Economics entrance exam, 2017 E.C. (2025)

Aggregate demand is total planned spending in the economy: consumption, investment, government spending and net exports. Anything that changes one of those four parts shifts the aggregate demand curve. Easy and cheap credit lets households borrow for big purchases and lets firms borrow to invest, so consumption and investment both rise.

The other three choices work on the cost or capacity side of production, so they shift aggregate supply instead. Cost of inputs is the most tempting: it changes what firms are willing to produce at each price level, not what buyers plan to spend.

Textbook: Economics Grade 12, Unit 2 Aggregate Demand and Aggregate Supply Analysis, section 2.1.3 Shifts in the Aggregate Demand Curve (page 30).

Government spending is one of the four parts of aggregate demand. When the government spends more for reasons outside the model, planned spending at every price level goes up, so the aggregate demand curve shifts to the right.

The short run aggregate supply curve slopes upward. Sliding to the right along it gives a higher output and a higher price level at the same time.

Choice D fails because output and the price level move together along an upward sloping supply curve. They cannot rise and fall at the same time.

Textbook: Economics Grade 12, Unit 2, section 2.3.1 Shocks to Aggregate Demand (page 43).

Aggregate supply rises when firms can produce more at the same price level. Better managers plan, organise and use resources more efficiently, so output per unit of input goes up and supply increases.

Each of the other choices reverses the real effect. Costlier imported raw materials cut production, weaker demand for goods does not push firms to produce more, and a technology subsidy lowers costs so it raises production rather than cutting it.

Textbook: Economics Grade 12, Unit 2, section 2.2 Aggregate Supply (page 35).

The short run aggregate supply curve shows how much total output firms are willing to supply at each price level, holding everything else constant. It slopes upward, so a higher price level goes with a larger quantity supplied.

Choice A describes the aggregate demand curve, not supply. Choices B and D both reverse the direction of the relationship.

Textbook: Economics Grade 12, Unit 2, section 2.2.2 The Upward Sloping Aggregate Supply Curve: The Short Run (page 36).

Short run equilibrium is the point where the aggregate demand curve cuts the short run aggregate supply curve. That crossing fixes both the equilibrium price level and equilibrium real output.

Choices A and C describe what happens when the economy is away from equilibrium, so they are adjustments and not the definition. Choice D is tempting, but where short run and long run supply meet only tells you about potential output; it says nothing about demand.

Textbook: Economics Grade 12, Unit 2, section 2.3 Equilibrium of Aggregate Demand and Aggregate Supply (page 41).

Aggregate demand slopes downward and short run aggregate supply slopes upward. Below the equilibrium price level, the quantity demanded is larger than the quantity supplied, so the economy faces a shortage.

Buyers compete for the limited goods and firms raise prices, so the price level climbs back toward equilibrium. Above the equilibrium price level the opposite happens: a surplus forms and the price level falls, which is why choices B and D are wrong.

Textbook: Economics Grade 12, Unit 2, section 2.3 Equilibrium of Aggregate Demand and Aggregate Supply (page 41).