ADAS Flashcards
Define AS
Total output by all firms in an economy
When aggregate supply decreases, which direction does the AS curve shift
Down
What is a change in productive capacity due to
Quantity, quality of resources, level of technology
What does productive capacity mean, what does a change in product capacity do to the AS curve
Ability of economy to produce goods and services
Inward/ outward shift of AS curve
If wages increase faster than an increase in productivity, what direction does AS curve move, what is the type of inflation that occurs?
Downwards, cost push inflation
Why does cost push inflation result in lower real GDP?
Cost push inflation → GPL increases → quantity demanded of consumers decreases → real GDP decreases
How does an increase in wages over productivity affect bot (2)
Aggregate supply declares, GPL increases, price of exports increases, quantity demanded for exports decreases (consider PED)→ total revenue from exports decreases → bot deficit
What happens to a change in RNY on price in the Keynesian range (6 step)
- real national output much lower than full employment level
- abundance of unutilised and under utilised resources
- spare capacity
- rise in agg demand, producers would be able to draw on abundance of spare capacity to increase output production without increasing price of goods and services
- no pressure on GPL to increase
- no increase in GPL
Explain how at the intermediate range, an increase in AD affects GPL (and RNY) - 8 steps
At intermediate range:
- resources (capital goods, raw materials etc CELL) increasingly scarce as production levels rise
- less spare capacity as resources are increasingly employed
- when ad rises, increase in output to meet shortage of goods causes bottlenecks (e.g. shortage of labour)
- firms forced to rely on less efficient resources (like less skilled workers) - difficult to expand output
- rise in prices makes this profitable
- firms incentivised to increase output despite constraints
- responds by increasing prices and increasing output
- RNY and GPL rises
Determinants of AS and where does AS curve shift (5)
- Change in input prices:
- up/down - Change in quality of resources:
- left/right - Change in quality of resources:
- both up/down and left/right - Technological advancements:
- both up/down and left/right - Government policies;
- depends, can be both
Process for change in AD on RNY (10)
- ad increases, shifts from AD0 to AD1
- assuming initial equilibrium,
- disequilibrium as aggregate quantity demanded exceed aggregate quantity supplied
- while all output produced is sold, so that there are no surpluses, not all demand is met
- result in shortages
- unplanned disinvestment
- firms draw down on inventories to meet excess demand, resulting in stock levels falling below optimal levels
- firms thus employ more FOPs to increase production in next production cycle to replenish stocks
- pay out more factor incomes
- RNY (sum of all factor incomes earned by households in economy) increases
Define investment
The acquisition of new capital goods
What is gross investment vs net investment
Gross: total investment (new)
Net investment: - depreciation of investment assets
How does an increase in business confidence lead to an increase in investment, and what does it relate to (wrt MEI)
Increase in business confidence -> expected RoROI increase -> expected net ROI increase -> investment increase (shift of MEI)
What influences an autonomous change in Cd which causes a shift in AD (6)
- Income taxes
- Level of uncertainty
- Interest rates (for lender who is households)
- Interest rate (for borrowers - firms)
- Exchange rate
- Wealth
What is the pathway for a change in income taxes to a shift in AD
- Change in income taxes
- Change in disposable income due to change in PP
- Non-price change in Cd
- Shift of AD
What is the pathway for a change in level of uncertainty leading to a shift in AD
- Change in level of uncertainty
- Change in savings
- Non price change in Cd
- Shift of AD curve
What is the pathway for a change in interest rates to cause a shift in AD (2 ways)
- Households
- change in interest rates -> change in opp cost of consumption for households -> change in S -> non price change in Cd -> shift of AD curve - Firms:
- changes in interest rates -> change in cost of borrowing -> change in Cd -> shift of AD curve
What is the pathway for a change in exchange rates to cause a shift in AD
Change in exchange rates -> change in price of imports -> change in Cd -> shift of AD
What influences an autonomous change in I that causes a shift of AD curve
- Interest rates
- Corporate tax rates
- Economic growth
What is the pathway for a change in interest rates to cause a shift of AD (from I pov)
Change in interest rates -> change in cost of borrowing -> expected ROI change -> net ROI change -> movement along MEI curve -> non price change in I -> shift of AD curve
What is the pathway for a change in corporate tax rates to cause a shift of AD curve?
Change in corporate tax rate -> change in expected ROI -> change in net ROI -> change in I -> shift of AD
What is the pathway for a change in economic growth to cause a shift of AD
Change in economic growth -> change in expected ROI -> change in net ROI -> Change in I -> shift of AD
How does a change in exchange rate lead to a shift of AD (X pov)
Change in exchange rates -> change in price of exports (in foreign currency) -> change in quantity of exports -> change in X -> shift of AD
What factors would cause a shift in LRAS
- quantity of resources
- quality of resources
- level of tech
What factors cause a shift of the SRAS curve
- quantity of resources
- level of productive inefficiency
- indirect taxes
How does a change in quantity of resources lead to a SRAS shift
Change in quantity of resources -> change in level of productivity of economy -> if wages remain constant, change in unit COP -> shift of SRAS curve
How does a change in indirect taxes lead to a shift of SRAS
Change in indirect taxes -> change in supply of FOP -> change in prices of FOP -> change in unit COP -> shift of SRAS curve
Any factor that shifts the LRAS will in turn, shift the SRAS, true or false
True
Explain the process for a rise in AD to affect RNY (assume increase in I) - 10 steps
- Ad rises from AD0 to AD1 as I is a component of AD
- Assuming that economy was initially at equilibrium
- Total expenditure in real terms is higher than real value of production in economy
- While all output is sold, so there are no surpluses, not all demand is met
- Unplanned disinvestment, Firms have to draw down on inventories to meet excess demand
- Resulting in stock levels to fall below optimal levels
- Firms have to increase production in next production cycle to replenish stocks
- Employ more FOP
- Pay out more factor incomes to households
- RNY - sum of all factor incomes earned by households in the economy, rises
Explain the multiplier effect arising from an increase in RNY (8 steps)
- Increase in RNY induces smaller increase in Cd as some of the increase in RNY is leaked out through taxes, savings, imports (withdrawals)
- Rise in Cd causes AD to rise again
- Another round of shortages and unplanned disinvestment
- RNY increases a second round as firms increase production to replenish stocks
- Second round of RNY increases induces an even smaller increase in Cd
- Process continues until cumulative increase in withdrawals (T,S,M) matches initial increase in (whichever aspect of increase in Ad)
- W=J, equilibrium
- RNY would have increased by multiple K of initial increase in (whichever aspect of increase in Ad)
What does a fall in COP encourage firms to do? (Exact phrasing)
Encourages firms to expand output at every level -> shift of AS curve downwards
What is productive capacity?
The maximum output that a country can achieve when all of its scarce resources are fully and efficiently employed
What are the 3 benefits of economic growth
- Higher current and future material and non-material SOL
- Decrease in demand-deficient (cyclical( unemployment
- Higher capacity to redistribute wealth
What are the 3 costs of economic growth
- Overheating economy and demand pull inflation — hurts export competitiveness and leads to uncertainty for investors
- Unequal and inequitable distribution of income — economic growth beneficiaries are usually skilled workers and minority rich (who benefit from higher incomes and dividends)
- Negative externalities and environmental costs — unsustainable growth in LR
What is meant by a health economic growth rate
- not too fast to create high inflation
- not too slow to create a recession
