Economics- Theme 2.2 + 2.3: Aggregate Demand and Supply

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26 Terms

1

Aggregate Demand

The total level of demand in an economy at a given price level.

<p>The total level of demand in an economy at a given price level.</p>
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2

AD formula

C + I + G + (X-M)

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3

Yield (Y)

Earnings generated and realized on an investment over a particular period of time.

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4

Consumption

Consumer spending on goods and services

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5

Disposable Income

Money consumers have left available after taxes and benefits added.

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6

Investment

Increase in capital stock of an economy, leads to creating of real goods.

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7

Wealth

The value/stock of assets owned

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8

Government Spending

The expenditures of the Government

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9

Fiscal Policy

The use of borrowing, government spending and taxation to manipulate the level of AD and improve macroeconomic performance

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10

Types of Fiscal Policy

Discretionary- Implemented through policy change/ government action Automatic stabilisers- Policies used to offset fluctuations in economic cycle but do not need government intervention or regular policy change.

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11

Purpose of Fiscal Policy

Contractionary- Reduce AD Expansionary- Increase AD

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12

Exports (X)

Spending by foreign consumers on domestic goods and services.

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13

Imports (M)

Spending by domestic consumers on foreign produced goods and services.

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14

Net Trade (X-M)

The difference between the value of exports and imports of an economy.

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15

Exchange rate

The price of a currency in terms of another

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16

Aggregate Supply

The total amount of output of goods and services at a given price level in an economy.

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17

Short-Run Aggregate Supply (SRAS)

At least one factor of production is fixed

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18

Long-Run Aggregate Supply

A curve that shows the potential amount of real output that will be supplied in the economy in the long run at any given overall price level.

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19

SRAS Shifts

Raw Material/ Energy/ Commodity prices- Increase= Inward, Decrease= Outward Exchange Rate- Weak= Inward, Strong= Outward Tax- Increase= Inward, Decrease= Outward

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20

LRAS types

Classical and Keynesian

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21

Classical LRAS

In the Long-Run AS is Inelastic and is determined by supply side policies rather than AD.

<p>In the Long-Run AS is Inelastic and is determined by supply side policies rather than AD.</p>
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22

Relation Between SRAS and LRAS

SRAS will always shift during a boom or recession but will find a way to come back to LRAS (Perfect Inelastic)

<p>SRAS will always shift during a boom or recession but will find a way to come back to LRAS (Perfect Inelastic)</p>
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23

Keynesian LRAS

One Aggregate supply which is determined by the level of spare capacity within the economy.

<p>One Aggregate supply which is determined by the level of spare capacity within the economy.</p>
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24

Spare Capacity

When an economy is not fully utilizing its factors of production.

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25

LRAS shifts

-Change in potential output or productivity -Increase in quantity FOP Increase in Education

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26

Strong Banking/ Financial sector

More money available for investment. Leads to increase in productivity. Therefore, LRAS and SRAS shift outwards.

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