Aggregate Supply and Demand Model Flashcards
Aggregate Demand
Total amount of goods and services consumers are willing and able to purchase in a national economy during a specific time period
C + I + G + (X - M)
Factors Affecting Aggregate Demand
Economic conditions in other countries
Expectations about the future
Competitiveness in the export market
Government policy
Aggregate Supply
The total supply of goods and services that firms in a national economy plan on selling during a specific time period.
Affected by changes in the factors of production or if there are changing costs
Long Run Aggregate Supply
When the economy reaches full capacity, all resources are fully utilised and everyone willing and able to work is working. At this point the AS curve becomes vertical
Equilibrium Point
Where the AD and AS curves meet = the national income
National Income
Total amount of goods and services produced during a year, which is equal to the total amount earned by people and businesses
Inflationary Gap
Where AD increases but the economy is at max capacity (AS curve is vertical) there is an inflationary gap. Prices will increase to a new equilibrium
Deflationary Gap
Where spare capacity in the economy causes costs and prices to fall
Economic Growth: GDP & GNP
Gross Domestic Product - the value of goods and services being produced in an economy
Gross National Product - GDP plus the net income received by residents for overseas investments
Growing an Economy
Main drivers of economic growth are:
- Increase AD; or
- Increase AS
Cost of Economic Growth
Growth could be in demerit or goods or environmental damage
May be unequal distribution of the gains between the rich and poor, widening the gap
Growth which does not match increasing population size results in excess demand and inflation
