Explaining changes in AS/AD Flashcards
An increase in consumption (AD curve shifts to the right)
Describe: Aggregate Demand is the total demand for all goods and services produced in an economy. An increase in AD will cause an increase in output and income.
Explain: An increase in consumer spending (caused by things like:
- Increase in disposable home
- Increase in consumer confidence
- Decrease in interest rates
- Decrease in Immigration)
will cause Aggregate demand to increase and shift to the right. Since consumption is a component of Aggregate Demand, if consumption increases, then Aggregate Demand will increase, causing an increase in growth.
Connection: So AD increases from AD1 to AD2 and output increases from Ye1 to Ye2, leading to more growth
An increase in investment (AD shifts to the right)
Describe: AD is the total demand for all goods and services produced in an economy. Investment is the buying of capital goods by firms.
An increase in Aggregate Demand will cause an increase in output and income.
Explain: An increase in investment (caused by:
- Increase in business confidence
- Increase in profits
- Decrease in interest rates)
will cause AD to increase and shift to the right as investment is a component of AD, therefore if the investment increases, then AD will increase, causing an increase in output and growth.
Relate: So, the AD will increase from AD1 to AD2, and the output will increase from Ye1 to Ye2, leading to more growth.
An increase in government spending (AD shifts right)
Describe: AD is the total demand for all goods and services produced in an economy. An increase in AD will cause an increase in output and incomes.
Explain: An increase in government spending (caused by:
- Increase in tax revenue during a boom
- Election spending
- Increase in transfer payments
- Infrastructure spending
- Public sector pay increases)
will cause the aggregate demand to increase and shift to the right. Because government spending is a component of AD, if government spending increases, then AD will increase causing an increase in output and growth.
Connection: So AD increases from AD1 to AD2, and output increases from Ye1 to Ye2 leading to more growth.
An increase in net exports (AD shifts to the right)
Describe: Aggregate Demand is the total demand for all goods and services produced in an economy. An increase in AD will cause an increase in output and income.
Net Exports are Export receipts - Import Payments
Explain: An increase in Net Exports (caused by:
- a depreciation of the NZ dollar
- Increased demand for NZ exports
- Fall in demand for imports etc)
will cause Aggregate Demand to increase and shift right because net exports is a component of AD, if net exports increase, then AD will increase causing an increase in output and growth.
Connection: So, AD increases from AD1 to AD2, and output increases from Ye1 to Ye2 leading to more growth.
Decrease in the cost of production
Describe: Aggregate Supply is a total supply of all goods and services in an economy.
Explain: A decrease in the cost of production (caused by things like:
- A decrease in nominal wages
- Decreasing electricity pipes
- Decreasing petrol pipes
- Decreasing interest rates)
Firms increase their output because of reduced production costs, output increases and the price level falls due to increased efficiency, AS increases, which causes an increase in output - Growth.
Connection: So, Aggregate Supply increase from AS1 to AS2 and output increases from Ye1 to Ye2, the price level decreases from PLe1 to PLe2.
Increase in Productivity (AS curve shifts to the right)
Describe: AS is the total supply of all goods and services in an economy.
Explain: An increase in productivity (caused by things like:
- Increase in labor productivity
- Investment in new capital
- New Technology
- Investment in human capital etc)
causes efficiency and productivity to increase. AS increases which causes output to increase.
Connection: So AS increases from AS1 to AS2 and output increases from Ye1 to Ye2 the price level decreases from PLe1 to PLe2.
Appreciation of the NZ Dollar (AS Curve shifts right)
Describe: AS is the total supply of all goods and services in an economy.
Explain: An Appreciation of the NZ Dollar (caused by things like:
- Other countries’ currencies depreciating
- NZ interest rates increase
- More demand for the NZ Dollars etc)
If the NZ Dollar appreciates then the cost of imported raw materials will decrease. Firms’ costs of production decrease and so their output increases. AS increases which causes output to increase.
Connection: So AS increases from AS1 to AS2, and output increases from Ye1 to Ye2 the price level decreases from PLe1 to PLe2.
PPF Shifting outward vs increase in production
Describe: The PPF is a diagram that shows the productive capacity of an economy given a fixed amount of resources and technology.
A shift in the PPF shows an increase in productive capacity. A movement from inside the PPF shows an increase in output or employment.
Explain: A shift of the PPF can be caused by an increase in resources, new technology causing productivity to increase, new capital, investment in Human Capital, immigration etc.
This will cause an increase in productive capacity and so shift the curve outward.
A movement from inside the curve to a point closer to the PF shows an increase in output and resource use which leads to a decrease in unemployment.
Connection: For a shift of the PPF curve, it will shift from C to D, showing an increase in productive capacity. For an increase in output there will be a movement inside the curve from A to B, to a point closer to the PPF showing a decrease in unemployment.
What is the impact of an injection of money into the circular flow e.g. investment
Define: The circular flow is a model that shows the flow of money, resources, and commodities in an economy.
The injection of money into the circular flow is when money is put into the economy. Investment is the buying of capital goods by firms.
Explain: An injection of money into the circular flow from an increase in investment (or:
- export receipts
- Increased consumption
- Increased government spending)
will cause the amount of money in the economy to increase. This will cause an increase in production and profits as more capital goods are bought, this will cause the demand for resources such as labor to increase, causing an increase in employment and household incomes. As household incomes increase, there will be an increase in consumption.
With an increase in income, sales, and profits, the government will receive more revenue from both direct and indirect taxes. This will cause an increase in output, growth, and income in the economy.
Connection: So the money flow for investment will increase as producers borrow more from the financial sector to buy capital goods. This will cause the economy to grow as the impact of the increased investment flows onto other areas of the economy.
