3. AD/AS Flashcards
What is aggregate demand?
Total demand for goods and services produced in an economy over a period of time
What is the relationship between AD and real GDP?
Inverse relationship
Why does the AD curve slope downwards?
- Wealth effect: price level rises lead to less disposable income
- Interest effect: price level rises mean people demanding more loans, increasing interest rate
- International trade effect: rising price mean exports more expensive + imports more competitive, increasing demand
ALL DECREASE AGGREGATE DEMAND
What are the 6 determinants of consumption?
- Level of household indebtedness
- Consumer confidence
- Interest rates
- Wealth
- Income taxes
- Future price expectations
What are 4 determinants of investment?
- Interest rates
- Animal spirits
- Technology
- Corporate taxes
What are the 2 determinants of government expenditure?
- Political priorities: spending depends on governments aims/objectives
- Economic priorities
What are 3 determinants of exports?
- Income of trading partners
- Exchange rates
- Trade policies
What is aggregate supply?
Total volume of goods/services produced in an economy
Why does SRAS slope upwards?
As prices rise, more firms are incentivised to enter the market, increasing output
What are 6 determinants of SRAS?
- Labour costs
- Raw materials
- Interest rates
- Exchange rates
- Income taxes
- Bureaucracy + administration
What do neoclassical economists believe?
Market forces lead to the best outcome for society, so government should not intervene in the allocation of resources
What is the shape of the neoclassical LRAS curve?
- Perfectly inelastic
- In the long run, the economy always operates as Yfe
What causes a shift in the neoclassical LRAS curve?
The quantity and quality of factors of production
What are the 3 stages of keynesian LRAS?
- Keynesian
- Intermediate
- Neoclassical
Describe the keynesian stage
Low levels of output and employment, there is spare capacity in the economy. Firms can increase output without increasing costs
