10.2 Aggregate Demand And Aggregate Supply Analysis Flashcards
What is aggregate demand?
Total planned spending on real output in the economy at different price levels
What is aggregate supply?
The level of real national output that producers are prepared to supply at different price levels
What are reflationary policies?
Policies that increase aggregate demand with the intention of increasing real output and employment
Diagram for aggregate demand
What are the four sectors that make up aggregate demand?
-households
-firms
-gov sector
-overseas sector (exports-imports)
Aggregate supply diagram
Why is the aggregate supply curve upwards sloping?
All firms aim to maximise profit
In the short run, the cost of producing extra units or output increases as firms produce more output
Explain this increasing slope
At p1 the economy’s firms are willing to sell y1
To persuade firms to sell y2 the price level must rise to p2
-higher prices are needed to create higher sales revenues needed to offset the higher production costs that firms incur as they increase output
As the price level in the economy falls what happens to aggregate demand?
It increases
As price level in the economy falls what happens to aggregate supply?
It decreases
Diagram for AD moving right
Real national output increases
Diagram for AS moving left
Real national output decreases
When will the AD curve shift?
If there is a shift in he value in any of the components of AD
(Consumption, investment, gov spending, exports and imports)
What is the AS curve constructed under?
The assumption that all the determinants of AS other than the price level remain unchanged
What does a decrease in AS lead to
Inflation
What is long-run aggregate supply?
The real output that can be supplied when the economy is on its PPF. This is when all the available factors of production are employed and operating at their ‘normal capacity’ level of output
Diagram for a shift of AD along a LRAS curve
In the short run, what does the aggregate supply or real output demand on?
The average price level in the economy
Is aggregate supply affected by price level in the long run?
No, it reflects the economy’s production potential
Diagram for increasing AD when the economy is operating at full capacity
What does short run growth result from?
Temporary fluctuations in aggregate demand
What is the underlying rate of growth?
The long-run average growth rate for a country over a period of time,
What is underlying growth caused by?
The same factors that determine the position of the economy’s PPF (the quantities of capital and labour and other factors of production in the economy and technical progress
(These also determine the position of the LRAS)
Two diagrams to show increasing underling growth
What shifts the economy’s PPF outwards?
Increase in the quantity of available factors of production including labour, improvements of tech that increase the productivity of labour
Diagram for equilibrium national outcome
What is an economic shock ?
An unexpected event hitting the economy. They can be demand or supply side (sometimes both) being favourable or unfavourabl
E.g war on Ukraine negative supply shifts I
