does the term 'multiplier effect' refer to?

• The increase in national income resulting from an initial increase in AD

• The decrease in inflation due to increased savings

• The relationship between interest rates and investment

• The impact of taxes on consumer spending

Answer explanation

Multiplier effect refers to the change in national income that is greater than the initial increase in expenditure (e.g. AD)

Which of the following best describes Aggregate Supply (AS)?

• The total expenditure on final goods and services

• The total quantity of goods and services demanded

• The total output of goods and services producers are willing to supply

• The total income earned by households

Which of the following is a factor that affects Aggregate Supply in the long run?

• Changes in consumer preferences

• Changes in technology

• Changes in government policies

• Changes in interest rates

In the context of the AD-AS model, what does a rightward shift of the Aggregate Supply curve indicate?

• A decrease in national output

• An increase in the general price level

• An increase in productive capacity

• A decrease in consumer spending

Answer explanation

A rightward shift of the AS Curve (LRAS), suggests an increase in the economy's productive capacity. Hence, the maximum amount of goods the economy can produce has increased, translating to potential economic growth.

What is the effect of a decrease in investment expenditure on the economy?

• Decrease in national income

• Increase in national income

• Increase in government spending

• No effect on national income

What is the formula for calculating the multiplier?

• MPS + MPT + MPM

• MPC / (1 - MPC)

• 1 / (MPC + MPT + MPM)

• 1 / (MPS + MPT + MPM)