Answer Happy

Economists use the model of aggregate supply and aggregate demand (AS-AD model) to explain short run fluctuations of GDP around its long run trend. iv) Explain why, in the AS-AD model, the long run aggregate supply curve is fixed or vertical. [10 marks] v) List and briefly explain the three reasons why, in the AS-AD model, the aggregate demand curve is downward sloping. [15 marks] vi) What is stagflation? With the aid of a diagram, explain how a decrease in short run aggregate supply results in stagflation. [20 marks] vii) When an economy experiences stagflation, the government may decide to use fiscal policy to shift the aggregate demand (AD) curve. When they do this by increasing government spending, there is a crowding out effect. Explain what this means. [20 marks]