一、鞏固你所學 · web viewthe short-run aggregate supply curve shows the relationship...

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10.1 Aggregate demand

A. Foundation Training

I. Fill in the Blanks: Fill in each blank with a suitable word. (1 mark each)

1. Aggregate demand is the quantity of (i.e., all goods and services) at different price levels.

2. The shows the quantity of domestic output demanded at different price levels.

3. The aggregate demand curve slopes downward because of the effect, the effect and the effect.

4. The table below lists the main factors affecting aggregate demand:

FactorsComponents which affect

aggregate demandDiagram

Private consumption

Firms’ investment

Net exports

Movements along the

aggregate demand curve

Economic prospects, income

tax, welfare allowances, interest

rates & saving habits

Interest rates, business

prospects & profits tax rates

, expenditure on infrastructure, and the public’s

demand for public services

Overseas economic conditions

& Net exports

Chapter 10 Aggregate Demand andAggregate Supply

©Hong Kong Educational Publishing Co.T1


II. True / False Questions: The following statements are about aggregate demand. For each one of them, if it is correct, put a in the box; if it is wrong, put a in the box and explain why it is wrong on the lines provided. (2 marks each)

1. A fall in the price level leads to an increase in wealth and the quantity of output demanded.

2. A fall in the price level leads to a fall in the real money supply but a rise in the quantityof output demanded.

3. A fall in the price level leads to a rise in the real exchange rate and the quantity of outputdemanded.




B. Reinforcement Training

I. Multiple Choice Questions (1 mark each)

1. If overseas economies keep growing, this will lead to:(1) an increase in domestic exports.(2) an increase in net exports.(3) an increase in the demand for domestic output.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

2. Which of the following changes will not shift the aggregate demand curve?A. A lower interest rate caused by a lower price level.B. A lower interest rate caused by a lower money demand.C. A lower exchange rate.D. A lower income tax rate.

3. Suppose the government cuts welfare allowances. Which of the following is correct?A. A fall in government expenditure shifts the aggregate demand curve rightward.B. A fall in government expenditure shifts the aggregate demand curve leftward.C. A fall in private consumption expenditure shifts the aggregate demand curve

rightward.D. A fall in private consumption expenditure shifts the aggregate demand curve

leftward.




II. Short Questions

1. Give three reasons to explain why the aggregate demand curve slopes downward.(6 marks)




10.2 Aggregate supply, long-run and short-run equilibrium



1. is classified into long run and short run.2. The potential output is determined by labour, , natural resources and

.3. In both the long-run and short-run AS-AD model, the potential output is generally

assumed to be constant. The long-run aggregate supply curve will shift only in case of a change in the potential output due to long-term economic growth, or significant changes in or .

4. In the short run, the price level and aggregate output are jointly determined by the and the .

5. In the AS-AD model, the short-run equilibrium condition is: Quantity of output supplied = , and the long-run equilibrium condition is: Quantity of output supplied = = .

6. When the short-run equilibrium aggregate output is lower than the potential output, there is .

7. When aggregate demand falls, in the short run, the economy adjusts along the , leading to lower aggregate output. In the long run, aggregate output will return to the .

8. The economic phenomenon where there is economic recession accompanied with higher price levels is called .




II. Matching: On each line given, write the letter that matches the term most. Each letter can be used once only. (1 mark each)

1. Aggregate supply

A. When the price level falls, firms mistakenly believe it as a fall in the relative prices of its goods and therefore produce less. Workers will also mistakenly believe real wages have fallen and supply less labour. These lead to lower quantity of output supplied.

2. Potential output

B. When the price level falls, wages are not fully flexible. This results in higher real wages, and some firms will produce less, leading to lower quantity of output supplied.

3. Sticky-price theory C. The output of an economy at full employment.

4. Sticky-wage theory D. The quantity of output supplied (or the real national income) at different price levels.

5. Misperceptions theory E. When the price level falls, some firms will choose to

cut production instead of prices, leading to lower quantity of output supplied.

III. True / False Questions: The following statements are about aggregate supply, long-run and short-run equilibrium. For each one of them, if it is correct, put a in the box; if it is wrong, put a in the box and explain why it is wrong on the lines provided. (2 marks each)

1. In the long run, prices are not fully flexible.

2. The short-run aggregate supply curve shows the relationship between aggregate demandand aggregate output in the short run.




