AD and AS Flashcards
What is Aggregate demand?
It is the total spending in an economy on goods and services at a given period of time.
What is the AD fromula?
AD = C + I + G + (X-M)
What are the factors affecting consumption?
01 ) Disposable income - As income level rises ppl may want to spend more and vice versa
02) Interest rates - higher interest rates will discourage burrowings and therefore reduce consumption
03) Household wealth - When wealth increases, people’s confidence will rise.
04) Availability of credit
05) Expectation of price
06) Consumer confidence
What factors affect investment?
01 ) Rate of interest
02) Advancements in technology - improves efficiency will help increase returns on investments
03) Cost of capital goods - If they rise, and the firm is unable to charge high prices, then the return on investment will fall
04) Government policy - Government can provide grants or cut corporate tax
05) Profit expectations-
What does a government spend on?
Public goods, merit goods, infrastructure, education, healthcare, social protection, and defense.
Which factors affect exports and imports?
Exchange rate
competitiveness
Price and quality
Trade restrictions
Domestic GDP
The elasticity
What does the AD curve look like?
Why does the AD curve slope downwards?
01)Interest rate effect - At a lower price level, interest rates usually fall and this will cause an increase in AD, as the cost of borrowing is low.
02)Purchasing power - at a lower price level, people’s purchasing power is high.
03)International trade effect - If domestic prices rise, people will switch to imports which are cheap and there’d be less demand for domestic goods.
What causes movements along the AD curve?
Changes in the general price levels.
What would cause a shift in the aggregate demand curve?
01) Gross domestic product - When the GDP of an economy increases the AD curve will shift to the right.
02) Savings - An increase in savings will lead to a decrease in consumption, causing the AD curve to shift to the left.
03) Interest rates - Changes in int. rates will affect investment.
04) consumer confidence - When consumers lose faith in their economy. AD falls.
05) Advancements in technology - It reduces the cost of production, and investment will increase.
06) Changes in exchange rates
What would cause the AD curve to shift to the right?
01) Lower interest rates
02) Increased availability of credit
03) Currency depreciation - more exports, lower imports
04) Advancements in tech
What would cause AD to shift to the left?
01) Rise in interest rates
02) Decreased availability of credit
03) outdated technology use
04) currency appreciation
What is Aggregate supply?
It is the total production of goods and services, producers are willing to supply in an economy at different price levels.
Why is the short-run aggregate supply curve price elastic?
It is elastic as firms can get workers to work overtime. Therefore in the short run, the increased output will lead to increased costs and thus an increase in price but this increase would be small, given constant prices.
What will cause shifts in the SRAS curve?
01) Costs of production - Wages, raw materials, oil prices
02) Business taxes
03) Business Regulations
04) Import prices of raw materials and manufactured goods
04)Changes in factor productivity; an increase in labor productivity will increase supply in the short run and the long run.
05) Changes in the number of resources
These changes can happen quickly, this is called a supply-side shock.
What does the Keynesian LRAS curve look like?
