MACRO EQUILIBRIUM ANALYSIS - TOPIC 2 Flashcards
WHAT IS AD?
THE TOTAL DEMAND OF NEW GOODS AND SERVICES IN AN ECONOMY OVER A PERIOD OF TIME.
WHAT IS THE FORMULA FOR AD?
CONSUMPTION + INVESTMENT + GOVT SPENDING + EXPORTS - IMPORTS
WHAT IS CONSUMPTION?
SPENDING BY HOUSEHOLDS ON DOMESTICALLY PRODUCED GOODS AND SERVICES.
WHAT PERCENTAGE OF AD IS CONSUMPTION?
60%
WHAT IS INVESTMENT?
SPENDING BY FIRMS AND GOVT ON CAPITAL GOODS.
WHAT PERCENTAGE OF AD DOES INVESTMENT TAKE?
15-20%
WHAT IS GOVT EXPENDITURE?
TOTAL AMOUNT OF EXPENDITURE BY GOVT ON INFASTRUCTURE, INVESTMENT, HEALTHCARE, GOVT EMPLOYEES, DEFENSE AND PUBLIC GOODS AND SERVICES.
WHAT PERCENTAGE OF AD IS GOVT SPENDING?
18-20%
WHAT PERCENTAGE OF AD IS THE TRADE BALANCE?
5%
WHAT CAUSES A SHIFT IN THE AD CURVE?
CONSUMPTION
INVESTMENT
GOVT EXPENDITURE
TRADE BALANCE
WHY IS THE AD CURVE THAT SHAPE?
- IF PRICE LEVEL IS HIGH, CONSUMPTION FALLS AS PURCHASING POWER WILL NOT GO AS FAR WITH HIGHER PRICES.
- EXPORTS WILL FALL AND IMPORTS WILL RISE AS UK GOODS ARE EXPENSIVE RELATIVE TO OTHER COUNTRIES
WHY IS CLASSICAL LRAS THAT SHAPE?
CLASSICAL ECONOMISTS E.G HAYEK BELIEVE THAT IN THE LONG RUN, THE ECONOMY WILL ALWAYS SELF CORRECT SO ECONOMY WILL ALWAYS BE OPERATING AT FULL CAPACITY AS IT IS UTILISING ALL FACTORS OF PRODUCTION.
WHY IS SRAS THAT SHAPE?
IN THE SHORT RUN, INCREASING PRODUCTION IS LIKELY TO INCREASE COSTS AND HENCE PRICES.
WHY IS KEYNESIAN LRAS THAT SHAPE?
KEYNESIANS BELIEVE THAT FIRMS WON’T ALWAYS PRODUCE AT MAX OUTPUT SO SPARE CAPACITY IS CREATED. AS DEMAND INCREASES, OUTPUT INCREASES WITHOUT SIGNIFICANT IMPACTS ON INFLATION UP UNTIL THE POINT WHERE ALL RESOURCES ARE USED UP. AT THIS POINT, KEYNESIAN LRAS BECOMES PERFECTLY INELASTIC.
WHAT CAUSES SHIFTS IN SRAS?
CHANGE IN PRODUCTION COSTS FOR FIRMS.
