Aggregate Demand and Aggregate Supply

Explain what an economy's aggregate demand is and name its four components, giving an example of each.

Explain what aggregate supply is and mention two factors that can increase it. How does it relate to firms' production costs?

The figure shows the aggregate demand and aggregate supply curves of an imaginary country.

1. a) Read the equilibrium price level and output from the graph.
2. b) Explain in your own words what this macroeconomic equilibrium point means.

Households in a country, optimistic about the future, increase their consumption.

1. a) Which curve shifts and in which direction?
2. b) Explain what happens to the equilibrium output and price level.

Explain the difference between a movement along the aggregate demand curve and a shift of the curve itself. Give an example of a cause for each case.

A coastal autonomous community experiences an intense tourism “boom”: the arrival of foreign visitors doubles in one year, driving up spending on hospitality, transport, and leisure. At the same time, hotels and restaurants expand their facilities and hire thousands of additional workers.

1. a) Graph and explain using the AD-AS model the short-term impact on regional GDP and the general price level. Accurately identify which specific components of aggregate demand have been affected.
2. b) In the medium term, shortages of labor and housing push up required wages and commercial rents throughout the region. Predict how this cost reaction will affect regional aggregate supply and the final macroeconomic equilibrium.
3. c) Design a policy intervention for the regional government to mitigate the risk of overheating and inflation without destroying the employment generated. Justify the pros and cons of your proposal.

Following the collapse of several banking institutions, economic confidence plummets: households increase their savings rate from 6 % to 15 % of their income as a precautionary measure due to fear of unemployment, while firms cancel 30 % of their planned investment projects.

1. a) Represent the shock in the AD-AS model and explain the resulting recession. Justify how the individual, prudent behavior of each household ("saving more during a crisis") ends up collectively causing a drop in sales, more layoffs, and lower aggregate income (the paradox of thrift).
2. b) A business association proposes reducing wages by 10 % as a solution to cut costs so that firms start hiring again. Critically evaluate this proposal: what effect would it have on aggregate supply and what effect on aggregate demand? Would it help exit the recession or worsen the downward spiral of consumption? Justify your answer.

The price of oil doubles, driving up transport and manufacturing costs across the country.

1. a) Which curve is affected and why?
2. b) Analyse the new equilibrium: what happens to output and prices, and what problem does this combination of effects pose?

A pundit firmly states: "All economic growth is always accompanied by inflation; it is impossible for a country to increase its GDP while keeping prices stable or falling."

1. a) Use the AD-AS model to refute this statement. Graphically represent and compare two different ways an economy can grow by 3 % in GDP: one based on an expansionary aggregate demand shock and another based on an expansionary aggregate supply shock. Explain what happens to the price level in each case.
2. b) Assume that the country competes fiercely in international markets with industrial goods. Justify which of the two growth paths strengthens external competitiveness and the real purchasing power of wages more in the long run, and explain what economic policy measures foster this type of growth.