AD and AS Flashcards
Characteristics of AD
Government spending +Consumption + investment + (x-m)
Why is the AD curve downwards sloping
-Lower prices in an economy increases international competitiveness meaning there is lower imports and higher exports
At higher price levels interest rates increases, this encourages saving and may reduce spending and investment
Real balance effect - Total expenditure largely remains the same, so if price falls people will still spend the same amount on a larger quanitity of goods
At higher price levels intrest rates aew likely to be raised by monetray authorities meaning investment may fall, consumtpion decrease therefore AD contracts
At a lower price level, consumers are likely to have higher disposable income and therefore spend more ( this assumes wages are not falling with price, evaluation)
Consumption, and what effects it
Main component of AD
Effected by disposable income, which is effected by wages and tax
People tend to spend less proportionally as income rises
Increased Confidence of consumers leads to higher consumption
Interest rates, reduces spending as people have to may more on loans and are more likely to save
Housing market- if house prices soare home owners can extract more equity from their houses so spend more ( wealth effect)
Distrubtion of income- rich people save more propotionally so if money moves from rich to poor spending will increase
Tastes and attitudes- strong 21st centuary materilastic attitude encourages people to spend
investment, and what effects it
Increase in capital stocks Interest rates- investment often relies on borrowing, cost of borrowing is high if interest rates are high Profits of business Taxation, limits funds Government policy, could stimulate consumer spending Exchange rate Access to credit New technology Business confidence , future sales
Influences on Government expenditure
Main influence is the trade cycle
Fiscal policy- deliberate manipulation of government spending and taxation in order to influence AD
What is Net trade effected by
Exports are an injection into the economy
Imports mean there is an outflow of money
Changes in real incomes- more income=more spending=more imports
Changes in global economy- recession in US means they will buy less uk exports
Degree of protectionism- tariffs on certain countries
Non price factors- like quality
Exchange rate- increase in the value of UK currency = more imports as they are cheaper
AS
Amount firms are willing to produce at various price levels
Influenced by productivity: cost of production, level of investment, availability and efficiency of the factors of production and supply side policy
Shift in supply curve
Change in costs of raw materials, wages, exchange rate, Intrest rates, indirect taxes, or productive potential
Factors that shift SRAS
External shocks, shift supply up or down
Costs of raw materials
Exchange rates
Tax rates
Factors influencing LRAS (labour market)
Relative productivity
Changes in education and skills - occupational mobility
Demographic changes and migration - geographical mobility
Health spending increases, people should spend less time off sick
Factors influencing LRAS (product market)
Technological advances
Changes in government regulation, postal market
Competition policy and reduction in barriers to international trade- as a country opens up more trade increase competition drives prices down and increases efficiency
What is MPC
Marginal propensity to consume = change in consumption/ change in income
Poorer people have a higher mpc whilst richer people have a higher MPS
Some people may have an MPC of more than 1 as they borrow or use savings to spend
Influences on investment
Intrest rates
Profits of businesses
Taxation - if cooperation tax is high profits are lower
Goverment policy- if government policy encourages consumer spending e.g cutting taxes
Exchange rates - low exchange rates makes exports cheaper meaning there is greater demand for them, firms increase investment as there is greater prospect of making profits
Access to credit - no credit no loans no investment
New technology- if new technology does not increase output or efficency investment will not occur
Buisness confidence- if ecnomic growth looks good, other businesses are investing and market is moving how the business expects it to the economy will grow
Animal spirits - if one business invests so will others
Factors that influcence goverment expenditure
Trade cycle
During “booms” economic growth is fast and above trend, goverment recive more tax payments and dont need to spend as much, will be in surplus
During reccesions the real output of the economy falls and there is negative economic growth, during reccesions goverment will spend to try and stimulate the economy
This will increase govermemt deficit
Fiscal policy
Demand side policy - works on influencing AD
Implemented through 1 off policy changes
Goverment use exapnisonary fiscal policy during periods of economic decline this invloves: increasing spending or reducing tax
During periods of econmoic growth goverment use contractionary fiscal policy to reduce the size of goverment budget deficit and to counterbalance inflation
Main influcences on Net trade
Real incomes - during periods of economic growth people consume more so buy more imports so there is a larger deficit on the current account. And vice versa
Exchange rates - depreiation of the pound means our exports become realively cheaper to other countries meaning our exports increase leading to an increase on the current account (evaluation - which currency it depreiates against, dollar is more significant than random currency)
State of world economy - if uks main trading partners are struggling they will import less meaning our imports fall
Degree of protectionsim - act of guarding a countrys industries from foreign compeition e,g tarrifs or quotas. Trade deficit will reduce becuase uk consumers will import less due to increased prices due to tarrifs. However tarrifs will envoke a response from other countires decreasimg our exports
Non price factors - quality , after sales service
