Studied by 0 people
Looks like no one added any tags here yet for you.
What is aggregate demand?
The total demand in the economy. It measures spending on goods and services by consumers, firms, the government and overseas consumers and firms.
What are reflationary policies?
Policies that increase aggregate demand with the intention of increasing real output and employment
What is aggregate supply?
The quantity of real GDP which is supplied at different price levels in the economy
What are the 4 components of aggregate demand?
consumption, investment, government spending, net exports
What does an aggregate demand diagram look like
pg 328
Why is the AD curve downwards sloping?
o Higher prices lead to a fall in the value of real incomes, so goods and services become less affordable in real terms.
o If there was high inflation in the UK so that the average price level was high, foreign goods would seem relatively cheaper. Therefore, there would be more imports, so the deficit on the current account might increase, and AD would fall.
o High inflation generally means the interest rates will be higher. This will discourage spending, since saving becomes more attractive and borrowing becomes expensive.
What are some factors that will shift the AD curve?
- Higher confidence of consumers and firms
- Lower interest rates
- Lower taxes
- Increase in gov spending
- Depreciation in currency making imports more expensive and exports cheaper
- Wealth effect
- More available credit
What is the wealth effect?
In the UK, most people own their houses. This means that a rise in the price of houses makes people feel wealthier, so they are likely to spend more. This is the wealth effect.
What does an aggregate supply curve look like?
pg 330
What causes movements along the AS curve?
Only changes in the price level, which occur due to changes in AD, lead to movements in the AS curve
What causes shifts in the SRAS curve?
Changes in the conditions of supply
What are some examples of factors that will shift the SRAS curve?
- The cost of employment might change, e.g. wages, taxes, labour productivity
- The cost of other inputs e.g. raw materials, commodity prices, the exchange rate if products are imported
- Government regulation or intervention, such as environmental laws and taxes, and business regulation. Business regulation is sometimes called 'red tape'.
Why is the SRAS curve upwards sloping?
Because supply is assumed to be responsive to a change in AD, which is reflected in the price level
What is short run aggregate supply?
It only covers the period immediately after a change in the price level. It shows the planned output of an economy when prices change, whilst the cost of production and productivity of the factor inputs are kept constant.
What is long run aggregate supply?
When the economy is producing on its production possibility frontier and shows the potential supply of an economy.
Why is the LRAS curve vertical?
Because supply is assumed not to change as the price level changes
What does a rightward shift in the LRAS curve show?
Economic growth
What is macroeconomic equilibrium?
The economy reaches a state of equilibrium when the rate of withdrawals = the rate of injections.
What is an economic shock?
A sudden unexpected event hitting the economy, disturbing either AD (a demand shock) or AS (a supply shock) or sometimes both.
What are some things that may cause the LRAS curve to shift to the right?
- Improvements in technology
- Labour improvements
- Increased productivity of labour, capital and land
How do economic shocks affect AS?
If the economy becomes more productive, or if there is an increase in efficiency, supply will shift to the right. This lowers the average price level and increases national output. If AS shifts inwards, price increases and national output decreases.
How do economic shocks affect AD?
If firms have less confidence or there is a recession, AD might shift inwards. This causes the price level to fall and national output to fall. If AD increases, the price level and level of national output both increase.
