Question Number 1: Write the definitions of aggregate demand and aggregate supply. Answer: AGGREGATE DEMAND:
Aggregate demand is the sum of all demand for final goods and services at a given time and price level. AGGREGATE SUPPLY:
Aggregate supply is the sum of all final goods and services that will be supplied at a given time and price level. Question Number 2: Why does short run aggregate supply curve slope upward? Answer: Because profits rise when the prices of the goods and services rise, and firms sell more rapidly than the prices they pay for inputs. Question Number 3: What are the causes of a shift of aggregate demand curve to the right? Answer: A shift of aggregate demand curve to the right may be caused by any of the following: 1. An increase in the money supply will increase demand directly as people and firms will have more money to spend and indirectly by lowering the rate of interest. 2. A rise in optimism will increase both consumption and investment. 3. A fall in the exchange rate will be likely to increase demand for net exports. 4. Government policy resulting in a reduction in taxes and/or an increase in government expenditure will raise aggregate demand. 5. An increase in the expected rate of inflation will be likely to increase consumption as people bring forward their spending plans. 6. If incomes rise abroad, demand for exports will be likely to increase. 7. Following a rise in population, the greater the number of people, the higher the level of demand is likely to be for a wide range of goods and services. 8. A fall in the rate of interest will probably stimulate demand for consumer durables and capital goods. 9. As the population becomes wealthier, following a rise in aggregate wealth, consumption usually rises. Question Number 4: What are classical and Keynesian views about long run aggregate supply curve?
Answer: CLASSICAL LONG RUN AGGREGATE SUPPLY CURVE: