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Economics (Tina) > Aggregate Demand and Supply > Flashcards

Aggregate Demand and Supply Flashcards

1
Q

Aggregate Demand

A
  • Refers to the total of all goods and services demanded at various price levels.
  • Shows the inverse relationship between the total real output and the average price level
  • AD = C + I + G + (X-M)
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2
Q

From the IB syllabus: determinants of AD

A
  • C - consumer confidence, interest rates, wealth, income taxes, level of household indebtedness, expectations of future price level
  • I - interest rates, business confidence, technology, business taxes, level of corporate indebtedness
  • G - political and economic priorities, transfer payments
  • (X - M) - income of trading partners, exchanges rates, trade policies
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3
Q

Consumer demand

A
  • Durable goods - used/consumed over longer periods of time (usually years)
  • when loans are needed, they are usually for durable goods
  • Non-durable goods - used/consumed over a shorter period of time (weeks, months)
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4
Q

Study tip for Aggregate Demand (shifts)

A

Think of the money flow in the economy. Increase money flow in the economy = aggregate demand shift to the right.

Decrease money flow in the economy = agg demand shift to the left

  1. An increase in consumer confidence would make people spend more = agg demand shift outward
  2. Increase foreign income = can buy more export = more money in the circular flow in economy = agg demand shift outward
  3. Increase in interest rate = investors save more, spend less = less money in the circular flow in economy = agg demand shift inward
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5
Q

Aggregate Supply

A
  • Refers to the total of all goods and services supplied at various price levels.
  • It shows the relationship between real output and the average price level.
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6
Q

From the IB syllabus: determinants of SRAS

A
  • Costs of factors of production
  • Indirect taxes
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7
Q

Factors effecting quantity of FOP

A
  • Land reclamation
  • Increased access to supply of resources
  • Discovery of new resources
  • Increase in birth rate
  • Immigration
  • Decrease in natural rate of unemployment
  • Investment
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8
Q

Factors effecting quality of FOP

A
  • Technologival advancedment
  • Fertilizers
  • Irragation
  • Education
  • Training
  • Appreticeship program
  • R&D
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9
Q

Three phases of the Aggregate Supply Curve (Keynesian)

A

1: Large amount of excess capacity. Can increase output without increase pressure in price

2: Some excess capacity only. Price of some goods will be pushed up, but not all

3: Full employment, no excess capacity. All resources has been utilised

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10
Q

From the IB syllabus: shifts of LRAS

A
  • Changes in the quantity and/or quality of FOP
  • Improvements in technology
  • Increases in efficiency
  • Changes in institutions
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11
Q

Short run Aggregate Supply

A

As output nears full employment, some factors of production become scarce, leading firms to compete for these resources, which drives prices up.

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12
Q

Long Run Aggregate Supply

A

Represents the economy’s maximum output, where all resources are fully employed and cannot produce more with current technology and resources.

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13
Q

How can we push out the physical limit?

A
  1. Increase the factors of production (i.e. discover more oil deposits)
  2. Improve the factors of production
  3. Promote savings (to have more funds available for investment)
  4. Promote mobility of factors between sectors of the economy
  5. Promote research and development to increase the level of technology
  6. Promote the supply side (incentives, investment, innovation, entrepreneurial spirit)
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14
Q

Keynesian Phase 1 (Deflationary Gap)

A

Increase in AD and Y but no change in PL (no increase in producer costs)

Using up spare capacity

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15
Q

Keynesian Phase 2

A

Economy starts to feel inflationary pressure as FOP become scarcer and prices for FOP rise

PL rises to compensate for higher costs

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16
Q

Keynesian Phase 3 (inflationary gap)

A

If operating at full employment and AD rises the outcome is ‘purely inflationary’

No increase in output is possible, only change is in PL

The present FOP cannot produce more

17
Q

Inflationary gap

A

When the economy is in equilibrium at a level of output that is GREATER than the full employment level of output

18
Q

Deflationary gap

A

When the economy is in equilibrium at a level of output that is LESS than the full employment level of output

19
Q

Explaining diagram for Macro Equilibrium

A

Step 1 - state what has occurred

Step 2 - consequences of that (and which determinant)

Step 3 - which curve shifts and in which direction

Step 4 - refer to curve from diagram

Step 5/6 - refer to price consequences

Step 7/8 - refer to output consequences

Also - you could discuss the impact on inflation and unemployment.

20
Q

Moving AD in Neoclassical Diagram

A

In Neoclassical perspectives, an increase in AD ALWAYS leads to a inflation (SR and LR).

21
Q

Macro Equilibrium

A

AD = SRAS

  • Output produced is exactly equal to total demanded in economy
  • No reason for producers to change level of output
  • No up/down inflationary/deflationary pressure
22
Q

Indebtedness

A

The condition of owing money

23
Q

Consumption

A

Total spending on domestic goods and services

  • Income (incl. direct taxes, and indirectly, wage rises)
  • Wealth - housing price rises often indicate increased wealth so people spend more
  • Savings - Increased savings means less consumption
  • Consumer confidence
  • Expectations about price rises - if prices are expected to rise in the future, consumers are likely to choose to buy it now, instead
  • Population size and migration
24
Q

Investment

A

Addition of capital stock to the economy by firms (replacement or induced)

  • Interest rates - the price of borrowing money affects both investment and consumption
  • National income - firms invest in new plants
  • Tech
  • Business Confidence/expectations about economy
25
Q

Government expenditure

A

At any level, depends on policies

  • Budget Surplus = means that they are not spending enough to use all the tax revenues
  • Transfer payments - payments by the government to one group of society (e.g. unemployment benefit or single-mother payment)
26
Q

Exports

A

Domestic goods and services bought by foreign consumers

  • Influenced by exchange rates
  • Foreign incomes
27
Q

Imports

A

goods and services bought from foreign producers

Economics (Tina) (21 decks)

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