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Assignment 8: The Aggregate Demand/Aggregate Supply Model

Module Summary:

In today’s economic environment, aggregate demand management is a tool frequently

used in the name of “helping to correct” the outcomes of the economy. The AD/AS

model gives a visual representation of the relationship between price levels and real GDP.

The AD/AS model also illustrates how changes in aggregate supply and aggregate

demand affects such economic goals as controlling inflation (price levels) and

unemployment (real GDP).

This module is designed to help familiarize you with the AD/AS model and all parts and

assumptions. In the next module we will see how the AD/AS model will be used to

graphically illustrate the effects of aggregate demand management and fiscal policy

Section 1 – Essay Questions: Please answer each essay question completely and to the best of your

ability. Please answer using complete sentences.

1. Explain the concept of aggregate demand management and give a description of how it is used. ___________________________________________________________________________________________

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2. There are a few real world problems with using aggregate demand management to help close

gaps in the economy. Pick two real world problems discussed in class and explain why you feel

these problems may result in poor policy decisions. ___________________________________________________________________________________________

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Section 2 – Vocabulary: Test your comprehension of key economic terms used throughout the course by completing the following sentence frames using the terms listed below.

Aggregate Demand Curve Intermediate Range Long-Run Aggregate Supply

Aggregate Supply Curve Interest Rate Effect Net-Exports Effect

Classical Range Keynesian Range Real Balance Effect

1. When the price level falls, the amount of domestic goods demanded increases because

domestic goods become relatively cheaper than foreign goods. This behavior is called

the _____________________________

2. The ________________________ is a relationship between the total amount of goods

and services produced at different price levels.

3. The ____________________ of the short-run aggregate supply curve represents sticky

prices.

4. Because people demand less credit when prices fall, causing interest rates to fall which in

turn allows more borrowing and spending on domestic goods and services. This

relationship between falling prices and increasing demand for goods and services is

called the _______________________________

5, The ___________________ is the part of the short-run aggregate supply cure where it

becomes nearly vertical.

6. The total amount of domestic goods and services consumed at various price levels is

represented by the _____________________________.

7. The ________________________ illustrates the level of potential output in the AD/AS

model

8. As prices become lower, people can demand more goods and services with their existing

incomes. This is called the ___________________________ and contributes to the

downward sloping AD curve.

9. The ______________________ of the short-run aggregate supply curve is the region

where prices will rise as real GDP rises.