Exam-style question
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AD/AS diagram case on aggregate demand and supply analysis: which option best explains how a demand shock changes real GDP and the price level when spare capacity exists?.
- A.Use a three-step chain: cause changes incentives, incentives change demand or supply behaviour, and the new equilibrium affects welfare or resource allocation.
- B.Short-run and long-run macroeconomic effects are identical.
- C.Aggregate demand is the same as demand in a single product market.
- D.Give a definition of aggregate demand and aggregate supply only, without application, chain of analysis, evaluation or judgement.
Model answer
What a good answer should say
- Correct answer: the option that links a rightward AD shift to higher real output before major inflationary pressure appears.
- The analysis must use both axes of the AD/AS diagram and refer to spare capacity.
Explanation
Why this works
This item tests AD/AS analysis as a diagram framework. The key distinction is between a movement in aggregate demand and the economy?s ability to respond through short-run aggregate supply.
Evaluation depends on spare capacity, slope of SRAS, confidence and import leakage.
Common mistake
No common mistake is linked to this question yet.