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Putting all markets together: AS-AD model

4 important questions on Putting all markets together: AS-AD model

What are the 2 important properties of the AS relation?

1. Given the expected price level, an increase in output leads to an increase in the price level.
2. Given unemployment, an increase in the expected price level leads, one for one, to an increase in the actual price level

What are the 3 characteristics of the short term equilibrium?

1. Intersection of the AS and AD curve. Equilibrium in the labor, goods and financial market.
2. The AS curve is drawn for a given value of Pe. Upward sloping: the higher the Y, the higher the P.
3. the AD curve is drawn for a given value of M, G & T. Downward sloping: the higher the P, the lower the Y.

What's the difference between monetary expansion in the short run and in the medium run?

- In the short run it leads to an increase in output, a decrease in the interest rate and an increase in the price level.
- In the medium run, no effect on output or on the interest rate, only an increase in price level

What happens to the short and medium run when the government runs a budget deficit?

- in the short run: AD curve shifts to the left, lower output for a given price level
- in the medium run: output returns to its natural level, while the interest rate declines further.

The question on the page originate from the summary of the following study material:

Macro

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