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Dynamic AD-AS Model: Introduction quiz

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  • What are the two main unrealistic assumptions of the traditional AD-AS model?
    The traditional AD-AS model assumes there is no long-run inflation and no long-run economic growth.
  • Why does the traditional AD-AS model struggle with long-term economic predictions?
    Because it assumes economies do not grow or experience inflation over time, which is not true in reality.
  • How does the traditional AD-AS model incorrectly predict recessions?
    It predicts that recessions are often accompanied by falling prices, which rarely happens in modern economies.
  • What is the main improvement of the dynamic AD-AS model over the traditional model?
    The dynamic AD-AS model allows aggregate demand and supply curves to shift over time, reflecting real-world changes.
  • Why is the dynamic AD-AS model called 'dynamic'?
    Because it allows all three curves—aggregate demand, short-run aggregate supply, and long-run aggregate supply—to change over time.
  • What does the long-run aggregate supply curve represent?
    It represents the potential GDP of the economy if it is operating at full employment.
  • What typically causes the long-run aggregate supply curve to shift to the right over time?
    Population growth and technological advances increase the economy's productive capacity.
  • Why does the short-run aggregate supply curve also shift to the right over time?
    For the same reasons as long-run aggregate supply: population growth and technological improvements.
  • What are the main reasons aggregate demand increases over time?
    Rising consumption, increased investment, and higher government spending due to population growth.
  • How does the dynamic AD-AS model address the issue of price levels during recessions?
    It recognizes that prices do not necessarily fall during recessions, unlike the prediction of the traditional model.
  • What does the dynamic AD-AS model show about equilibrium price levels and output?
    It shows how equilibrium price levels and output evolve dynamically over time.
  • Why might government spending increase as the population grows?
    Because it costs more to provide the same basic services to a larger population.
  • How does investment respond to shifts in aggregate supply in the dynamic model?
    As aggregate supply shifts right, businesses see more opportunities and are likely to invest more.
  • What limitation of the traditional AD-AS model is addressed by the dynamic model regarding equilibrium?
    The dynamic model shows that economies do not return to the same equilibrium repeatedly, unlike the traditional model's prediction.
  • What will be discussed in the next lesson about the dynamic AD-AS model?
    How different rates of movement in the curves can lead to various macroeconomic situations.