Macro 4 - Determinants of AD and SRAS Flashcards
Aggregate - definition
> A whole formed by combining multiple elements.
Aggregate demand - definition
> Total demand for a country’s goods and services at a range of price levels over a given time period.
Aggregate supply - definition
> Total supply of goods and services within an economy at a range of price levels over a given period of time.
Formula for AD
> C + I + G + (X-M).
Consumption - definition
> C.
>Spending on goods and services by households.
Government Spending - definition
> G.
Spending on goods and services and investment by the government.
Doesn’t include payments (e.g. JSA) as this doesn’t constitute demand for goods and services.
Investment - definition
> I.
Spending on capital goods by firms.
Theses are goods that aren’t immediately consumed but instead will continue to be used in the future.
Net Exports - definition
> Total spending on exports minus total spending on imports.
Why does the AD curve slope downwards?
- Income effect.
2. Substitution effect.
AD graphs - labels
> y-axis is labelled with ‘price level’. (PL1, PL2, etc)
>x-axis is labelled with ‘real GDP’, ‘output’ or ‘national income’. (Y1, Y2 etc.)
Price Level - definition
> An aggregate of the price of all goods and services in an economy.
Best understood as CPI or RPI, a measure of the average price of a basket of goods in an economy.
What causes AD to shift?
- fall in income tax = increased C = increased AD = shifts right.
- increased G above any increase in revenue = injection into CF = increased AD = shifts to the right.
- Weak currency = increased net exports = increased AD = shifts right.
- Rise in interest rates = fall in C and I = decrease in AD = shifts left.
- Increased inflation = (X-M) falls, C increases (savings worth less).
SRAS - detail
> Short-run aggregate supply curve is very similar to the supply curve for an industry or firm.
It basically combines the output of all goods and services all the producers in an economy are willing to produce at a range of price levels in a given time.
SRAS - definition
> Supply definition, assuming fixed availability factors of production.
Short-run - definition
> When talking about macroeconomics short run analysis usually assumes the quantity of factors of production available in the economy is fixed.
Individual firms can source more factors from within the finite pool available in the economy.
