Economic Growth and LRAS- Macro Topic 5.6

Mr. Clifford discusses economic growth using aggregate demand and supply concepts. He reviews previous lessons on recessionary and inflationary gaps, and explains how decreased interest rates affect investment and aggregate demand in the short run, leading to an inflationary gap. In the long run, increased investment results in more capital stock, shifting aggregate supply and long-run aggregate supply to the right, indicating economic growth. He clarifies when aggregate supply shifts back to the left, emphasizing the role of investment in long-term growth.

What are the three policy options discussed for addressing recessionary or inflationary gaps?

• Monetary policy, trade policy, and no policy

• Fiscal policy, trade policy, and no policy

• No policy, fiscal policy, and monetary policy

• Fiscal policy, monetary policy, and trade policy

How does a decrease in interest rates initially affect aggregate demand?

• It shifts aggregate demand to the left

• It shifts aggregate demand to the right

• It has no effect on aggregate demand

• It causes aggregate demand to fluctuate

What is the long-term effect of increased investment due to lower interest rates?

• Aggregate demand shifts to the left

• Aggregate supply shifts to the right

• Aggregate supply remains unchanged

• Aggregate supply shifts to the left

What happens to the long run aggregate supply when there is an increase in capital stock?

• It fluctuates

• It shifts to the left

• It shifts to the right

• It remains unchanged

What causes the short run aggregate supply to shift back to the left after an increase in aggregate demand?

• An increase in interest rates

• A decrease in consumption

• An increase in wages

• A decrease in government spending