Aggregate Demand and Supply Flashcards
Definition of AD
Total demand for G&S at given price level and given time period
What factors will affect AD
C + I + G + N
What are CIGN
Consumer expenditure, Investment, Government spending, Net exports
The shape of Keynesian LRAS
J-shape
Why at the first phase of Keynesian LRAS the supply is perfectly elastic
At low output, the firm can produce more without increasing the price
For Keynesian LRAS, why at low output, a firm can produce more without raising cost/price
There is spare capacity to fill the gap and produce new resources
What happens when there are no spare capacities?
Workers need to work overtime, need to find another supplier etc. which leads to price level raising
For Keynesian LRAS, why does the price increase when more outputs are produced?
Firm to pay for overtime, firms need to get a better skilled worker
For Keynesian LRAS, why in the end, does the price increase but the output no longer increases
Firms compete for finite resources but there are no extra resources due to maximum consumption (inflation)
Give 4 factors that shifts LRAS
- Net immigration
- Increase retirement age
- More women entering the work force
- Net investment
- Discovery of new resources
- Land reclamation
Why an increase in net immigration increases GDP?
More human capital enters the labor force.
The same goes to increase the retirement age and more women entering the workforce
Other than increasing the number of workers, how to increase GDP?
give 2 ways
- Improve education which will produce more skilled workers, but this will also raise their wages
- Improve machinery - increase productivity and reduce the cost of production, but lead to unemployment
What does the intersection of AS and AD represent?
National income, calculated GDP by output approach
Why AD slopes down form left to right?
A fall in price will increase the purchasing power. Saving has higher value at low price
Does a wage increase affect LRAS?
No
