Aggregate demand and aggregate supply Flashcards
Why is the AD curve downward sloping?
When prices fall consumers experience a wealth effect, they feel better off because their incomes will buy more goods or services, leading to more consumption
What causes the AD curve to shift?
C I G X M
What factors affect the decision to invest? (3)
The rate of interest
Expectations
Technical progress
How do interest rates cause greater investment? Why?
A fall in interest rates = more investment
Because borrowing will be cheaper
How do expectations cause greater investment? Why?
Positive expectations = more investment
Because businesses will expect more sales
How does technical progress cause greater investment?
Better equipment = more investment
What is the accelerator effect?
The relation between the change in new investment and the rate of change of national income
What is privatisation?
Sale of government owned assets to the private sector
If EU economies are fast growing, how will this affect the demand for UK exports? What will happen to AD?
UK exports will increase, AD will shift to the right
What happens to UK exports, if the value of the pound depreciates against the euro? What happens to AD?
WPIDEC, exports will increase
AD will shift right
What happens to UK exports, if the value of the pound appreciates against the euro? What happens to AD?
SPICED, exports will decrease
AD will shift left
If the UK economy is growing and incomes are rising, what will happen to UK imports? What happens to AD?
Imports will increase
AD will shift to the left
What does the AS curve show us?
The total output that the economy can produce using available factors of production at a given price level
What are the factors that affect the SRAS curve? (1)
Any factor that changes the firms costs
What are the factors that affect the SRAS curve? (3)
Money wages
Price of raw materials
Corporation tax
What is long-run AS?
The economy’s productive potential
Why does the AS curve become vertical?
All factors of production are fully employed and the productive capacity has been reached
What is the natural rate of unemployment?
The rate of unemployment that is consistent with a stable rate of inflation
What are the factors that influence the LRAS curve? (5) (CTAPP)
Capital equipment Technology Attitudes Policies Productivity
How does capital equipment affect the LRAS curve?
Increase in capital equipment = rightward shift in the LRAS curve
How does technology affect the LRAS curve? Why?
Better technology = rightward shift in the LRAS curve
More productive
How does attitudes affect the LRAS curve?
Better attitude = more likely to open firm = rightward shift in the LRAS curve
How do policies affect the LRAS curve?
Policies that persuade a larger proportion of the labour force will reduce the natural rate of unemployment and shift the LRAS curve to the right
How does productivity affect the LRAS curve?
Increase productivity = increase in output over time = rightward shift in the LRAS curve
Who are the monetary policy committee?
A committee of economists and central bankers who meet monthly and decide whether or not to change the rate of interest
What are supply-side shocks?
Something that will increase or reduce the costs, hence the supply-side of all firms in the economy
What does an increase in the LRAS curve represent? (2)
An increase in economic growth
A shift in the PPF
