Economics- Theme 2.2 + 2.3: Aggregate Demand and Supply

Aggregate Demand

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

AD formula

C + I + G + (X-M)

Yield (Y)

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

Consumption

Consumer spending on goods and services

Disposable Income

Money consumers have left available after taxes and benefits added.

Investment

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

Wealth

The value/stock of assets owned

Government Spending

The expenditures of the Government

Fiscal Policy

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

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.

Purpose of Fiscal Policy

Contractionary- Reduce AD
Expansionary- Increase AD

Exports (X)

Spending by foreign consumers on domestic goods and services.

Imports (M)

Spending by domestic consumers on foreign produced goods and services.

Net Trade (X-M)

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

Exchange rate

The price of a currency in terms of another

Aggregate Supply

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

Short-Run Aggregate Supply (SRAS)

At least one factor of production is fixed

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.

SRAS Shifts

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

LRAS types

Classical and Keynesian

Classical LRAS

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

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)

Keynesian LRAS

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

Spare Capacity

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

LRAS shifts

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

Strong Banking/ Financial sector

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