Unit 4 - AD and AS Flashcards
(22 cards)
What is Aggregate Demand?
Aggregate Demand (AD): The total amount of goods and services demanded in an economy at all price levels.
AD Curve: Slopes downward, showing that as prices drop, the quantity of Real GDP demanded rises.
Movements Along the AD Curve:
Caused by changes in price levels.
Example: Lower prices → more demand for goods/services → movement along the curve.
Shifts of the AD Curve
Occur when factors other than price change.
Examples: Changes in consumption, investment, government spending, or net exports.
Consumption (C)
Consumption (C):
Influenced by:
Wealth: Higher wealth → more spending → AD shifts right.
Future Price Expectations: If prices are expected to rise → more spending now.
Interest Rates: Lower rates → borrowing is cheaper → more spending.
Taxes: Higher taxes → less disposable income → AD shifts left.
Investment (I)
Influenced by:
Interest Rates: Lower rates → cheaper loans → more investment.
Future Sales Expectations: Optimism about future sales → higher investment.
Business Taxes: Lower taxes → increased investment.
Government Spending (G)
Government Spending (G):
Directly impacts AD.
Increased spending → AD shifts right; decreased spending → AD shifts left.
NET - EXPORTS (NX)
Net Exports (NX):
Influenced by:
Foreign Income: If trading partners are wealthier → more demand for exports.
Exchange Rates:
Depreciated Currency: Exports cheaper, imports expensive → AD shifts right.
Appreciated Currency: Exports are expensive, imports are cheaper → AD shifts left.
Role of Wealth
Wealthier consumers spend more, boosting demand.
AD Curve Dynamics
Price level changes cause movements, while external factors (C, I, G, NX) cause shifts.
Government’s Role
Fiscal policies (spending and taxes) directly influence demand.
Global Influence
Exchange rates and foreign economies affect net exports and overall demand.
What is Aggregate Supply?
AS: The total quantity of goods and services supplied in an economy at different price levels.
It includes two components: Short-run Aggregate Supply (SRAS) and Long-run Aggregate Supply (LRAS).
SRAS Curve (Short Run)
SRAS Curve (Short Run):
Upward Sloping: Higher prices incentivize producers to supply more goods and services.
Shifts in SRAS: Caused by changes in:
Wage Rates: Higher wages → SRAS shifts left (lower supply).
Non-Labor Input Prices: Cheaper inputs → SRAS shifts right (higher supply).
Productivity: Increased productivity → SRAS shifts right.
Supply Shocks: Sudden changes, like natural disasters or technological breakthroughs, can drastically shift SRAS.
LRAS Curve (Long Run):
Vertical Line: Represents full-employment output (Natural Real GDP).
Does Not Depend on Price Levels: Reflects the economy’s maximum sustainable output when all resources are fully utilized.
Short Run - Equilibrium Conditions
Short-Run Equilibrium: Where SRAS meets Aggregate Demand (AD); can change with economic conditions.
Disequilibrium
Occurs when AS ≠ AD at a given price level.
Can lead to unemployment (low supply) or inflation (high demand).
Understanding SRAS
Shows how the economy responds to price changes in the short term, important for managing inflationary or recessionary trends.
Role of LRAS
Highlights the economy’s potential output, guiding long-term growth policies.
Shifts in SRAS
Predictable by monitoring wages, input costs, and productivity.
Supply Shocks
Critical to understand as they can destabilize the economy rapidly.
Equilibrium and Policy
Policymakers use these concepts to balance inflation, employment, and economic stability.
Long Run - Equilibrium
Long-Run Equilibrium: Where LRAS intersects AD; represents stable economic output at full employment.
