AD & AS Flashcards
AD definition
Total level of planned real spending on goods and services produced within an economy in a given period of time
Components of AD
Consumption
Investment
Government Spending
Net Exports and Imports
Consumption
By Household
Depends on real income that is disposable
Investment
By Firms
On Capital Goods
Depends on cost of borrowing, profit and current economy
G spending
On public and merit goods
Depends on developments in the economy, and political priorities of the G
Net exports and imports
Depends on exchange rate
+ve: trade surplus
-ve: trade deficit
Why AD downward slopping
Wealth effect
- P level decrease
- people’s wealth increase
- purchasing power increase
Interest rate effect
- P level decrease
- D for money decrease
- interest rate decrease
- borrowing for consumption and investment decrease
International effect
- P level decrease
- X more competitive
- demand for net X increase
- X increase
AS definition
AS measures the volume of goods and services produced each year within an economy
SRAS definition
Output that will be supplied in a period of time when price of factors of production have not had time to adjust to changes in AD and the price level
LRAS definition
Output that will be supplied in a period of time when price of factors of production have fully adjusted to changes in AS and the price level
Why AS upward slopping
Profit effect
Cost effect
Misinterpretation effect
