2.2 2.3 aggregrate demand aggregate supply

formula for aggregate demand

Aggregate demand (AD) is calculated as:

AD = C + I + G + (X - M)

Where:

C = Consumption

I = Investment

G = Government spending

X = Exports

M = Imports

how does disposable income effect consumer spending

- Consumers are likely to buy non-essential items when they have extra income.

- Lower disposable income can lead to reduced spending, causing consumers to prioritize necessities.

- Changes in disposable income can significantly impact overall economic growth and demand in the market.

how can the rate if savings effect consumer spending

- Higher savings rates can lead to reduced consumer spending as individuals hold back on purchases to save more.

- When consumers prioritize saving, demand for goods and services may decline, impacting businesses.

- Conversely, lower savings rates may boost consumer spending, as people are more willing to spend their income

how can interest rates effect consumer spending

- Lower interest rates reduce borrowing costs, encouraging consumers to take loans and spend more.

- Higher interest rates increase borrowing costs, which can lead to decreased consumer spending and lower demand for goods and services.

- Changes in interest rates can influence consumer confidence and willingness to make large purchases, like homes and cars

how can consumer confidence effect consumer spending

- High consumer confidence generally leads to increased consumer spending, as people feel secure in their financial situation.

- When consumers are optimistic about the economy, they are more likely to make larger purchases.

- Low consumer confidence can result in reduced spending, as individuals may prioritize saving in uncertain times.

how can wealth effect consumer spending

- Higher wealth levels typically lead to increased consumer spending, as individuals feel financially secure.

- Wealthier consumers are more likely to spend on luxury goods and services.

- A decrease in wealth can cause consumers to cut back on spending and prioritize essentials.

difference between gross investment and net investment

- Gross investment is the total money spent on new assets.

- Net investment is what’s left after accounting for the loss of value in old assets.

- So, gross shows total spending, and net shows real growth.

how does the rate of economic growth effect investment

- Higher economic growth boosts investment due to expected demand.

- Strong growth increases business confidence and spending.

- Low growth makes businesses hesitant to invest.

how does business confidence effect investment

- High confidence boosts investment.

- Firms expand when they feel secure.

- Low confidence holds back investment.

- Confidence is crucial for investment decisions.

how does animal spirits effect investment

- Animal spirits influence investment through emotions.

- High spirits boost investment due to optimism.

- Low spirits lead to cautious investment.

- They significantly shape investment trends.

how does demand for exports influence investment

- High export demand boosts investment.

- Firms invest to increase production capacity.

- Low demand can reduce investment.

how do interest rates influence investment

- Low rates lower borrowing costs, encouraging investment.

- High rates increase costs, deterring investment.

- The relationship affects overall economic growth.

how does access to credit influence investment

- Easy access encourages borrowing for projects and expansion.

- Limited access restricts investment opportunities.

- Overall, credit availability affects business growth.

how do government regulations influence investment

- Favorable regulations can encourage more investment.

- Strict regulations may increase costs and deter investment.

how does real income effect trade balance

- Higher Real Income: Boosts imports, worsening trade balance.

- Lower Real Income: Reduces imports, improving trade balance.

.

how do exchange rates effect trade balance

- Strong Currency: Exports more expensive; imports cheaper, worsening trade balance.

- Weak Currency: Exports cheaper; imports more expensive, improving trade balance.

- Inflation: Higher inflation can weaken currency, affecting trade dynamics. .

how does state of world economy effect the trade balance

- Global Demand: Increases exports, improves trade balance.

- Recessions: Decrease demand, worsen trade balance.

- Commodity Prices: Affect export revenues and import costs.

- Trade Agreements: Influence trade balance positively or negatively.

how does degree of protectionism effect trade balance

- High Protectionism: Reduces imports, can improve trade balance.

- Tariffs: Increase costs of imports, encouraging local consumption.

- Trade Barriers: Limit foreign competition, benefiting domestic localities

how do non price factors influence the trade balance

- Quality: Higher quality goods attract more exports.

- Brand Reputation: Strong brands can boost sales overseas.

- Consumer Preferences: Changes in tastes affect import and export levels.

what will influence the SRAS of an economy

- Changes in production costs (wages, raw materials)

- Supply chain disruptions (natural disasters, pandemics)

- Government policies (taxes, subsidies)

- Changes in technology (improvements or setbacks)

- Short-term expectations of future prices

- Availability of labor and capital resources

- Seasonal factors affecting production

effect on higher wages on SRAS

- Increased production costs for businesses

- Potential decrease in short run aggregate supply (SRAS)

- Could incentivize firms to invest in labor-saving technology in the long run

a fall in cost of raw materials on SRAS

- Lower production costs

- Increase in short run aggregate supply (SRAS)

- Potential for lower prices and higher demand

- Encourages expansion and hiring for firms

a rise in the value of pound on SRAS

- Increased cost of exports

- Decreased competitiveness of domestic goods abroad

- Potential decrease in short run aggregate supply (SRAS)

- Lower import costs may benefit consumers

- Could lead to trade balance adjustments

a fall in productivity on SRAS

- Increased production costs

- Decrease in short run aggregate supply (SRAS)

- Lower output levels for businesses

- Potential for higher prices due to reduced supply

- May lead to inflationary pressures in the economy

define short run aggregate supply

SRAS is the total output of goods and services at a given price level, with some factors of production fixed. It can change with demand and productivity.

define LRAS

Long-run aggregate supply (LRAS) is the total output an economy can produce when resources are fully utilized, unaffected by the price level.

how do technological advances influence the LRAS of an economy

- Increasing productivity through more efficient production.

- Reducing production costs, encouraging output expansion.

- Creating new products and markets, shifting the LRAS right.

- Enhancing labor force efficiency, leading to higher output.

how will increases in the level of productivity influence LRAS

- Increases productivity, allowing more output with the same resources.

- Shifts LRAS to the right, indicating higher potential output.

- Stimulates economic growth and improves living standards.

- Enhances overall efficiency in the economy.

how does improving standards of education and skills in an economy effect LRAS

- Enhances workforce productivity, leading to increased output.

- Shifts LRAS to the right, indicating higher potential economic growth.

- Fosters innovation and adaptability in the labor market.

- Contributes to higher living standards and economic stability.

government removing regulations to make it easier for businesses to start up effect LRAS

- Encourages entrepreneurship by lowering barriers to entry for new businesses.

- Increases competition, leading to more innovation and efficiency.

- Shifts LRAS to the right, indicating greater potential output.

- Stimulates economic growth and job creation in the economy.

how does a rise in migration of working age people influence LRAS of an economy

- Increases the labor supply, providing more workers for businesses.

- Enhances workforce skills and diversity, contributing to productivity.

- Shifts LRAS to the right, indicating higher potential output.

- Stimulates economic growth through increased consumption and demand.

how do government introudcing new policies which encourage competition and innovation influence LRAS

- Promotes a more dynamic business environment, encouraging new entrants.

- Increases efficiency and productivity as firms strive to outdo each other.

- Shifts LRAS to the right, indicating greater potential output in the economy.

- Fosters innovation, leading to new products and services that drive growth.

how does access to borrowing on credit cards affect consumer consumption

When consumers can borrow on credit, they are able to spend more than their current income allows.leads to higher spending on goods and services. However, if borrowing becomes excessive, it can lead to debt potentially reducing future consumption as consumers allocate more income toward repaying credit card debt.

Factors causing a shift in the Short Run Aggregate Supply curve

Classical LRAS

Keynesian LRAS – rise in AD

Keynesian LRAS – rise in AD