Aggregate Demand and Supply Flashcards
What is the definition of aggregate demand?
The total demand for good + services produced in an economy.
What is the definition of aggregate supply?
the total quantity of goods and services produced in an economy (real GDP) over a specific time period at different price levels.
What is full employment?
when the economy is operating at its full capacity - natural rate of unemployment still exists.
What is a deflationary gap?
Economy’s real GDP is below its full employment level.
What are the components of natural rate of unemployment?
seasonal, frictional, and structural unemployment.
What are the compenents of AD?
C + I + G + (X - M) = GDP (expenditure method)
What are the determinants of AD (consumption)?
- Consumer confidence in the economy
- Interest rates
- Wealth
- Income Taxes
- Level of household debt
- Expectations of future price levels
What are the determinants of AD (Investment)?
- Interest rates
- Business confidence in the economy
- Technology
- Business taxes
- Level of corporate debt
What are the determinants of AD (Government expenditure)?
- political priorities
- economic priorities
What are the determinants of AD (Net exports)?
- Income of trading partners
- Exchange rates
- Trade policies
What are the determinants of SRAS?
- Costs of Factors of Production
- Indirect Taxes
What can shit LRAS?
- Changes in quantity and/or quality of factors of production
- Improvements in technology
- Increases in efficiency
- Changes in institutions
What are the consequences of economic growth?
- Impact on Living standards: Generally improved standard of living. Risks higher inflation.
- Impact on the environment: Create negative externalities on the environment.
- Impact on income distribution: Usually widens income/wealth gap. Could lead to more government revenue if progressive taxes are implemented which chould be used to aid the poor.
