3) Aggregate Demand - MMT Flashcards
What does ‘aggregate’ mean?
Means ‘total’ or ‘everything combined’
Define demand
The amount of goods and services that different economic agents are willing and able to buy at a particular price and in a particular time period
What is Aggregate Demand forever known as?
AD
What is AD?
Is a measure of the total (combined) value of every goof and service demanded in an economy over a period of time, so the demand for every single item in the UK that is sold in exchange for money is added together
Why does the aggregate demand curve look exactly like a Micro Demand curve (but with different names on the axis)?
As in Microeconomics, if the prices of goods and services increase then demand for them should decrease, therefore if the overall level of prices in the economy was to increase, then the overall demand for goods and services would decrease, this means that the aggregate demand curve for all goods and services will slope downwards from left to right
What is the price level?
The overall level of prices in an economy
What does an AD diagram look like (in detail)?
1) The vertical axis is now labelled PL for price level
2) The horizontal axis is now labelled Y, Y stands for real income or to be precise Real GDP (for convenience we also measure employment on the Y axis
3) the downward sloping line is now labelled AD, it shows the aggregate or total demand across the full range of goods and services in the economy
Why is the vertical axis labelled PL?
Because we are measuring all goods and devices sold (billions of different ones) , therefore there are billions of different prices, the price level is a term used to describe average prices for all goods and service
What is the relationship between AD and Price Level?
1) This relationship is identical to the relationship between D and P in Micro. As PL increases, AD is expected to contract (move back along the AD line towards the PL axis)
2) if PL decreases we expect AD to expand, move along the AD lines away from the PL axis
Why is it logical that aggregate demand and demand in micro should stay the same?
The law of demand in Micro suggests that nearly all goods and services obey this rule; therefore , when all goods and services are combined (aggregated) the pattern will remain the same
Aggregate demand is… related to the price level within that economy
Inversely
How much of the economy is ‘informal economy’?
10-12%
What is informal economy?
It’s the economy that isn’t tracked in National Income, eg Trade Gifts (like flowers from the garden), Drugs and Cash
Aggregate demand links to…
National Expenditure
