Aggregate Demand - Quiz One [ncea Level Two Economics]

A deflationary [recessionary] gap occurs when the equilibrium income, employment, and output in an economy are below the full employment level. This means that the economy is not operating at its maximum potential and there is a gap between the actual output and the potential output. This situation is characterized by high unemployment rates, low consumer spending, and overall economic stagnation.

The correct answer is true because aggregate demand refers to the total demand for final goods and services in an economy at a specific time and price level. It represents the overall economic activity in the country.

Interest rate changes can have a significant impact on the Aggregate Demand curve because they affect the cost of borrowing for households and firms. When interest rates decrease, borrowing becomes cheaper, which encourages households to increase their spending on goods and services and firms to invest more in new projects. This leads to an increase in aggregate demand, as both consumption and investment spending rise. Conversely, when interest rates increase, borrowing becomes more expensive, leading to a decrease in spending and investment, which in turn reduces aggregate demand. Therefore, it is true that interest rate changes have a major impact on the Aggregate Demand curve.

The statement is true because shifts in the Aggregate Demand curve are influenced by the level of spending by major sectors of the economy. When sectors like households, businesses, government, and foreign entities increase their spending, it leads to an increase in aggregate demand, resulting in a rightward shift of the curve. Conversely, if spending decreases, it leads to a decrease in aggregate demand and a leftward shift of the curve. Therefore, the level of spending by major sectors has a direct impact on shifts in the Aggregate Demand curve.

The statement is true because in the aggregate demand and aggregate supply model, when there is full employment and all resources are fully employed, it means that the economy is operating at its maximum potential. This implies that firms are utilizing all available resources and producing at their maximum capacity, leading to optimal economic output.

In response to an inflationary gap, firms will compete for scarce labor, leading to an increase in wages. This increase in wages will cause the aggregate supply (AS) curve to shift to AS1, which represents the long-run aggregate supply curve. The long-run aggregate supply curve is vertical at the full employment level of output (Yf). Therefore, the inflationary gap will be eliminated as the economy adjusts to full employment.

Aggregate Demand consists of total consumption spending by consumers, total investment spending by firms and government, total government spending, and net exports (exports - imports).

The correct answer is "Provide insights into the operation of an economy" and "Aid in understanding changes in the price level [inflation], real output [GDP], employment, and unemployment." The Aggregate Demand and Aggregate Supply economic model is a tool used by economists to analyze and understand how changes in the overall demand and supply of goods and services in an economy affect various economic variables such as inflation, GDP, employment, and unemployment. It provides insights into the functioning of an economy and helps in understanding the relationships between different economic factors.

Aggregate Demand will shift to the left if consumption spending decreases due to income tax increasing because individuals will have less disposable income to spend on goods and services. Investment spending will also decrease due to a lack of business confidence, as businesses will be less willing to make long-term investments. Additionally, if the government has a budget surplus and spends less than it receives in revenue, this will lead to a decrease in government spending, which will further reduce aggregate demand. Finally, if net exports fall, this means that the value of exports is decreasing or the value of imports is increasing, which will also lead to a decrease in aggregate demand.

The correct answer is that an inflationary gap occurs when equilibrium income, output, and employment are above the full employment level. This means that the economy is operating at a level of output beyond its long-run capacity. In order to meet the increased demand, firms may produce the required quantity by working longer hours and paying overtime to workers.