AD/AS Analysis Flashcards
Characteristics of aggregate demand
Consumption
Investment
Government spending
Exports-Imports
How much GDP is capital investment
Between 15-20%
Trade surplus
Adds to AD
Trade deficit
Reducing AD
Capital investment
Spending by businesses and the government on capital goods such as plant and equipment, technology.
What is a small part of investment
The change in the value of stocks
Shocks to aggregate demand (creates shifts)
- fall or rise in the exchange rate
- recession in main trading partners
- slump in the housing market/share prices
- events such as the credit crunch
- cut or rise in interest rates or change in gov taxation/spending
Factors causing a shift in aggregate demand
- expectations
- monetary policy changes
- fiscal policy changes
- economic events in the world economy
- changes in household wealth
- changes in the supply of credit
SRAS
Total planned output when prices change but the prices and productivity of factor inputs remain constant
LRAS
Total planned output when both prices and average wage rates can change
In the long run
LRAS curve is vertical (does not change when the price level changes)
In the short run
SRAS curve is assumed to be upward sloping (responsive to a change in AD reflected in a change in the general price level)
Main cause of a shift in the AS curve
Change in business costs e.g. Labour wages, commodities, exchange rates, gov tax and subsidies
How do exchange rates effect SRAS
A depreciation in the exchange rate (fall) increases the costs of importing raw materials and component supplies from over seas
Why is the exchange rate important for the UK
Because a larger percentage of our components/raw materials/energy are imported
