ECON102 Chapter Notes - Chapter 2.2: Aggregate Demand, Aggregate Supply, Disposable And Discretionary Income

A. A decrease in aggregate supply can result in:

1. a recession
2. cost-push inflation
3. demand-pull inflation
4. unemployment 

B. In the short run (intermediate-range) of the aggregate supply curve, higher aggregate demand will increase

1. the price level but reduce real GDP.
2. real GDP without raising the price level
3. the price level without affecting real GDP
4. both the price level and real GDP

C. Which of the following helps explain why real GDP is inversely related to the price level within the framework of the AD-AS model?

1. As prices fall, domestic consumers have an incentive to buy more of the cheaper goods and services
2. As prices fall, the wealth of people holding the fixed quantity of money increases, causing them to expand their purchases of goods and services
3. As prices fall, the government will have to reduce taxes, which will lead to an increase in the number of goods and services purchased
4. As prices fall, the monetary authorities will have to increase the money supply, which will lead to an increase in the number of goods and services purchased

A.

B.

Determine the effect on either the aggregate demand curve (is it a rightward or a leftward shift?), the aggregate short-term supply curve, and the long-term aggregate supply curve (does the upward sloping portions of the SAS curve shift left or right, or does the vertical portion of the LAS curve shift to the right or to the left?). Also determine the effect on the price level, the real output level and employment/unemployment. Provide an explanation and express this graphically using the AS/AD macro model.



From 1980 to 1985, the U.S. dollar appreciated over 60%. An appreciation of a country's currency makes its goods more expensive relative to foreign goods. This reduces its exports and increases its imports, shifting its AD curve to the left.