3.2 Aggregate Demand & Aggregate Supply (components, determinants, shifts, alternative views, equillibrium) Flashcards
aggregate demand
value of total demand for all goods and services in the economy, per time period
reasons for inverse relationship between general price level and aggregate demand
- pigou wealth effect
- keynes’ interest rate effect
- Mundell - Flemmings exchange rate effect
pigou wealth effect
for any given nominal value of income, a lower price level enables households, firms and the government to have greater purchasing power
keynes interest rate effect
fall in general price level causes interest rates to drop, thus boosting the demand for money resulting in greater spending and investment
Mundell- Flemings exchange rate effect
as general price level falls, interest rates also tend to fall, resulting in depreciation of the exchange rate which increases demand for exports and decreases demand for imports
Mundell- Flemings exchange rate effect
as general price level falls, interest rates also tend to fall, resulting in depreciation of the exchange rate which increases demand for exports and decreases demand for imports
components of aggregate demand
- consumption expenditure
- investment expenditure
- government spending
- export earnings - import expenditure
- AD =C + I + G +(X-M)
net exports
measures the difference between the value of the country’s export earnings and import expenditure
difference between AD and GDP
AD = planned/ expected expenditure GDP = actual expenditure
determinants of consumption (AD)
- consumer confidence
- interest rates
- wealth
- income tax
- level of debt
- expectations of future price level
consumer confidence and AD
- more confident consumers = greater consumption level
- changes with business cycle
interest rates and AD
- higher interest rates = lower AD bc less demand for money + more saving, higher loan repayments = less disposable income for consumption and investment
- lower interest rates = demand for money increases
wealth and AD
positive correlation between household wealth and GDP
income and business tax and AD
- higher tax = less income available for consumption and investment
level of debt and AD
- high debt = less money for consumption and investment
expectatioons of future price level and AD
- expect prices to rise = increased AD and vice versa
determinants of investment (AD)
- interest rates
- business confidence
- technology
- business taxes
- level of corporate indebtedness
components of Aggregate demand
- consumption
- investment
- government spending
- net exports
determinants of net exports
- income of trading partners ( downturn in trading partners = fewer export sales and cheaper imports)
- exchange rates (high exchange rates increases demand for imports)
- Trade policies
Aggregate supply
- total amount of goods and services that firms within an economy are willing and able to supply at a given time and at an overall price level
- measures an economy’s potential output
SRAS curve
- total planed national output at different price levels
- holding productivity and costs of factor inputs constant
- relatively price elastic due to flexibility of raw materials and labour
determinants of SRAS
- costs of factors of production
2. indirect taxes
determinants of the costs of factors of production ( AS)
- labour costs
- raw material costs
- exchange rates (rise in exchange rate makes imports less expensive = lower cost of production)
- bureaucracy and admin ( strict policies decrease supply)
slope of the SRAS curve
- depends on degree of spare capacity in the economy
- steeper curve = few underutilized resources
- as national output expands and economy heads towards productive capacity, supply bottlenecks appear making SRAS more inelastic