3.2 Variations in economic activity—aggregate demand and aggregate supply

Aggregate demand

the total value of demand for all goods and services in an economy by all stakeholders at different price levels over a time period

Consumption (C)

the total spending by households on goods and services within an economy

Investment (I)

the total spending on capital goods by firms

Government spending (G)

the total spending by the government in the economy, such as public sector salaries

Exports (X)

Imports (M)

interest rates

the cost of borrowing and the reward for saving expressed as a percentage

Aggregate supply

the total value of goods and services produced in an economy at different price levels over a time period

Short-run aggregate supply

shows the relationship between real GDP and the price level in the short run

Long-run aggregate supply

shows the relationship between real GDP and the price level in the long run

Monetarist/New Classical Model

assumption that resource prices are flexible in the long run and eventually adjusts according to changes in the general price level

Keynesian Model

believe that resource prices do not fall in the long run due to labour contracts, minimum wage legislations and trade unions

Inflationary gap (excess AD)

occurs when actual real GDP is greater than the potential level of GDP at full employment level of output

Deflationary/Recessionary gap (insufficient AD)

occurs when actual real GDP is less than the potential level of GDP at full employment level of output

natural rate of unemployment

comprises of frictional unemployment, seasonal unemployment and structural unemployment