Aggregate demand and Aggregate supply Flashcards
What is aggragete demand ?
total planned spending in an economy over a period of time at any given price level
C + I + G + X - M
What does aggregate demand consider?
the equilibrium position of the macroeconomy in terms of the level of real national income and also the price level at that equilibrium position
Why is the AD curve sloping downwards?
- at lower price level, the value of any assts such as property and shared will increases in real terms. may lead to wealth effect, consumers feel they have higher wealth leader to higher consumption
- at lower price level UK exports more price competitive thus leading to higher level of exports sold abroad
What is the wealth effect?
increases in the value of households assets cause people to feel wealthier and encourage them to spend more of their current income
What is wealth?
refers to the value of the assets held by households
What is the largest componant of AD?
consumption - 70%
What factors effect consumption?
- interest rates
- consumer confidence
- taxation
- wealth
- unemployment
How do interest rates effect consumption?
- higher interest rates increased the reward for savings which reduces consumption
- high IR reduce desirability of households to engage in credit-financed consumption
How does consumer confidence effect consumption?
- if people feel their incomes are about to fall or job is less secure, current consumption will fall in preperation
How does taxation effect consumption?
- changes in tax will impact how much disposable income households have
How does wealth effect consumption?
- if household wealth increases, will have a positive wealth effect on households means they will probably spend more
How does unemployment effect consumption?
- if more people are unemployed and relying on welfare benefits then the level of consumption is likely to be lower
What are the main determinants of the level of investment?
- interest rates
- business confidence
- tax
- technology
- accelerator theory
How do interest rates effect investment?
- increases in IR raise the cost of borrowing and will reduce the profitability of any investment
How does business confidence effect investment?
- if businesses expect that sales will increase in the future they will be more likely to spend money on investment goods in order to increase productive capacity and satisfy future demand
How does tax impact investment?
companies taxed on profits, if tax is lowered businesses will have more of their profits available to spend
How does technology impact investment?
- new tech increases effeciency of production, firms should invest more in tech due to this
- new technologies will generate new markets leading to more ways for firms to invest
What is the accelerator theory?
where increases in national income lead to firms spending more on investment, in order to expand their capacity to exploit the rising income
what will governments spend money on?
- public services
- local government services
- welfare expenditure
- interest on debt
What is gov spending funded by?
taxation
What is a budget balance?
the differance between government spending and the taxation revenue collected
What is a budget deficit?
government expenditure > taxation
What is a budget surplus?
government expenditure < taxation
What are exports and imports effected by?
- exchange rates
- foreign growth
- UK growth
- relative inflation
What is the multiplier process?
how a change in AD leads to a proportionately larger change in overall national income
Why does the multiplier effect occur?
because an extra spending creates income for another person or business. the extra income will in turn be spent again, creating further income
explain the negative multiplier?
a fall in a component of AD will lead to a proportionately larger fall in overall national income
What is aggregate supply?
total quantity of output that all the firms in the economy are willing to produce at any given price level
What is short-run aggregate supply?
how much firms will produce at a given price level in the short term
What is long run aggregate supply?
how much firms will produce in the long run. where an economy is producing its maximum potential output level and will be independent of the price level
What does short run refer to?
period of time during which the prices of factors of production are constant
What causes the SRAS to shift?
- money wage rates
- changes in the cost of raw materials
- business taxation
- productivity
- exchange rate changes
How does money wage rates effect SRAS?
if wage rates to workers increase, firms will be less willing to supply output as it is less profitable to do so. SRAS will shift in
how do changes in raw material costs effect SRAS?
if cost of materials increase, reduce profitability of production, firms less wiling to supply output, higher costs causing SRAS to shift in
Effect of business taxation on SRAS?
changes in indirect taxes will influence profitability of production
How does productivity effect SRAS?
- if productivity increases, firms will find it more profitabke ti supply more and SRAS will shift out
How do changes in ER effect SRAS?
- alter price of imported materials, fall in ER will mean imports are more expensive shifting SRAS to the right
What is long run?
defined as a period of time when the costs of the factors of production may vary
What does LRAS represent?
the maximum amount an economy can produce
What is LRAS determined by?
- technology
- productivity
- factor mobility
- enterprise
- economic incentives and attitudes
How does technology effect LRAS?
- advances in technology increase the amount firms can produce with the same resources
hwo does productivity effect LRAS?
workers become more skilled, become more productive, more produced in same time, increase LRAS
how does factor mobility effect LRAS?
how willing workers are to move around country, or retrain, more willing and able higher LRAS
How does enterprise effect LRAS?
more new businesses will increase capacity of economy, shift LRAS outwards
How do economic incentives and attitudes effect LRAS?
- changes in taxes and benefits can change people attitute towards work