3. If the money price of production resources or the expected price level falls, the short-runaggregate supply curve will shift leftward.

4. When the long-run aggregate supply curve shifts, the short-run aggregate supply curvewill also shift accordingly.

5. A advancement in production technology means both long-run and short-run aggregatesupply will rise.

6. A rise in the cost of production leads to a fall in long-run aggregate supply.

7. The long-run effects of a rise in aggregate demand is a rise in both the price level andaggregate output.

8. The short-run effects of a fall in short-run aggregate supply is that the price level rises butaggregate output falls. In the long run, the aggregate output will return to the potentialoutput.






1. Which of the following statements about long-run aggregate supply are correct?(1) Long-run aggregate supply equals potential output.(2) Long-run aggregate supply is not affected by changes in the price level.(3) Long-run aggregate supply is not affected by changes in aggregate demand.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

2. Which of the following changes will not shift the short-run aggregate supply curve?A. Advancement in technology.B. Changes in the expected price level.C. Changes in wages.D. Changes in the price level.

3. Suppose a rich oil well is discovered in Country A. Which of the following are correct?(1) The short-run aggregate supply curve shifts rightward.(2) The long-run aggregate supply curve shifts rightward.(3) In the long run, the price level falls.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

4. In the long run, if aggregate supply rises and aggregate demand falls, real GDP will _______ and the price level will _______.A. rise … riseB. rise … fallC. fall … riseD. fall … fall




5. In the short run, if aggregate supply rises and aggregate demand falls, real GDP will _______ and the price level will _______.A. rise … riseB. rise … fallC. fall … riseD. rise, remain constant or fall … fall

6. In an economic recession, real GDP generally _______, and is _______ than the potential output.A. rises … higherB. rises … lowerC. falls … higherD. falls … lower

7. Which of the following changes will result in the short-run output being smaller than the potential output?A. A fall in the expected price level.B. A temporary rise in oil prices.C. A fall in interest rates.D. Overseas national incomes keep rising.

8. Suppose the economy is initially at point A in the diagram below. If consumption and investment both fall, in the short run, the economy will adjust to _______. In the long run, the economy will adjust to _______.

A. B … AB. B … CC. D … A




D. D … C




9. Suppose members of the Organization of Petroleum Exporting Countries raise the oil prices, leading to a sharp rise in international oil prices. Which of the following are true for the oil importing countries?(1) There may be stagflation.(2) The aggregate demand curve shifts leftward.(3) The short-run aggregate supply curve shifts leftward.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

10. According to the short-run AS-AD model, if the general price level falls by 5% and nominal wage falls by 3%, which of the following are correct?(1) It is difficult for wages to adjust downward.(2) Real wage increases.(3) Aggregate output is lower than potential output.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

11. Suppose the economy is initially at point A. If the price of raw materials falls, in the short run, the economy will adjust to _______. In the long run, the economy will adjust to _______.

A. B … AB. B … C




C. D … AD. D … C




12. Suppose the economy is initially at point E0. If the expected price level rises and firms invest more because of optimistic economic prospects, in the short run, the new equilibrium point is

A. E1

B. E2

C. E3

D. E4




II. Short Questions

1. The table below lists the factors which lead to shifts of the long-run and short-run aggregate supply curves. Circle the correct answers. (8 marks)

Long-run aggregate supply curve

Short-run aggregate supply curve

An increase in resourcesShifts rightward /

Remains constant /

Shifts leftward

Shifts rightward /

Remains constant /

Shifts leftward

Advancement in technologyShifts rightward /

Remains constant /

Shifts leftward

Shifts rightward /

Remains constant /

Shifts leftward

Higher wages or higher prices of other resources

Shifts rightward /

Remains constant /

Shifts leftward

Shifts rightward /

Remains constant /

Shifts leftward

A higher expected price levelShifts rightward /

Remains constant /

Shifts leftward

Shifts rightward /

Remains constant /

Shifts leftward

2. What are the differences between the long-run and short-run equilibrium conditions in the AS-AD model? (3 marks)




3. Give three possible reasons to explain why the short-run aggregate supply curve slopes upward. Also, briefly explain why the long-run aggregate supply curve is vertical.(8 marks)




4. With the aid of a diagram, use the AS-AD model to explain why, in the long run, aggregate output is solely determined by aggregate supply, and the price level is determined by aggregate demand. (7 marks)



Price level

Aggregate output0


5. With the aid of a diagram, use the AS-AD model to explain why the long-term economic growth is independent of aggregate demand, and is only determined by resources and technology. (5 marks)



Price level

Aggregate output0


III. Structured Questions

Level 11. Suppose the real GDP of Country A in 2009 is lower than that of the previous year.

