Macroeconomic Equilibrium Theories and Analysis Quiz

Exports are not directly a part of Aggregate Demand; AD comprises consumption, investment, government spending, and net exports.

Labor force participation is a determinant of Aggregate Supply, representing the quantity of labor available for production.

Fiscal policy involves government revenue and expenditure decisions, distinct from monetary policy tools controlled by central banks.

The primary aim of monetary policy is to control inflation by regulating the money supply and interest rates.

When AD surpasses AS, a surplus occurs, driving prices up as demand outpaces supply.

The Keynesian model assumes prices and wages are 'sticky,' meaning they adjust slowly to changes in supply and demand.

The natural rate of unemployment represents the equilibrium rate unaffected by cyclical fluctuations, reflecting frictional and structural aspects.

The Quantity Theory of Money posits a direct relationship between the money supply and the price level, assuming velocity and output remain constant.

The LM curve depicts combinations of interest rates and output levels where the money market is in equilibrium.

The AS-AD model shows how equilibrium output and price level are determined by the intersection of Aggregate Supply and Aggregate Demand curves.

In the Classical Theory, market forces ensure full employment without government intervention.

The Phillips curve shows the trade-off between inflation and unemployment, indicating an inverse relationship.

Crowding out occurs when increased government borrowing leads to reduced funds available for private investment, diminishing private sector spending.

A liquidity trap occurs when nominal interest rates are near zero, limiting the effectiveness of monetary policy to stimulate the economy.

Hysteresis refers to the long-term effects of economic downturns, such as persistently high unemployment rates even after the economy recovers.

In the classical dichotomy, real variables like output and employment are determined by non-monetary factors, while nominal variables are influenced by monetary factors.