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Unit 3: Aggregate Demand and Supply and Fiscal Policy
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AD and AS Practice Worksheet
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What Happens In the Long-Run?
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In the long-run, wages and costs increase
If consumer spending increases, what will happen in the short-run and in the long-run? In the long-run, wages and costs increase LRAS AS1 Real GDP Price Level AS PL2 PL1 Real GDP PLe AD AD1 QY Q1 GDPR Time 4
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In the long-run, wages and costs increase
If consumer spending increases, what will happen in the short-run and in the long-run? In the long-run, wages and costs increase LRAS AS1 Real GDP Price Level PLe Real GDP AD1 QY GDPR Time 5
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In the long-run, wages & costs eventually decrease
If consumer spending decreases, what will happen in the short-run and in the long-run? In the long-run, wages & costs eventually decrease LRAS Real GDP Price Level AS AS2 PLe PL1 Real GDP PL2 AD2 AD Q1 QY GDPR Time 6
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Practice 7
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#1. Assume there is an increase in government spending
#1. Assume there is an increase in government spending. What happens to PL and output in the short- run? LRAS Price Level AS PL and Q will Increase PL1 PLe AD1 AD QY Q1 GDPR 8
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Price Level decreases and output stay s the same
#2. Consumer expectations fall and consumer spending plummets. What happens to price level and output in the long-run? Price Level LRAS AS AS1 Price Level decreases and output stay s the same PLe Short Run -AD Falls, PL and Q fall Long Run- AS Increases as workers accept lower wages and production costs fall. PL goes down, Q goes back to Full Employment PL1 PL2 AD AD AD1 Q1 QY GDPR 9
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Price level increases and output stays the same
#3. If consumer spending increases, what happens to price level and output in the long-run? LRAS Price Level AS1 AS PL2 Price level increases and output stays the same PL1 PLe AD1 AD QY Q1 GDPR 10
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2008 Audit Exam E
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Economic Growth 12
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If investment increases, what happens in the short-run and long-run?
Capital Stock- Machinery and tools purchased by businesses that increase their output Price Level LRAS LRAS1 The PPC shifts outward since producers can make more AS AS1 Capital Goods PL1 PLe AD AD1 QY Q1 QY1 GDPR Consumer Goods 13
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Only Investment causes growth since firms increase their capital stock
An increase in consumption or government spending doesn’t cause economic growth. Only Investment causes growth since firms increase their capital stock Price Level LRAS1 AS1 Capital Goods PLe AD1 QY1 GDPR Consumer Goods 14
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2008 Audit Exam E
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2008 Audit Exam B
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2012 FRQ #3
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2012 FRQ #3
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