Aggregate demand and supply

Aggregate Demand

the total demand for final goods and services in an economy domestically at a given time

aggregate demand curve

a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level

Shifts in Aggregate Demand

Wealth, Debt, confidence, taxes, interest rates

4 changes in aggregate demand

Consumer spending, Investments spending, Govt spending, Xnet exports

Increase in demand

a rightward shift of the demand curve

Decrease in demand

a leftward shift of the demand curve

Consumer spending

more wealth=more spending

less wealth=less spending

Investment spending

spending on productive physical capital

Higher expectations=more investments

lower expectations=lower investments

Government spending

more government spending=increase in AD

less govt spending=lower investment

Net Exports (NX)

stronger $= more imports, less exports=decrease in AD

Aggregate Supply

the total value of all goods and services that all firms would produce in a specific period of time at various price levels

short-run aggregate supply curve

a curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms

Short Run Aggregate Supply

At least one resource is fixed and cannot produce more than what is available

sticky wages

wages are fixed

Changes in Aggregate Supply

Political or environmental, Input prices, Productivity/technology, Expected inflation, Government

Increase in SRAS

rightward shift

Decrease in SRAS

leftward shift

Long Run Aggregate Supply

Wages and resource prices are flexible and WILL change as price levels change. Resources are also variable

Aggregate Equilibrium

AD=SRAS

QF

quantity at full employment

GDP surplus

producing more than it is consuming

GDP shortage

AD>AS

inflationary gap (expansionary)

when aggregate output is above potential output

recessionary gap (contractionary)

Short-run GDP behind long-run aggregate supply

Disinflation in aggregate equilibrium

increase in supply

stag inflation

high unemployment and high inflation(decrease in supply)

fiscal policy

govt tools that can be used to fight inflation or unemployment

2 ways to fix it

Taxes and government spending

Taxes

Decrease disposable income, Decrease consumer spending

Government spend

government purchases, transfer payments

expansionary fiscal policy

fiscal policy that increases spending and or decrease taxes

contractionary fiscal policy

decreasing govt spending and/or increasing taxes

crowding out

increased government spending leads to a decreased private spending as higher interest rates make borrowing more expensive.

crowding in

the phenomenon where increased government spending leads to an increase in private sector investment, often due to lower interest rates or improved economic conditions.

Cost push

inflation caused by rising production costs, leading to decreased supply.

Demand pull

inflation caused by increased consumer demand, leading to higher prices.

positive shock

a sudden and unexpected event that significantly affects the economy, often leading to changes in supply or demand.

automatic stabilizers

mechanisms that automatically adjust government spending and taxes in response to economic changes, helping to stabilize the economy. (taxes, unemployment)

Autonomous

Investments that are not dependent on economic conditions, like GDP or income changes