AD/AS Flashcards
Define AD
Aggregate demand(AD) is the total value of goods and services demanded by different groups at a given price level in an economy. It is the sum of the expenditure categories that make up GDP at a specific price level.
Why AD is downward sloping
As prices fall, effective disposable income rises and consumers can buy more goods. Real GDP increases.
AD=C + I + G + NX
At a lower price level:
1) increased spending power. AD+
2) increase in demand for export. NX+, therefore AD+
3) lower interest rates. AD+
Formula of AD
AD = C + I + G + (X - M)
C is consumption expenditure
I stands for investment spending.
G is government expenditure
(X - M) or NX stands for net exports or trade balance.
How components of AD would shift the curve?
4 Components of AD:
C, I, G, NX (X - M)
any change in the components that is not due to changes in the price level leads to a shift of the AD curve.
When a component decreases, AD curve shifts inward
When a component increases, AD curve shifts outward
Determinants:
for C (Consumption) consumer confidence + interest rates - wealth + Income tax - level of household indebtedness +/- expectations of future price levels +
For I (Investment) Interest rates - business confidence + technology + business taxes - level of corporate indebtedness +/-
For G (government expenditures) Fiscal policy
For NX (net exports)
income of trading partners +
exchange rates
trade policies
Define AS
Aggregate supply(AS) refers to the total output that all firms in a country are able to produce at any given price level.
Why the SRAS curve is upward sloping?
The SRAS curve is upward sloping because of sticky wages and prices.
factors that makes SRAS curve shift
A change in the average price level causes a movement along the SRAS curves. Any factor that causes production costs to change will cause SRAS curve to shift. Wage rates - Resource costs - Energy and transportation costs - Government regulation - Business taxes - Business subsidies + Exchange rate 
