4.2.2.D - AD/AS Macroeconomic Equilibrium & External Shocks

Aggregate Demand

Total value of goods and services that economic agents are willing and able to buy at any given price level in an economy over a given period of time

Aggregate Supply

Total value of goods and services that producers are willling and able to supply at any given price level in an economy over a given period of time

Macroeconomic Equilibrium

The level of real output at which aggregate demand equals aggregate supply and Real GDP is not changing.

Negative Output Gap (NOG)

When the level of real output/GDP (y1) in the economy is lower than the economy's productive potential (YFE)

Output Gap

The difference between the level of real output/GDP (y1) in the economy and the economy's productive potential (YFE)

Economic Shock

Unexpected event hitting the economy. Can be demand-side or supply-side and favourable or unfavourable

Demand-Side

The impact of changes in aggregate demand on the economy

(anything which shifts AD curve = demand-side shock)

Supply-Side

The change in the potential output of an economy, which is affected by the available factors of production.

- Change in Costs of Production = Shifts SRAS

- Change of QQE of CELL = Shifts LRAS

Demand-pull Inflationary Pressures

Higher demand outpaces available supply, leading to increases in avg price level

Cost-push Inflationary Pressures

Higher production costs leads to firms having to raise prices, leading to increase in avg price level

Evaluation/IDO Points for AD

SCUMCOT

Size (of change)

Confidence (households & firms)

Unexpected (shocks)

Multiplier (size)

Changes (other) / Ceteris Paribus

Output Gap (size)

Time (duration & lag)