Exercises

What is aggregate demand?

What is aggregate supply?

What does real output in AS-AD model mean?

What does potential output in AS-AD model mean?

Draw an AS-AD diagram in the short run. Indicate the price level and output level.

Draw an AS-AD diagram in the long run. Indicate the price level and output level.

What is inflationary gap?

What is deflationary gap?

What will cause a movement along the AD curve?

What will cause AD curve shift to the right?

What will cause SRAS curve shift to the left?

What will cause LRAS curve shift to the right?

What are the differences between short-run and long-run aggregate supply?

Why AD curve is downward sloping? Explain.

Why SRAS curve is upward sloping? Explain.

What are the differences between inflationary gap and deflationary gap?

What are the differences between domestic goods and foreign goods?

Draw, with an AS-AD diagram, the effect on output when consumption expenditure increases in the short run.

Draw, with an AS-AD diagram, the effect on output when investment expenditure decreases in the short run.

Draw, with an AS-AD diagram, the effect on price level when government expenditure increases in the short run.

Draw, with an AS-AD diagram, the effect on output and price level when government raises the profit tax rate in the short run.

Draw, with an AS-AD diagram, the effect on output and price level when domestic products become more attractive overseas in the short run.

When there is an economic recovery in the country’s major trading partner, AD shifts __________ (leftwards/rightwards) in the short run and SRAS shifts __________ (leftwards/rightwards/does not shift) in the long run.

Suppose the government greatly increases the tax allowance on continuing education. AD shifts __________ (leftwards/rightwards) in the short run, SRAS shifts __________ (leftwards/rightwards/does not shift) in the long run, and LRAS shifts __________ (leftwards/rightwards/does not shift) in the long run.

Deflationary (output) gap will be eliminated by a __________ (leftward/rightward) shift of the aggregate demand curve when the market adjusts from short run equilibrium to long run equilibrium.

The government bought bonds from the public and raised the tax allowance at the same time will lead to a/an ___________ (increase/decrease) in aggregate output.

The government sold bonds to the public and reduced transfer payment to the poor at the same time will lead to a/an ___________ (increase/decrease) in price level.

With an aid of AS-AD diagram, explain the effect on price level and output when consumption expenditure decreases in the short run and the government cuts taxes in the long run.

With an aid of AS-AD diagram, explain the effect on price level and output when investment expenditure increases in the short run and the cost of production decreases in the long run.

With an aid of AS-AD diagram, explain the effect on price level and output when the government cuts the profit tax rate.

With an aid of AS-AD diagram, explain the effect on price level and output when government expenditure decreases.

With an aid of AS-AD diagram, explain the effect on output and price level when domestic products become more attractive overseas.

With an aid of AS-AD diagram, explain the effect on output and price level when imported goods become more desirable to local customers.

With an aid of AS-AD diagram, explain the effect on price level and output when the labour productivity increases in the long run.

With an aid of AS-AD diagram, explain the effect on output when the government reduces the profits tax rate for corporations and raises subsidy for innovation and technology at the same time.

Suppose the incentive to invest increases in the short run. With an aid of AS-AD diagram, suggests a demand-side factor to offset the effect on the price level. Explain.

Suppose the government announces a tax reduction. With an aid of AS-AD diagram, suggests a demand-side factor to offset the effect on the price level. Explain.

In Apr 2020, the WTI crude oil price dropped to a historical low price of -$40/barrel. With an aid of AS-AD diagram, explain the effect on price level and output of the above event.

In 2016-17 Budget, the Financial Secretary proposed to waive business registration fees for 2016-17. At the same time, the personal basic tax allowance was raised from $120 000 to $132 000. With an aid of AS-AD diagram, explain the effect on price level and output of the above event.

In response to the pandemic, the government gives out $10,000 cash to eligible Hong Kong residents. Explain, with an aid of AS-AD diagram, the effect on price level and aggregate output of the policy.