(a) What changes in aggregate demand will lead to a fall in the country’s real GDP in the short run? Explain with an example. (3 marks)

(b) What changes in aggregate supply will lead to a fall in the country’s real GDP in the short run? Explain with an example. (3 marks)




2. The exchange rate of Country A’s currency falls. Answer the following questions using the AS-AD model.(a) How does the above change in the exchange rate affect Country A’s aggregate

demand? Explain. (2 marks)(b) How will the price level and real GDP of Country A change? Explain with the aid of

a diagram. (5 marks)

Hint:

(1) Since the questions only involve short-run analysis, a long-run aggregate supply curve is not

needed.

(2) Will a fall in exchange rate affect the aggregate demand curve and the short-run aggregate

supply curve? Will the curves shift leftward or rightward? Mark the short-run equilibrium

points in the diagram.



Price level

Aggregate output0


3. Suppose there is a major breakthrough in the use of renewable energy. How does this affect the long-term economic growth and the price level? Explain with the AS-AD model. (5 marks)

Hint:

(1) Since the question only involves long-term economic growth, only the aggregate demand

curve and the long-run aggregate supply curve are needed.

(2) Will the aggregate demand curve and the long-run aggregate supply curve change? Will the

curves shift leftward or rightward? Mark the long-run equilibrium points in the diagram.



Price level

Aggregate output0


Level 24. Suppose Country A was initially in long-run equilibrium. If large-scale enterprises of

Country A expect the profits of the coming quarters to fall, answer the following questions with the AS-AD model, and explain the adjustment process with the aid of a diagram.(a) In the short run, how do real GDP and the price level of Country A change?

(6 marks)(b) In the long run, how do real GDP and the price level of Country A change?

(6 marks)

Hint:

(1) Since the questions involve both long-run and short-run analyses, both long-run and short-

run equilibrium points must be marked. They should be the same point initially.

(2) Short-run changes: Will the above event lead to a change in aggregate demand or short-run

aggregate supply? How will it change? Mark the new short-run equilibrium point in the

diagram and explain.

(3) Long-run changes: Will the short-run aggregate supply curve shift leftward or rightward to

reach long-run equilibrium? Mark the new long-run equilibrium point in the diagram and

explain.



Price level

Aggregate output0


News Commentary Questions

Study the following report on the worsening mainland inflation and answer the questions.

A07 China news Daily News 12 September 2007

Mainland inflation soared 6.5% in AugustA rate not seen for 11 years

Mainland inflation has further worsened. The National Bureau of Statistics of China announced that in August, the Consumer Price Index rose by 6.5%, which was 0.9% higher than the 5.6% recorded in July. This means inflation is at an 11-year high. The prices of food products, which make up most of the CPI, have soared by 18.2%. Of these, the greatest increase was in meat prices, which rose by 49%, while eggs and vegetables rose by over 20%. In response to the rising price of mainland non-staple food exported to Hong Kong during recent months, some local restaurant owners said an average price hike of $1 had been made for meat dim sums.

The rapid growth of the Chinese economy is accompanied by inflation.(a) What is inflation? (2 marks)(b) Use the Quantity Theory of Money to explain the conditions for a simultaneous rise in

real GDP and the general price level. (5 marks)(c) With the aid of a diagram, use the AS-AD model to explain under what conditions the

general price level will rise as the economy grows. (5 marks)



Mainland inflation soared by 6.5% in August, with a sharp rise of 18.2% in food prices.

Price level

Aggregate output0




141–148 104–140 74–103

37–73 0–36


10.1 Aggregate demand



1. Aggregate demand is the quantity of domestic output (i.e., all goods and services) demanded at different price levels.

2. The aggregate demand curve shows the quantity of domestic output demanded at different price levels.

3. The aggregate demand curve slopes downward because of the wealth effect, the interest rate effect and the exchange rate effect.

