Gillespie: Foundations of Economics 4e

Put into practice and end of chapter review questions

Chapter 19

Review questions

1. What is shown by aggregate demand?

Total planned expenditure on final goods and services in an economy in a

given time period.

2. What is shown by aggregate supply?

Total planned output of final goods and services in an economy in a given

time period.

3. How might an increase in the aggregate demand affect the equilibrium

price and output in the economy?

If aggregate supply is upward sloping it should lead to an increase in

equilibrium price and output.

4. Explain two factors that might cause an outward shift of the aggregate
supply curve.

An increase in the quantity of resources.

An improvement in the quality of resources.

5. Why might the aggregate supply be price inelastic?

If the economy is near full capacity then price changes may have relatively
little effect on the quantity supplied.

6. Explain two supply-side policies to promote growth.

Investment in training.

Improving the workings of the labour market.

Increase investment in capital and technology.

7. Explain two demand-side policies to promote growth.

Reduce direct taxation to encourage consumption spending to boost demand.

Andrew Gillespie, 2016. All rights reserved.

 Gillespie: Foundations of Economics 4e

Increased government spending to boost demand.

8. Explain why Keynesians think aggregate supply is price elastic.

If the economy is significantly below full employment there will be

underutilised resources and capacity. This means output can increase
relatively easily if prices rise.

9. Explain why Classical economists think aggregate supply is price

inelastic.

If the economy is at full employment then an increase in price cannot easily

increase output and so supply is price inelastic.

10. Should demand-side policies always be used rather than supply-side

policies when a government intervenes in an economy?

It depends on the position of the economy- how close or far from full
employment it is and the effectiveness of different policies.

Put into practice questions

1. Explain why aggregate supply might be price inelastic.

The economy is near full capacity.

2. Explain why aggregate supply might be price elastic.

Economy is well below its capacity e.g. high levels of unemployment.

3. Show the effect of a decrease in aggregate demand on the equilibrium

price level in the economy and the quantity; assume that aggregate
supply is relatively price inelastic.

A fall in price and quantity; most of the effect is on price.

4. Show the effect of an increase in aggregate supply on the equilibrium

price and quantity. Assume that aggregate demand is relatively price
inelastic.

A fall in price and an increase in quantity. Most of the effect will be on price.

5. Explain the difference between demand-side policies and supply-side

policies using diagrams.

Demand side policies focus on influencing aggregate demand.

Andrew Gillespie, 2016. All rights reserved.

 Gillespie: Foundations of Economics 4e

Supply side policies focus on influencing aggregate supply.

6. Imagine the components of aggregate demand are:

Consumption 500 billion

Investment 100 billion

Government spending 200 billion

Import spending 150 billion

Total aggregate demand 900 billion

What is the value of export spending? Explain your answer.

AD= C+I+G+X-M

900=500+100+200+?-150

Exports = 250 billion

7. All things being equal which could have caused the price level to have
fallen from P1 to P2?

a. a fall in interest rates. No.

b. a fall in exports. Yes this reduces aggregate demand.

c. a fall in production costs. No.

d. a fall in taxation rates. No.

Andrew Gillespie, 2016. All rights reserved.