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Dynamic AD-AS Model: Inflation and Recession quiz

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  • What causes inflation in the dynamic AD-AS model?
    Inflation occurs when aggregate demand increases faster than aggregate supply, leading to rising prices as demand outstrips supply.
  • How does the aggregate demand curve shift during inflation in the dynamic AD-AS model?
    The aggregate demand curve shifts significantly to the right, more than the short-run aggregate supply curve.
  • What happens to the price level and GDP when aggregate demand shifts more than short-run aggregate supply?
    The price level increases and GDP also rises, resulting in inflation.
  • In the dynamic AD-AS model, what is the main factor leading to higher price levels during inflation?
    A larger rightward shift in aggregate demand compared to the short-run aggregate supply causes higher price levels.
  • What is the effect of a small shift in short-run aggregate supply compared to a large shift in aggregate demand?
    It results in inflation, with both higher prices and increased GDP.
  • What are the axes on the dynamic AD-AS model graph?
    The y-axis represents the price level, and the x-axis represents real GDP.
  • What three curves are used in the dynamic AD-AS model?
    The model uses the aggregate demand curve, short-run aggregate supply curve, and long-run aggregate supply curve.
  • What major event contributed to the 2007-2009 recession in the dynamic AD-AS model?
    The end of the housing bubble, which led to a small increase in aggregate demand.
  • How did the financial crisis during the 2007-2009 recession affect aggregate demand?
    It limited credit availability, causing aggregate demand to shift only slightly to the right.
  • What supply shock occurred during the 2007-2009 recession, and how did it affect the model?
    Rising oil prices caused a large leftward shift in short-run aggregate supply.
  • How does a supply shock affect short-run and long-run aggregate supply in the dynamic AD-AS model?
    A supply shock affects only the short-run aggregate supply, not the long-run aggregate supply.
  • What happens to equilibrium in the dynamic AD-AS model during a recession?
    The new equilibrium shows higher prices and lower GDP compared to the previous year.
  • How is the 2007-2009 recession represented graphically in the dynamic AD-AS model?
    Aggregate demand shifts slightly right, while short-run aggregate supply shifts significantly left, resulting in higher prices and lower GDP.
  • Why does long-run aggregate supply continue to increase even during a recession?
    Long-run aggregate supply increases due to factors like technology and labor force growth, reflecting rising potential GDP.
  • Where is the short-run equilibrium found in the dynamic AD-AS model during a recession?
    It is at the intersection of the new aggregate demand and short-run aggregate supply curves, showing the effects of the recession.