Aggregate demand etc

1. Material vs. Non-Material Living Standards

  • Material Living Standards: Determined by access to goods and services, income levels, employment rates, and GDP per capita.

  • Non-Material Living Standards: Includes quality of life factors like happiness, health, environmental quality, crime rates, and leisure time.

  • Trade-offs: Improving material living standards may negatively impact non-material ones, such as environmental degradation or social stress.

2. Economic Activity and Living Standards

  • Economic Activity: The process of producing goods and services to meet societal needs.

  • Measurement: GDP per capita is a key indicator, but other factors like wealth distribution and unemployment also influence actual living standards.

  • Effects on Living Standards:

    • Higher economic activity raises income but can harm the environment.

    • Balanced growth can improve both material and non-material aspects.

3. The Business Cycle

  • Four Phases:

    • Expansion: Rising GDP, employment, and inflation.

    • Peak: Maximum GDP growth, low unemployment, high inflation.

    • Contraction: Slowing GDP growth, rising unemployment, falling inflation.

    • Trough (Recession if prolonged): Lowest economic activity, high unemployment, deflation possible.

  • Stagflation: A rare scenario where high inflation and high unemployment coexist.

4. The Circular Flow Model

  • Five Sectors:

    • Households: Supply labor and consume goods.

    • Businesses: Produce goods and services.

    • Government: Collects taxes and provides public goods.

    • Financial Institutions: Facilitate investment and savings.

    • Overseas Sector: Trade with foreign economies.

  • Key Flows:

    • Leakages: Savings, taxes, imports (reduce spending).

    • Injections: Investment, government spending, exports (boost spending).

5. Aggregate Demand (AD) and Its Drivers

  • Definition: Total spending on goods and services (AD = C + I + G + X - M).

  • Key Influences:

    • Consumer & Business Confidence: Higher confidence increases spending.

    • Interest Rates: Higher rates discourage borrowing and spending.

    • Government Policies: Budget surpluses reduce AD, deficits boost AD.

    • Exchange Rates: Weaker currency boosts exports, stronger one reduces them.

    • Overseas Growth: Higher growth abroad increases demand for exports.

6. Aggregate Supply (AS) and Its Drivers

  • Definition: Total supply of goods and services in the economy.

  • Key Influences:

    • Resources Availability: More skilled labor and capital boost AS.

    • Production Costs: Lower costs improve profitability and expand AS.

    • Technology & Productivity: Increases efficiency and potential GDP.

    • Regulations & Policies: Can either support or restrict economic activity.

    • Climate & Supply Chains: Natural disasters and disruptions impact AS.

7. Policy and Economic Stability

  • Macroeconomic Goals:

    • Sustainable economic growth (around 3% GDP growth per year).

    • Low unemployment (4-4.5% is ideal).

    • Low inflation (2-3% annual target).

  • Government’s Role:

    • Fiscal policy (spending and taxation) to influence AD.

    • Monetary policy (interest rates) to regulate inflation and growth.

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