aggregate demand and supply explanations Flashcards
(24 cards)
economic growth influence on investment
increase in investment = increase in economic growth
business expectation + confidence influence on investment
firms only invest if confident will get a return on their investment and will expect to make greater profit
Keynes influence on investment
argued animal spirits or confidence couldn’t be measured, gut feeling on the part of those who have to make investment
demand for exports influence on investment
increase in investment = demand pull inflation in short-term leading to fall in exports but eventually will lead to increase in LRAS
interest rates influence on investment
fall In interest rates= cheaper for firms to borrow money = increased invest,et
access to credit influence on investment
most firms need to borrow to invest , so investment levels limited by availability of credit
gov and regulations influence on investment
gov can influence investment by reducing corporation tax or by removing regulatory barriers such as making planning permission easier
expansionary phase = when gov alters spending habits
confidence is high
gov receive higher tax revenues
less spending on benefits
leads to budget surplus
recessionary phase= opposite
confidence falls along with consumption
gov see tax revenue fall and benefit spending increases
leads to fall in budget surplus
after cycles completed either of 2 things can happen
if gov budget still in surplus = increase spend on public goods
if recessionary phase deep = gov needs to borrow money to balance budget
factors influencing trade balance
exchange rate between sterling and other currencies. affects prices of good and those produced overseas
SPICED
strengthening pound imports cheaper exports dearer
WPIDEC
weakening pound import dearer exports cheaper
AS diagram
economy at full capacity = LRAS line is vertical, total productive efficiency is achieved
quantity produced in an economy depends on
quantities of input of FOP employed, total amounts labour, capital
reasons for shift in SRAS
- change in unit labour costs
- changes to price of raw material
- exchange rate fluctuations
- taxation an dsubsidies
change in level of international trade - changes in education and training
MAIN IDEAS = oil prices, exchange rates
classical LRAS
classical economists believe markets will quickly correct themselves once pushed into disequilibrium - cuz wages flexible and can be lowered if needed - if all markets equilibrium can be no unemployed resources. therefore economy must be operating at full capacity on PPF boundary
Keynesian LRASS
even in long run, unemployment persists cuz wages don’t fall when unemployment occurs - wages=sticky
when mass unemployment output can be increased without increased costs or prices
as economy nears full employment, higher output = higher prices.
reasons for shift in LRAS
- technological advancements
- change in productivity
- chang in education and skills
- change in gov regulations
- competition
-immigration
aggregate supply shocks
occur when : change in costs of raw materials and energy (oil prices key), change in exchange rates , change in tax rates
effects of supply-side shocks
cause shift in SRAS curve.
competition policy
gov promotes competition then firms forced to lower prices and increase quality of goods. to make a profit still firms need to increase efficienCY which increases production so LRAS increases
EDUCATIONAL/SKILL CHANGES on AS
more skilled workforce, more employable , work quicker + efficiently = increases output, SRAS shifts right, education improves occupational mobility of labour, decreases structural unemployment ( people can switch jobs)
gov regulation changes on AS
LRAS shifts right, increased size of workforce, encouraged employment, decrease inactivity (more resources in economy, more can be produced)
easier to set up businesses/invest/expand, increases company jobs,outpits = increase LRAS
BUT too high could cause shift left = increased costs + time to do tasks, reduces output
