2.2/3 Agregate Demand/ Supply Flashcards
What is Aggregate Demand (AD)?
The ‘Aggregate’ (total) demand/ expenditures in the whole economy at any price level
AD=C+I+G+(X-M)
What effects Consumption (C)? / Consumption function
Interest rates
Consumer confidence
Wealth effect
Availability of credit
Inflation
Composition of households (young people and old people spend more than average)
Depreciation / capital consumption
Value of capital stock depreciates over time as it wears out overtime or is used up
Gross investment
Measures investment before depreciation
Net investment
Gross investment - depreciation
Animal spirits
Business confidence
Term used by John Maynard Keynes in 1930s
Retained profit
Profit that is kept by the firm, not distributed to shareholders
About 7% of industrial and commercial investment in the Uk is financed by retained profit
Higher the retained profit, the higher the investment
Investment function (determinants)
Access to credit
Retained profit
Rate of interest
Animal spirits
Government influence
Regulations
Net trade balance / net exports
Exports - Imports
How much is made by the country
Demand for exports/ imports determinants
Price
Real income in domestic economy
Exchange rate
State of world economy
Degree of protectionism
Non-price factors - next day delivery, quality, etc
How does a stronger pound affect the economy?
Higher the value of the pound, the more expensive exports are for foreigners, and imports will be cheaper for domestics, so AD decreases
SPICED
What happens when the pound gets weaker?
The weaker the pound, the more it buys foreigners on Uk products, so exports increase, but imports are more expensive for domestics, as it buys them less, so imports decrease
So AD will increase
Why is SRAS upwards sloping
In the short run, wage rates and prices are fixed, so if firms want to increase output, they will have to make workers work longer and leads to an increased price in the short run
Why is SRAS price elastic
As in the short run, wages rates are fixed, making workers work more will just give them higher wage earnings, as they work longer, so the increase in price would be fairly small
So it’s price elastic
What’s the classical LRAS?
As LRAS is the productive potential, they believe no matter the PL, they will produce the same amount no matter the price level
The economy is said to be efficient and allocates all it’s resources, even at low price levels
Economy operates at full capacity, so there are no unused factors of production/ resources
Wages and prices are seen as flexible, and markets efficient so that the labour market adjusts to maintain full employment
