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Worksheet (Part A)

DSME 1040C

Flipped Classroom Activity: Aggregate Demand and Aggregate


A. Review Questions
(i) Aggregate Demand

1a. Aggregate demand is the sum of the demands from private consumption
expenditure, private investment expenditure, government ________ and
________ with trading partners.

1b. The Aggregate demand curve slopes ________ as ______ of these expenditure
components are negatively related to the price level.

2. The aggregate demand curve shows the relationship between ______ and

3. According to the wealth effect, when the price level falls, the ________ value of
household wealth rises, ________ increases as a result.

4. According to the interest rate effect, when the price level increases, money
________ will shift to the right as consumers need more ________ for the same
basket of goods consumption.

5. According to the interest rate effect, a higher price level ______ the interest
rate and lowers investment and ________.

6. When the price level falls, government purchase ________.

7. When the price level increases, HK-made goods are ________ to foreign
buyers. Net exports ________ as a result.
8. According to the exchange rate effect, when the price level increases, the
interest rate ________, leading to currency appreciation. Net exports ______ as
a result.

9. Explain how a higher income-tax rate will affect the aggregate demand curve.

10. In Dec 2015, the Federal Reserve Board Open Market Committee raised the
target range for the federal funds rate from 1/4 to 1/2 percent. It was the first
hike in more than seven years. Explain how a higher interest rate affects the
aggregate demand curve.

(ii) Aggregate Supply

11. The long-run-aggregate-supply curve (LRAS) is vertical. It touches the x-axis

at ________.

12. Potential GDP is defined as the output level where ________.

13. LRAS shifts when ________.

14. The short-run-aggregate-supply curve (SRAS) slopes ________, meaning that

the price level P is positively related to the aggregate quantity supplied (Y S).

15. Classical economists believe that product prices and wages are ________. On
the contrary, Keynesian economists believe that prices and wages are

16. Are you willing to take a wage cut? Why or why not?

17. In an economy where wage is sticky, what happens to the aggregate-

quantity-supplied when price level falls?

18. Give an example of SRAS shift.

(iii) Adjustment to the Long Run Equilibrium

19. In the ________ run, wage is assumed to be sticky in a simple ADAS model like
ours. The adjustment from SR to LR comes from changes in the ________

20a. In particular, when output is less than the full-employment level, wages (and
other input prices) will ________. The ________ curve will shift to the ________ as
a result.

20b. The adjustment to long-run equilibrium ends when ________.

21. SR equilibrium is the intersection of ________ and ________ curves. An economy
is always in ________ equilibrium.

22. LR equilibrium is the intersection of ________.