3.1 AD + AS

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9 Terms

1
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Aggregate Demand

Value of all goods and services demanded in the economy

C+G+I+(X-M)

2
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Aggregate Supply

Total amount of output of goods and services that firms in an economy are willing and able to supply at a given time and price level

3
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Shifts of AD (C component) (TWICE)

  • Consumer Confidencce

    • High confidence AD ⬆ and ➡

  • Interest rates

    • Lower IR AD ⬆ and ➡

  • Wealth

    • Richer AD ⬆ and ➡

  • Income Tax

    • Fall in taxes (disp income ⬆) AD ⬆ and ➡

  • Indebtness

    • Low debts, AD ⬆ and ➡

  • Expectations of Future Price Levels

    • Will rise AD ⬆ and ➡

4
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Shifts of AD (I Component) (TL)

  • Technology

    • Better Tech, AD ⬆ and ➡

  • Legal Changes

    • E.g government of EconLand makes it easier for firms to get a loan so more firms get a loan (AKA financial capital)

    • Easy access to finance, AD ⬆ and ➡

5
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Shifts of AD (G Component) (1)

  • Changes in political priorities

    • Increase in gov spending AD ⬆ and ➡

6
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Shifts of AD (X-M Component) (ET)

  • Trade Barriers Imposed by Domestic Gov

    • High protection (domestic) spending AD ⬆ and ➡

  • Exchange Rates

    • Weak domestic currency AD ⬆ and ➡

7
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Shifts in SRAS (SSR)

  • Resource prices

    • Lower COP, AS ⬆ and ➡

  • Subsidies

    • Lower COP, AD ⬆ and ➡

  • Supply shocks

    • AD ⬇ and ⬅

8
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New Classical Model (AD/SRAS/LRAS)

  • SRAS

    • elastic as in short run, prices of resources are fixed

    • e.g takes time to impose minimum wage legislation, and for firms to adjust wages/prices due to inflation

  • LRAS

    • inelastic in long run, as workers and firms realize inflation occurs (distorts their real income) and demand higher nominal wages (constant real wages)

9
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Keynesian Model (AS Curve) 3 sections

  1. Horizontal Section

    • Many resources unemployed, lots of spare capacity

    • Hence firms can easily increase output without having to increase wages and other resource prices

    • Labor contracts prevent wages from falling

  2. Elastic Section

    • More resources used, less spare capacity

    • Hence COP rises, and sells good at higher price

  3. Vertical Section

    • Max. capacity, resource allocation is most efficient

    • COP rises rapidly, so price level rises rapidly