Aggregate demand and aggregate supply

What is aggregate demand (AD)?

The sum of all final demand for goods and services produced within the economy at a given price level

What is the formula for AD?

C + I + G + (X-M) (all cause shifts in AD curve)

What is consumption?

All the spending money done by households on goods and services

How does disposable income and wealth affect consumption?

Disposable income is the after-tax incomes of households and therefore if a household as higher disposable income consumption will increase on goods and services

When the value of existing wealth (real assests and financial assests) increases, house holds will tend to spend more on goods and services

How does confidence and real interest rates affect consumption?

If households are confident that their incomes will rise in the future, they will be less likely to save and more likely to spend

Lower interest rates leads to more as savings would become less and appealing and borrowing money to buy goods and services can be done more cheaply

How does household debt and taxation affect consumption?

If consumers increase debt level they can increase spending in short run, but if HH debt is too high C will fall eventually

Higher taxes decreases disposable income and causes C to decrease

What are the three formulas for the multiplier effect and how do you calculate increase in AD?

1 / 1 - MPC

1 / MPW

1 / MPS + MPT + MPM

Times this number by original number given to the economy

What is MPC?

The proportion of an additional unit of income that a person receives which is spent in consumption expenditure

What is MPW?

The proportion of an additional unit of income that a person receives which is withdrawn from the circular flow

What is capital investment?

Spending money on capital goods that will allow increased output of consumer goods and services in the future

What is gross net investment?

Total capital spending

Gross investment minus and estimate for capital consumption

How does real interest rates and business confidence effect investment?

When interest rates are low, firms will be more likely to borrow more money to invest in new capital, and vice verca

If firms are confidence about the level of future demand for their products, they are more likely to invest in capital to increase consumer goods

How does technology and businesses taxes and expectations effect investment?

New technology leads to spur new businesses to invest in it as firms rush to keep their manufacturing techniques as modern and efficient as possible

When firms keep a larger share of their revenue, they may invest more

If firms expect the prices of their goods to be higher in the future then they will be more likely to invest in capital

What is the accelerator effect?

When the demand is high firms may choose to increase spending on new capital goods to increase capacity and output of consumer goods

What is the fiscal policy?

Changes in the levels of taxation and government spending meant to expand or contract the level of AD in a nation to promote macroeconomic objectives, such as full employment

What are the three types of G?

Current spending - wages of NHS staff or teachers

Capital spending - spending on capital goods or infrastructure

Transfer payments - spending by the government that does not result in an exchange of goods and services

What is net trade balance?

The revenue earned from the sale of exports to the rest of the world minus the expenditures made on imports from abroad

What effects the net trade?

Foreign and domestic income - if income rises in other nations, households from other countries will have more disposable income to spend on a country’s exports - however, if domestic income rises demand for imports will increase 

Exchange rate 

Tase and preferences 

What is aggregate supply?

The quantity of goods and services that al producers in an economy are willing and able to supply at given price levels

What is short run aggregate supply and what does SRAS show?

At least one factor of production is fixed (normally capital) meaning the quantity of it can not be changed

SRAS shows how much output the economy can generate in the short-term at each price level

How does taxes affect LRAS?

Less tax means more profit for firms and therefore firms will increase production and supply

How do changes in cost of raw materials and energy effect LRAS?

More expensive to make, less supply as less profit

How do changes in exchange rates effect LRAS?

More expensive tarrifs on imported raw materials and components will decrease LRAS