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Tutorial Sheet 4.macro.2017

1. The equilibrium price level will be at Pe because it is the point where the aggregate supply (AS) and aggregate demand (AD) curves intersect, indicating both full employment and equilibrium in the market. P1 and P2 are not equilibrium points as they do not represent the situation where quantity supplied equals quantity demanded. 2. The AD curve slopes downward because as the price level increases, consumption and investment spending decrease as the real value of money balances fall, reducing aggregate demand. 3. The short run aggregate supply curve slopes upward because in the short run, producers cannot adjust all inputs and an increase in price encourages greater production up to the full employment level of output. 4

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67 views3 pages

Tutorial Sheet 4.macro.2017

1. The equilibrium price level will be at Pe because it is the point where the aggregate supply (AS) and aggregate demand (AD) curves intersect, indicating both full employment and equilibrium in the market. P1 and P2 are not equilibrium points as they do not represent the situation where quantity supplied equals quantity demanded. 2. The AD curve slopes downward because as the price level increases, consumption and investment spending decrease as the real value of money balances fall, reducing aggregate demand. 3. The short run aggregate supply curve slopes upward because in the short run, producers cannot adjust all inputs and an increase in price encourages greater production up to the full employment level of output. 4

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Cördïî X Cördïî
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© © All Rights Reserved
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UNIT 4

TUTORIAL SHEET #4

1. Given the curves in the graph below, discuss why the equilibrium price level will be at
Pe and not at P1 or P2 ?

AS

P2

Pe

P1
AD

2. Why does the aggregate demand curve slope downwards?

3. Why does the Short run Aggregate Supply curve slope upwards?

4. Why is the Long Run Aggregate Supply curve vertical?

5. Suppose that Aggregate Supply decreases while Aggregate Demand is held constant

a. What will happen to the price level?

b. What will happen to the national output?


6. Look at the above figure.
a) If full employment occurs at 5,000 and the current price level is at 130 what
will happen to the aggregate demand, aggregate supply and price level?
. b) If full employment occurs at 4,000 and the economy at current at output level
of 5,000 then what can be expected of the economy?

7. What type of curve is depicted in the above figure?

8. To which side the curve will shift if the technology improves?

9. What is the aggregate demand curve and what does it represent?


Use the table below to answer question 10.

Output Consumption Investment Net Exports


1000 800 500 100
1500 1200 500 100
2000 1600 500 100
2500 2000 500 100
3000 2400 500 100
3500 2800 500 100
4000 3200 500 100

10 a) What is the equilibrium level of output?

b) At the output level of 4,000 what happens to the inventory level?

c) Up to what level of output, inventories will deplete?

d) Up to what level of output inventories will increase?

11. Explain the following terms

Aggregate Demand Aggregate Supply


Aggregate Demand Curve Aggregate Supply Curve
Equilibrium in the Market economy Inflationary gap
Recessionary gap

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