4. The table below lists the main factors affecting aggregate demand:

FactorsComponents which affect

aggregate demandDiagram

Price level Private consumption

Firms’ investment

Net exports

Movements along the

aggregate demand curve

Economic prospects, income

tax, welfare allowances, interest

rates & saving habits

Private consumption

Shifts of the

aggregate demand

curve

Interest rates, business

prospects & profits tax rates Firms ’ investment

Government revenue , expenditure on infrastructure,

and the public’s demand for

public services

Government expenditure

Overseas economic conditions

& exchange rates Net exports




II. True / False Questions: The following statements are about aggregate demand. For each one of them, if it is correct, put a in the box; if it is wrong, put a in the box and explain why it is wrong on the lines provided. (2 marks each)

1. A fall in the price level leads to an increase in wealth and the quantity of output demanded.

2. A fall in the price level leads to a fall in the real money supply but a rise in the quantityof output demanded.

A fall in the price level leads to a rise in the real money supply and the quantity of

output demanded. / A rise in the price level leads to a fall in the real money supply and

the quantity of output demanded.

3. A fall in the price level leads to a rise in the real exchange rate and the quantity of outputdemanded.

A fall in the price level leads to a fall in the real exchange rate but a rise in the quantity

of output demanded. / A rise in the price level leads to a rise in the real exchange rate

but a fall in the quantity of output demanded.






1. If overseas economies keep growing, this will lead to:(1) an increase in domestic exports.(2) an increase in net exports.(3) an increase in the demand for domestic output.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

2. Which of the following changes will not shift the aggregate demand curve?A. A lower interest rate caused by a lower price level.B. A lower interest rate caused by a lower money demand.C. A lower exchange rate.D. A lower income tax rate.

3. Suppose the government cuts welfare allowances. Which of the following is correct?A. A fall in government expenditure shifts the aggregate demand curve rightward.B. A fall in government expenditure shifts the aggregate demand curve leftward.C. A fall in private consumption expenditure shifts the aggregate demand curve

rightward.D. A fall in private consumption expenditure shifts the aggregate demand curve

leftward.



D

A

D

Book 5B, pp.133–134, Qs.1–2 and 6.


II. Short Questions

1. Give three reasons to explain why the aggregate demand curve slopes downward.(6 marks)

Wealth effect: A lower price level implies a rise in the purchasing power of money and the

real value of financial assets, so private consumption rises, the quantity of output

rises. (2)

Interest rate effect: As the price level falls, real money supply rises, real interest rate falls,

both consumption and investments rise, leading to a larger quantity of output

demanded. (2)

Exchange rate effect: As the price level falls, real exchange rate falls, net exports rises,

leading to a larger quantity of output demanded. (2)



Book 5B, p.135, Q.3.


10.2 Aggregate supply, long-run and short-run equilibrium



1. Aggregate supply is classified into long run and short run.2. The potential output is determined by labour, capital , natural resources and

technology .3. In both the long-run and short-run AS-AD model, the potential output is generally

assumed to be constant. The long-run aggregate supply curve will shift only in case of a change in the potential output due to long-term economic growth, or significant changes in resources or technology .

4. In the short run, the price level and aggregate output are jointly determined by the aggregate demand curve and the short-run aggregate supply curve .

5. In the AS-AD model, the short-run equilibrium condition is: Quantity of output supplied = Quantity of output demanded , and the long-run equilibrium condition is: Quantity of output supplied = Quantity of output demanded = Potential output .

6. When the short-run equilibrium aggregate output is lower than the potential output, there is unemployment .

7. When aggregate demand falls, in the short run, the economy adjusts along the short-run aggregate supply curve , leading to lower aggregate output. In the long run, aggregate output will return to the potential output .

8. The economic phenomenon where there is economic recession accompanied with higher price levels is called stagflation .




II. Matching: On each line given, write the letter that matches the term most. Each letter can be used once only. (1 mark each)

1. Aggregate supply D

A. When the price level falls, firms mistakenly believe it as a fall in the relative prices of its goods and therefore produce less. Workers will also mistakenly believe real wages have fallen and supply less labour. These lead to lower quantity of output supplied.

2. Potential output C

B. When the price level falls, wages are not fully flexible. This results in higher real wages, and some firms will produce less, leading to lower quantity of output supplied.

3. Sticky-price theory E C. The output of an economy at full employment.

4. Sticky-wage theory B D. The quantity of output supplied (or the real national income) at different price levels.

5. Misperceptions theory A E. When the price level falls, some firms will choose to

cut production instead of prices, leading to lower quantity of output supplied.

