Macroeconomic Equilibrium (Y12)

Aggregate demand definition

The total planned spending on real output produced within the economy

Short Run Aggregate Supply (SRAS) definition

Aggregate supply when the level of capital is fixed, though the utilisation of existing factors of production can be altered so as to change the level of real output.

Long Run Aggregate Supply (LRAS) definition

Aggregate supply when the economy is producing at its production potential. If more factors of production become available or productivity rises, the LRAS curve shifts to the right

Causes of SRAS shifting right

-fall in business costs (raw materials)
-fall in unit labour costs (wages or productivity changes)
-fall in indirect taxes (like VAT)
-increase in subsidies
-appreciation in the exchange rate

Productive potential

The amount of output an economy could produce if all of its resources were fully and efficiently employed.

Economic cycle diagram

Effects of a positive output gap

- high inflation
- low u/e and working overtime

Recession

a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. (AD left or SRAS left)

OPEC oil crisis 1973

Refusal of Middle East nations to sell oil which caused the price of gas to rise around the world and affected economies drastically through leftward shift in SRAS (higher business costs)

Stagflation

persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

Shift right in Keynesian AS is caused by the same factors that ...

shift LRAS (classical ) rightwards.

An example of a negative supply side shock

Rise in oil prices

Trend rate of growth

The long-run average rate of growth of real GDP (UK 2.5%)

Keynesian Aggregate Supply

Aggregate Supply goes from high levels of spare capacity to low levels of spare capacity as a result of increasing Aggregate Demand.

Yfe

National Income at 'full employment'

full employment

the level of employment reached when unemployment is at a 'natural rate' / when there is no negative output gap (no cyclical unemployment)

Short Run Aggregate Supply diagram

LRAS diagram

Factors of Production

land, labor, capital, enterprise

Shift rights in LRAS caused by

-Progress in technology
-Quantity of labour (immigration)
-Quantity of capital
-Increased labour mobility
-Increased labour productivity (education/training)
-Better incentives to work (less tax/less benefits)
-Better incentives for enterprise (less corporation tax)

Shift LRAS right diagram

Positive Output Gap diagram

Positive Output Gap

The level of actual real output in the economy is greater than the trend output level Y1> YFE

Negative Output Gap

When actual GDP is below the productive potential of the economy. Y1 < Yfe

Effects of a negative output gap

-high unemployment
low growth
low pressure on prices

Great Financial Crisis

The Financial Crisis which led to a worldwide recession in 2008 and 2009

Animal spirits

psychological factors that lead to changes in the mood of consumers or businesses, thereby affecting consumption, investment, and GDP

Macroeconomic Objectives

1) Economic Growth (trend rate 2.5%) 2) Price Stability (Inflation 2%) 3) Low Unemployment 4) Stable Trade Balance 5) Better living standards 6) Lower inequality 7) Control national debt 8) Environmental Sustainability

Economic Shocks

Unpredictable events such as volatile prices for oil, gas and foodstuffs

Macroeconomic equilibirum

AD=AS or AD=SRAS

Aggregate demand formula

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

Consumption

spending by UK households on domestic (UK) goods and services,

Investment

spending on capital goods by firms (includes machines, software and factories)

Government Spending

includes spending by government departments on final goods and services

Net Exports

exports minus imports; X-M

Aggregate demand shifting right on a diagram

Causes of aggregate demand shifting right

-fall in income tax
-fall in corporation tax
-fall in interest rates
-fall in savings ratio
-increase in consumer/business confidence
-increase in govt spending
-depreciation in the value of the £
-increase in welfare spending
-increase in household wealth

Causes of movements (not shift) along AD line

Changes in the price level in an economy