Aggregate Demand and Aggregate Supply Flashcards
Define aggregate demand
The total demand for good and services in a given time period in an economy
What is the equation for AD? Explain the different categories
C+I+G+(X-M)
Consumption is the biggest section for the Uk - around 60% of their GDP and it makes people happy which is the main economic objective
Investment is good for the future and in the long run can improve well being
Government- they provide public goods
(X-M)- countries can not produce everything they need alone. Imports and exports are vital.
Why does the Ad curve slope top left to bottom right?
It shows the inverse relationship between the general price level and real GDP.
When there is a rise in the price level it causes a contraction in aggregate demand
When there is a fall in the price level it causes an expansion of aggregate demand
What could cause a shift in AD?
Changes in expectations Fiscal policy Monetary policy Economic events in the world economy Changes in household wealth Changes in the supply of credit
What could cause a shock to AD
Diseases and natural disasters - Haiti 2010 earthquake
War
Changes in technology
What influences consumption ?
Real incomes - people feel richer so they consume more
Interest rates - cost of borrowing money or the reward for saving consumer confidence
Direct and indirect taxation
The supply of credit
What influences investment?
Interest rates
Expectations/ confidence
Public policy
The stock of capital
The level of economic activity
What influences government spending?
Fiscal policy - political decisions
State of the economy - recession or boom
Money earned from national companies
What influences net exports?
Cost of transportations of goods
Income abroad
Trade policy
Political friction/tension
What is the marginal propensity to save?
The marginal propensity to consume measures the proportion of extra income that is spent on consumption.
For example
If an individual gains an extra £10 and spends £7.50 then the marginal propensity to consume is 7.5/10 = 0.75
The MPC will invariably be between 0 and 1
What is the paradox of thrift?
It is an idea from Keynesian economics- saving is positive because it provides the funds to finance the capital investment needed to promote long term growth
Define aggregate supply
Aggregate supply measure the volume of goods and services produced. It is the total supply available in a particular market from producers.
What are the two types of aggregate supply? Explain the difference
Short run aggregate supply - is the total planned output in which prices can change but the prices and productivity of factors of input eg wage rates stay constant
Long run aggregate supply- is the total planned output in which both prices and factors of input can change , it is a measure of a country’s potential output and the concept is linked to ppf
What can cause the short run aggregate supply curve to shift?
Commodity prices changing Exchange rates moving Government taxation and subsidies A change in business costs Short run shocks to production
What can cause the long run aggregate supply curve to shift ?
A rise in productive potential Gains from innovation and enterprise Capital investment Increased Labour Market Participation Higher Productivity of Labour and Capital
