Aggregate Demand And Aggregate Supply Flashcards
Aggregate demand
Total level of planned real expenditure on the goods and services produced within a country
Aggregate supply
The quantity of goods and services that producers in an economy are willing and able to supply at given level of prices
Short-run aggregate supply
The relationship between planned national output and the general price level
shows how much output the economy can generate in the short-term at each price level
-rise in GPL should stimulate an expansion of supply
-when prices are falling, production may contract
What affects changes in short-run aggregate supply
- changes in resource prices
- business taxes, subsidies, regulations and imported costs
- supply shocks
Equilibrium
Where AD equals SRAS
Long-run aggregate supply
the ability of an economy to produce goods and services to meet demand is based on the state of production technology and the availibility and quality of factor inputs
The relationship between real GDP and general price level
What effects long-run aggregate supply
Anything that increases quantity or quality of the factors of production, e.g. land, labour, capital, enterprise will shift LRAS to the right
Negative output gap
Occurs when actual output is less than what an economy could produce at full capacity
Positive output gap
Occurs when actual output is more than full capacity output
Components of aggregate demand
C+I+G+(X-M)
- C = houshold spending on goods and services
- I = capital investment spending
- G = Government consumption / public services
- X = exports of goods and services
- M = imports of goods and services
Aggregate demand curve
A rise in price level causes a contraction of AD
A fall in price level causes an expansion of AD
Wealth effect
As price level rises, the real value of income falls and customers are less able to buy what they want or need - this is known as the real balance effect
Balance of trade
A persistent rise in the price level of country X could make foreign-produced goods and services cheaper, causing a fall in exports and a rise in importa
Interest rate effect
If the price level rises, this cause in inflation and an increase in demand for money and a possible rise in interest rates on loans which then has a deflationary effect on customers and business demand
What causes a fall in aggregate demand
Fall in exports
Cut in government spending
Decline in household spending
Higher interest rates
What causes an increase in aggregate demand
Depreciation in exchange rate
Cuts in direct/ indirect taxes
Increase in house prices
Expansion of credit and lower rates
Key causes of shifts in aggregate demand
- changes to monetary policy:
Changes in interest rates/ supply of money and credit/ value of exchange rate - changes to government fiscal policy:
Changes in level of taxes/ spending/ borrowing - business and customer confidence:
Planned capital investment spending by a business/ customer confidence and retail spending
external shocks definition
Many unexpected events cause changes to demand, output and unemployment. These events are called external socks
External shocks to aggregate demand
- A large rise in value of the exchange rate
- A recession, slowdown or boom in one or more of a nations key trading partners
-a slump in housing market/ construction sector
-an evet such as the global financial crisis which caused a fall in the supply of credit available to businesses and households
-a large change in commodity prices for a countrythat is a commodity and exporter
Disposable income
income after taxes/ benefits
household savings
occurs when people decide to postpone their consumption till a future time
saving is a households disposable income that is not spent, i.e. deferred spending
ways to save money
-accounts in banks
- building society accounts
- savings in pensions/ stock market
saving ratio
the percentage of disposable income saved rather than spent
A high savings ratio lowers consumption and aggregate demand
Base intrest rate
set by the bank of england, its the rate of intrest used by commercial banks as a basis for their lending rates
FTSE-100 index
tracks the share-prices of the 100 largest companies listed on the London Stock Exchange
Unemployment
Someone who is either out of work and actively lokking for a jobor out of work and waiting to strak a job in the next two weeks
Value added tax (VAT)
A tax on consumption, whoch is paid to the tax authorities by the seller on behalf of the consumer
Macroeconomic importance of saving
Business survival
Business survival:
-corporate savings provide a cushion during a recession
-Business savings can be used as finance for takeovers and for capital investment projects
Macroeconomic importance of saving
Funding investment
Banks need deposits from which they van lend
Savings flow into pension funds - there can be reinvested in stock markets providing investment funds
Macroeconomic importance of saving
Buffer for customers
Savings can smooth consumption during tough times
They allow people to reduce their debts
Savings are a key source of retirement income
Real intrest rate
( factors affecting household savings)
= nominal intrest rate adjusted for inflation, a positive real intrest rate incentives saving
affects household saving
Price Expectations
( factors affecting household savings)
If consumers expect prices to fall, i.e. deflation, they may choose to save more now
Unemployment/job secuirity
( factors affecting household savings)
when unemployment is rising, many people save as a precaution
household savings increase
Availibility of credit
( factors affecting household savings)
Consumer borrowing counts of dis-saving ( spending > current income
Credit
when banks make a loan it creates credit. The loan results in the creation of an advance, which is an asset on the banks balance sheet, and a deposit, which is a liability to the bank
Consumer confidence/ expectations/ uncertainty
( factors affecting household savings)
When consumer confidence is strong, people are more will to borrow and save less
Taxation of savings
( factors affecting household savings)
Interest on many types of savings is taxed, some saving schemes are tax-free or low-tax
Trust in saving institutions
( factors affecting household savings)
Deposit guarantees can encourage a higher level of household saving in banks
Need to pay back debt
( factors affecting household savings)
Short-term saving to repay credit card bills or save for a mortgage deposit
Ntional income multiplier effect
The effect on national income and product of an exogenous increase of demnad
Gross investment
the total investment on new capital inputs
the total amount that the economy spends on new capital
net investment
= gross investment adjusted for capital consumption
some new investment needed each year to replace worn out machinery
if gross investment in a given year is higher than capital consumption, then net investment will be positive and the economies capital stock will grow
Key factor determining business investment
-Actual and expected demand
- Expected profits and business taxes
- intrest rates and availibility of business finance
- Business confidence i.e. animal spirits
Implications of a rise in business investment
A higher level of investment can raise both actaul and potencial GDP growrh and help to control inflationary pressures
short-run aggregate supply curve
The SRAS curve is upward sloping as higher prices for goods and services make output more profitable and enable businesses to expand production by hiring extra labour and other resource
rise in price = expansion of AS
fall in price = contraction of AS
main factor causing a shift in SRAS is the resource cost of producing goods and services, e.g. wage unit costs
shifts in SRAS
- changes in resource prices
-wage cost per unit of output
- labour productivity, higher efficiency lowers unit cost
-Raw materials and component prices such as glass, cement and rubber
-energy costs such as the world price of oil, gas and electricity
shifts in SRAS
- Business taxes, subsidies, regulations and imported costs
- VAT, environmental changes/ employment taxes
-changes in the scale and size of gov subsidies to ceratin industries
-Business rates and costs of meeting business regulations and other laws
-costs of imported component
shifts in SRAS
-Supply shocks
e.g. a hurricane or tsunami or the effects of drought, flooding or a political crisis/ civil war which can have an effect on a countries national output
outward shift of LRAS
yp?
An outward shift of LRAS shows a rise in productive potencial
yp = the estimated national output in the long run
