AD + AS, Circular Flow Flashcards
Define AD
total expenditure on a ccountry’s goods + services at a given price level in a given time period
Determinants of AD
C + I + G + (X-M)
Reasons for downward AD curve
Wealth effect
Trade effect
Interest rate effect
Define 3 different effects on AD
W- as prices rise purchasing power reduces so less demanded
T- as prices rise domestic exports less competitive, less demanded (opposite for foreign imports)
IR- as prices rise interest rates to counter inflation, increasing cost of borrowing and return on savings, less consumption, invesment, more savings
6 determinants of consumption
Level of real-disposable income
Interests rates
Consumer confidence
Wealth (assest prices)
Household debt level
Anticipated inflation
5 determinants of saving
Level of real disposable income
Interest rates
Consumer confidence
Range + trustworthiness of financial instiutions
Tax incentives- ISAs etc.
6 determinants of investment
Interest rates
Level of corporation tax
Business confidence
Capacity utilisation
Rate of growth of technology + competition
Price of capital
3 uses of governement spending
+ examples
Influence level of economy- high levels of unemployment/ recession, GS used to stimulate AD as employment derived demand
Correct market failures + improve AE- subsidising state provsion of merit/ public goods
Reduce inequality + improve equity- transfer payments, social housing
Determinants of net exports (X-M)
Exchange rates
Real disposable income earned abroad
Real disposable income earned at home
Governement restriction on free trade- Tarrifs, Quoatas etc.
Determinants of SRAS
Raw material/ commodity prices
Wages
Indirect taxes- VAT
Relative prices of imported commodities
Define Classical LRAS
Maximum level of output an economy can produce using all FoPs at sustainable levels (productive potential)
Define Keynsian LRAS
Total amount of goods + services producers are willing + able to produce at a given prive level in a given time peiod
Determinants of LRAS
Q + Q of FoPs, Productive efficiency
Labour productivity
Investment
Infrastructure improvements
Competition
Immigration
Institutional structure of economy
Effect on Macro equailibrium
AD shift right
Growth= Y1-> Y2
Unemployment= Reduced, as firms require more workers for extra output
Inflation= Demand pull, greater pressure on existing FoPs, P1-> P2
Trade position= Worsen, exports less competitive, increased growth increases demand for imports
Evaluation of AD shift right
Initial level of activity- level of spare capacity, previous negative output gap reduces inflationary pressure, little effect on trade position
Size of multiplier- large, means any initial increase in AD will lead to a greater increase in growth etc.
Small, means initial increase in spending will need to be larger enough to have any positive effect at all
Effect on Macro equilibrium
LRAS shift right
Growth= Y1-> Y2
Unemployment= increased
Inflation= P2<- P1, deflationary pressure
Trade position= improved
Evaluation of LRAS shift right
Initial level of economic activity- large level of previous spare capacity, shift would have no impact due to unemployment of FoPs being higher
Growth achieved by utilising not increasing them
Define deflationary gap
Difference between current and potential employment within the economy
Define inflationary gap
Where actual growth is higher than potential growth
