4.4.1 the AD/AS model Flashcards
What is aggregate demand?
Total demand in the economy.
What does aggregate demand meaure?
Spending on goods and services by consumers, firms, the government, and overseas consumers and firms.
What are the components of aggregate demand? [4]
- Consumer spending
- Investment
- Government Spending
- Exports minus imports
What are some influences on consumer spending? [2]
- Interest rates
- Consumer confidence
What are influences on investment? [6]
- The rate of economic growth
- Business expectations + confidence
- Demand for exports
- Interest rates
- Access to credit
- Influence of government and regulations
How does the rate of economic growth influence capital investment?
If growth is high then firms will make more revenue, due to higher consumer spending. This means there are more profits to invest.
How do business expectations and confidence influence capital investment?
If firms expect a high rate of return, they will invest more. Expectations about society and politics could affect investment.
What are animal spirits?
This describes the instincts and emotions of human behaviour which drives level of confidence in an economy.
How do demand for exports influence capital investment?
Higher the demand is, more likely a firm will invest as they expect higher sales so they might direct capital goods into markets where consumer demand is increasing.
How do interest rates influence capital investment?
Investment increases as interest rates falls. This means that the cost of borrowing is less.
How do governments and regulations influence capital investment?
Rate of corporation tax is an example. Lower taxes means firms keep more profits, which could encourage investment.
What are some influences of government expenditure? [2]
- Economic growth
- Fiscal policy
What are the main influences on the net trade balance?
- Real income
- Exchange rates
- State of the world economy
- Degree of protectionism
- Non-price factors
How is the AD curve shifted?
By changes in components of AD.
What does aggregate supply show?
The quantity of real GDP which is supplied at different price levels in the economy.
How do price levels occur on an AS curve? What does it do to the curve?
Due to changes in AD and it is the only factor that leads to movements along the AS curve.
When do SRAS shifts occur?
When there are changes in conditions of supply.
What are the main determinants of SRAS? [2]
The price level + production costs.
What are the conditions of supply that can cause SRAS shifts? [4]
- Cost of employment might change
- Cost of other inputs might increase
- Government regulation and intervention
- Net outward migration of workers ‘brain drain’
What are the factors influencing long run AS? [6]
- Technological advances
- Changes in relative productivity
- Changes in education and skills
- Changes in government regulations
- Demographic changes and migration
- Competition policy
How do technological advances influence LRAS?
Economy can produce goods in larger volumes or improve quality of goods and services produced.
How do changes in government regulations influence LRAS?
Could limit how productive and efficient a firm can be.
How do demographic changes + migration influence LRAS?
If there is net inward migration and the majority of the population is of working age, size of labour force is going to be significant, meaning economy can increase output.
How does competition policy influence LRAS?
More competitive market encourages firms to be more efficient and productive.
When does an economy operate at full capactity?
When all resources are fully employed.
What is the result of an economy operating at full capacity? [3]
- Low unemployment rates
- Increases in AD
- Sustainable rates of economic growth
When does the multiplier effect occur?
When there is new demand in an economy, leading to an injection of more income into the circular flow of income, which leads to economic growth.
This leads to more jobs being created, higher averages incomes, more spending and eventually more income is created.
What is a ‘reverse’ multiplier?
Means that a withdrawal of income from the circular flow could lead to an even larger decrease in income for the economy. This could decrease economic growth and potentially lead to a decline in the economy.
