Aggregate demand and supply

Define aggregate demand

Total quantity of aggregate output , or rGDP, that all buyers in the economy want to buy at different possible price levels.

Consists of: demand of consumers, demand of business, demand of government, and ned demand of foreigners

What causes change in consumption spending (6)

• Change in consumer confidence (degree of optimism of consumers about future income and economy): Positive feedback

• Changes in interest rate: Negative feedback

• Changes in wealth: positive feedback

• Changes in income tax: Negative feedback

• Expectations of future price levels: Positive feedback

• Changes in level of household indebtedness: Negative feedback

Causes of changes in investment spending (6)

• Changes in business confidence (Degree of optimism among firms about future performance): Positive feedback 

• Changes in interest rates: Negative feedback

• Changes in tech: Positive feedback

• Changes in business tax: Negative feedback

• Level of corporate indebtedness: Negative feedback

• Legal/institutional changes: depends

Causes of change in government spending (2)

• Changes to political priority

• Changes in economic priorities (deliberate efforts to influence AD

Causes of changes in export spending - import spending (3)

• Changes in national income abroad: Positive feedback

• Changes in exchange rate: Negative feedback

• Changes in trade policies

Why do wages not change a lot in short term

• Labour contract fix wage rate

• Minimum wage legislation

• workers and labour unions resist wage cuts

• Wage cuts leads to low morale, inefficiency

Define aggregate supply

Total quantity of goods and services produced in an economy (rGDP) over particular amount of time

Causes in changes in SRAS (5)

• Changes in wage: Negative feedback (assuming PL is constant)

• Changes in non-labour resource price: Negative feedback

• Changes in indirect taxes: Negative feedback

• Changes in subsidy: Positive feedback

• Supply shock

Draw and label Recessionary gap (keynsian + monetarist)

Draw and label Inflationary gap (keynsian + monetarist)

Draw and label potential output (keynsian + monetarist)

Causes of change in LRAS (6)

• Quantity of FOP: Positive feedback

• Quality of FOP: Positive feedback

• Tech improvement: Positive feedback

• Efficiency: Positive feedback

• Institutional changes: eg privatisation

• Rate in natural rate of unemployment: Negative feedback