III. True / False Questions: The following statements are about aggregate supply, long-run and short-run equilibrium. For each one of them, if it is correct, put a in the box; if it is wrong, put a in the box and explain why it is wrong on the lines provided. (2 marks each)

1. In the long run, prices are not fully flexible.

In the short run, prices are not fully flexible. / In the long run, prices are fully flexible.

2. The short-run aggregate supply curve shows the relationship between aggregate demandand aggregate output in the short run.




The short-run aggregate supply curve shows the relationship between the price level and

the quantity of output supplied (or real national income) in the short run.




3. If the money price of production resources or the expected price level falls, the short-runaggregate supply curve will shift leftward.

If the money price of production resources or the expected price level falls, the short-run

aggregate supply curve will shift rightward. / If the money price of production resourcesor the expected price level rises, the short-run aggregate supply curve will shift leftward.

4. When the long-run aggregate supply curve shifts, the short-run aggregate supply curvewill also shift accordingly.

5. A advancement in production technology means both long-run and short-run aggregatesupply will rise.

6. A rise in the cost of production leads to a fall in long-run aggregate supply. A rise in the cost of production leads to a fall in short-run aggregate supply.

7. The long-run effects of a rise in aggregate demand is a rise in both the price level andaggregate output.

The short-run effects of a rise in aggregate demand is a rise in both the price level and

aggregate output. / The long-run effects of a rise in aggregate demand is that the pricelevel rises but aggregate output remains constant.

8. The short-run effects of a fall in short-run aggregate supply is that the price level rises butaggregate output falls. In the long run, the aggregate output will return to the potentialoutput.






1. Which of the following statements about long-run aggregate supply are correct?(1) Long-run aggregate supply equals potential output.(2) Long-run aggregate supply is not affected by changes in the price level.(3) Long-run aggregate supply is not affected by changes in aggregate demand.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

2. Which of the following changes will not shift the short-run aggregate supply curve?A. Advancement in technology.B. Changes in the expected price level.C. Changes in wages.D. Changes in the price level.

3. Suppose a rich oil well is discovered in Country A. Which of the following are correct?(1) The short-run aggregate supply curve shifts rightward.(2) The long-run aggregate supply curve shifts rightward.(3) In the long run, the price level falls.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

4. In the long run, if aggregate supply rises and aggregate demand falls, real GDP will _______ and the price level will _______.A. rise … riseB. rise … fallC. fall … riseD. fall … fall



D

D

D

B

Book 5B, pp.133–135, Qs.3–5 and 7–15.


5. In the short run, if aggregate supply rises and aggregate demand falls, real GDP will _______ and the price level will _______.A. rise … riseB. rise … fallC. fall … riseD. rise, remain constant or fall … fall

6. In an economic recession, real GDP generally _______, and is _______ than the potential output.A. rises … higherB. rises … lowerC. falls … higherD. falls … lower

7. Which of the following changes will result in the short-run output being smaller than the potential output?A. A fall in the expected price level.B. A temporary rise in oil prices.C. A fall in interest rates.D. Overseas national incomes keep rising.

8. Suppose the economy is initially at point A in the diagram below. If consumption and investment both fall, in the short run, the economy will adjust to _______. In the long run, the economy will adjust to _______.

A. B … AB. B … CC. D … A



D

D

B

B


D. D … C




9. Suppose members of the Organization of Petroleum Exporting Countries raise the oil prices, leading to a sharp rise in international oil prices. Which of the following are true for the oil importing countries?(1) There may be stagflation.(2) The aggregate demand curve shifts leftward.(3) The short-run aggregate supply curve shifts leftward.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

10. According to the short-run AS-AD model, if the general price level falls by 5% and nominal wage falls by 3%, which of the following are correct?(1) It is difficult for wages to adjust downward.(2) Real wage increases.(3) Aggregate output is lower than potential output.A. (1) and (2) onlyB. (1) and (3) onlyC. (2) and (3) onlyD. (1), (2) and (3)

11. Suppose the economy is initially at point A. If the price of raw materials falls, in the short run, the economy will adjust to _______. In the long run, the economy will adjust to _______.

