AD Curve (C + I + G + NX)
what happens to AD if consumer confidence rises?
AD increases (shifts right).
Why does SRAS slope upward in the short-run?
Sticky Wage Theory — nominal wages don’t adjust quickly.
Why is LRAS vertical?
Long-run output depends on resources (land, labor, capital, technology), not price.
In self-correction, which curve ALWAYS shifts?
SRAS.
Which curve does government intervention shift?
AD. (Only AD shifts with policy)
Which component of AD is affected by interest rate changes?
Investment (I)
If the price level unexpectedly rises, what happens to the real wage (W/P)?
Real wage falls.
What does Y* represent?
Natural rate of output or full-employment output.
If short-run prices are rising, which way will SRAS shift to self-correct?
Left (firms expect higher wages/costs).
What policy is used to fight a recession?
Expansionary policy (raise AD).
What effect does a tax cut have on AD?
AD increases (right).
If real wages fall, what do firms do?
They increase production → quantity supplied rises
Which of the following shifts LRAS?
A) Consumer optimism
B) Immigration
Immigration — increases labor → LRAS shifts right.
If prices fall in the short-run, which way does SRAS shift during self-correction?
Right
Lower interest rates are what type of monetary policy?
Expansionary
According to the Interest Rate Effect, when the price level falls, what happens to investment?
Investment increases because interest rates fall.
A decrease in expected price level causes SRAS to shift which direction?
Right
Right
Does AD affect output in the long run?
No. (Worksheet question 5)
Why does self-correction NOT restore the original price level?
Because SRAS shifts, not AD — long-run equilibrium has a different price level.
Cutting government spending is what type of fiscal policy?
Contractionary
If the Fed lowers interest rates, what happens to AD?
AD increases (shifts right).
In a recession with falling prices, why does SRAS eventually shift right?
Workers accept lower wages → firms’ costs fall → SRAS shifts right.
Name two things that increase long-run output (Y*).
Increases in labor, capital, natural resources, or technology.
In the worksheet, which scenario has no self-correction?
Advances in technology (LRAS & SRAS both shift — no short-run deviation).
In the worksheet, if firms become more optimistic (AD ↑), how would policymakers reverse inflation?
Shift AD left (contractionary monetary or fiscal policy).