A. B … AB. B … C



B

D

C


C. D … AD. D … C




12. Suppose the economy is initially at point E0. If the expected price level rises and firms invest more because of optimistic economic prospects, in the short run, the new equilibrium point is

A. E1

B. E2

C. E3

D. E4



A


II. Short Questions

1. The table below lists the factors which lead to shifts of the long-run and short-run aggregate supply curves. Circle the correct answers. (8 marks)

Long-run aggregate supply curve

Short-run aggregate supply curve

An increase in resources

Shifts rightward /

Remains constant /

Shifts leftward

Shifts rightward /

Remains constant /

Shifts leftward

Advancement in technologyShifts rightward /

Remains constant /

Shifts leftward

Shifts rightward /

Remains constant /

Shifts leftward

Higher wages or higher prices of other resources

Shifts rightward /

Remains constant /

Shifts leftward

Shifts rightward /

Remains constant /

Shifts leftward

A higher expected price levelShifts rightward /

Remains constant /

Shifts leftward

Shifts rightward /

Remains constant /

Shifts leftward

2. What are the differences between the long-run and short-run equilibrium conditions in the AS-AD model? (3 marks)

Short run: The quantity of output supplied equals the quantity of output demanded. (1)

Long run: The quantity of output supplied equals the quantity of output demanded as well as

the potential output. (1)

Long-run equilibrium implies short-run equilibrium, but short-run equilibrium does not imply

long-run equilibrium. (1)



Book 5B, pp.135–136, Qs.1–2 and 4–6.


3. Give three possible reasons to explain why the short-run aggregate supply curve slopes upward. Also, briefly explain why the long-run aggregate supply curve is vertical.(8 marks)

Possible reasons for an upward sloping short-run aggregate supply curve include:

Sticky-price theory: As the price level falls, some firms choose to cut production instead of

price, leading to lower quantity of output supplied. (2)

Sticky-wage theory: As the price level falls, wages are not fully flexible. Firms produce less

due to higher real wage costs, leading to a lower quantity of output supplied. (2)

The misperceptions theory: As the price level falls, firms mistakenly believe that the relative

prices of their goods are lower and thus produce less. Workers mistakenly believe they

have lower real wage and supply less labour. These bring a lower quantity of output

supplied. (2)

Reasons for a vertical long-run aggregate supply curve:

In the long run, both prices and wages can fully adjust, and the misperceptions about the

price level are corrected. Aggregate output equals potential output. (2)




4. With the aid of a diagram, use the AS-AD model to explain why, in the long run, aggregate output is solely determined by aggregate supply, and the price level is determined by aggregate demand. (7 marks)

The long-run aggregate supply is the potential output, which is determined by resources and

technology, independent of the price level. The long-run aggregate supply curve is vertical at

the potential output. (3)

Suppose the long-run aggregate supply curve remains constant. A rise in aggregate demand

will lead to a rise in the price level. A fall in aggregate demand will lead to a fall in the price

level, but aggregate output does not change. (2)

Correct diagram (2)




5. With the aid of a diagram, use the AS-AD model to explain why the long-term economic growth is independent of aggregate demand, and is only determined by resources and technology. (5 marks)

As shown in the diagram below, the long-run aggregate supply curve is a vertical line. The

aggregate output is determined by the long-run aggregate supply curve. Changes in

aggregate demand do not affect aggregate output. Aggregate output increases only when the

long-run aggregate supply curve shifts rightward. (2)

Since the long-run aggregate supply curve is at the potential output, long-term economic

growth is the result of higher potential output caused by more resources or technological

advances. (2)

Correct diagram (1)




III. Structured Questions

Level 11. Suppose the real GDP of Country A in 2009 is lower than that of the previous year.

(a) What changes in aggregate demand will lead to a fall in the country’s real GDP in the short run? Explain with an example. (3 marks)

(b) What changes in aggregate supply will lead to a fall in the country’s real GDP in the short run? Explain with an example. (3 marks)

(a) Aggregate demand falls. (1)

Possible reason: Higher interest rate leads to less consumption and investment

expenditure. (2)

(b) Short-run aggregate supply falls. (1)

Possible reason: Higher wages increase production costs. (2)



Book 5B, p.136, Qs.1–4.


2. The exchange rate of Country A’s currency falls. Answer the following questions using the AS-AD model.(a) How does the above change in the exchange rate affect Country A’s aggregate

demand? Explain. (2 marks)(b) How will the price level and real GDP of Country A change? Explain with the aid of

a diagram. (5 marks)

Hint:

(1) Since the questions only involve short-run analysis, a long-run aggregate supply curve is not

needed.

(2) Will a fall in exchange rate affect the aggregate demand curve and the short-run aggregate

supply curve? Will the curves shift leftward or rightward? Mark the short-run equilibrium

points in the diagram.

(a) Aggregate demand rises. (1)

Lower exchange rates will increase net exports. (1)

(b) The price level rises. (1)

Real GDP rises. (1)

Diagram: rightward shift of the aggregate demand curve, a rise in the price level

and aggregate output. (3)




3. Suppose there is a major breakthrough in the use of renewable energy. How does this affect the long-term economic growth and the price level? Explain with the AS-AD model. (5 marks)

Hint:

(1) Since the question only involves long-term economic growth, only the aggregate demand

curve and the long-run aggregate supply curve are needed.

(2) Will the aggregate demand curve and the long-run aggregate supply curve change? Will the

curves shift leftward or rightward? Mark the long-run equilibrium points in the diagram.

Technological advances and more production resources pushes up potential output. The price

level falls and real GDP rises. (3)

Diagram: a rightward shift of the long-run aggregate supply curve, a fall in the price level

and a rise in real GDP. (2)




Level 24. Suppose Country A was initially in long-run equilibrium. If large-scale enterprises of

Country A expect the profits of the coming quarters to fall, answer the following questions with the AS-AD model, and explain the adjustment process with the aid of a diagram.(a) In the short run, how do real GDP and the price level of Country A change?

(6 marks)(b) In the long run, how do real GDP and the price level of Country A change?

(6 marks)

Hint:

(1) Since the questions involve both long-run and short-run analyses, both long-run and short-

run equilibrium points must be marked. They should be the same point initially.

(2) Short-run changes: Will the above event lead to a change in aggregate demand or short-run

aggregate supply? How will it change? Mark the new short-run equilibrium point in the

diagram and explain.

(3) Long-run changes: Will the short-run aggregate supply curve shift leftward or rightward to

reach long-run equilibrium? Mark the new long-run equilibrium point in the diagram and

explain.

The economy is initially at point A.

(a) Short run: Aggregate demand fall s to AD2. (1)

Due to sticky prices and sticky wages (or misperceptions about the price level), (1)

both the price level and aggregate output move along SAS1 and fall toP2 andY2

respectively. (2)

Correct diagram (2)




(b) Long run: Prices and wages fully adjust downward to clear the market (or the expected

price level falls). (1)

The short-run aggregate supply curve shifts rightward to SAS2. (1)

The price level falls further to P3, (1)

aggregate output returns to the potential output at YF. (1)

Correct diagram (2)




News Commentary Questions

Study the following report on the worsening mainland inflation and answer the questions.

A07 China news Daily News 12 September 2007

Mainland inflation soared 6.5% in AugustA rate not seen for 11 years

Mainland inflation has further worsened. The National Bureau of Statistics of China announced that in August, the Consumer Price Index rose by 6.5%, which was 0.9% higher than the 5.6% recorded in July. This means inflation is at an 11-year high. The prices of food products, which make up most of the CPI, have soared by 18.2%. Of these, the greatest increase was in meat prices, which rose by 49%, while eggs and vegetables rose by over 20%. In response to the rising price of mainland non-staple food exported to Hong Kong during recent months, some local restaurant owners said an average price hike of $1 had been made for meat dim sums.

The rapid growth of the Chinese economy is accompanied by inflation.(a) What is inflation? (2 marks)(b) Use the Quantity Theory of Money to explain the conditions for a simultaneous rise in

real GDP and the general price level. (5 marks)(c) With the aid of a diagram, use the AS-AD model to explain under what conditions the

general price level will rise as the economy grows. (5 marks)

(a) Inflation refers to a persistent increase in the general price level. (2)

(b) Equation of exchange: MV = PY

M = Money supply; V = Velocity of circulation of money;



Book 5B, p.137.

Mainland inflation soared by 6.5% in August, with a sharp rise of 18.2% in food prices.


P = Price level; Y = Real income (1)

Suppose the velocity of circulation of money is constant, %M – %Y = %P (2)

When the growth rate of money supply is higher than that of real GDP, the price level

rises. (2)




(c) As the economy grows, both aggregate demand and the long-run aggregate supply curve

shift rightward, and aggregate output will rise. If aggregate demand has a bigger

rightward shift than the long-run aggregate supply curve, the price level will rise. (3)

Correct diagram (2)



141–148 104–140 74–103

37–73 0–36

一、鞏固你所學 · web viewthe short-run aggregate supply curve shows the relationship...

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