AD/ AS Framework

Question 1

Aggregate Demand (AD)

Definition

Answer 1

The total level of spending in an economy at each GPL.

Question 2

Aggregate Demand

Formula

Answer 2

AD = C + I + G + (X-M)

where
- C = consumer expenditure
- I = investment expenditure
- G = government expenditure
- X = export expenditure
- M = import expenditure
- (X-M) = net exports

Question 3

GPL Determinants of AD

Answer 3

• Wealth Effect
• Interest Rate Effect
• International Substitution Effect

Question 4

Non-GPL Determinants of AD

C component

Answer 4

• Δ in consumer expectations & confidence
• Δ in personal income taxes
• Δ in income distribution
• Δ in interest rates & availability of credit

Question 5

Non-GPL Determinants of AD

I component

Answer 5

• Δ in interest rates & access to credit
• Δ in firms’ expectations & business confidence
• Δ in corporate income tax rates
• Δ in technology

Question 6

Non-GPL Determinants of AD

G component

Answer 6

• Δ in economic priorties ie. fiscal policies
• Δ in political priorties

Question 7

Non-GPL Determinants of AD

(X-M) component

Answer 7

• Δ in national income of a country & its trading partners
• Δ in relative price levels between countries
• Δ in foreign exchange rates

Question 8

Aggregate Supply (AS)

Definition

Answer 8

The total value of G&S produced & sold by domestic firms within an economy at each GPL.

Question 9

Non-GPL Determinants of AS

Answer 9

• Δ in price of FOPs
• Δ in quantity of resources
• Δ in technology
  
  • Positive
  • Negative
• Δ in governments policies
• Δ in expected rate of inflation

Question 10

The Multiplier Process

ie. K Process

Answer 10

1. Firms experience unplanned rundown in stocks & inventories
2. Firms ↑ production by hiring ↑ labour
3. Demand for labour ↑
4. Income of workers ↑ since they are paid ↑ wages by firms
5. [Multiplier Principle] Since one’s spending is another’s income, many rounds of spending & re-spending occurs
6. Each round becomes smaller due to leakages through savings, taxes & import expenditure
7. Assuming firms have spare capacity & idle resources, AD ↑ mtp.
8. RNY ↑ mtp.
9. AEG achieved

Question 11

The Reverse Multiplier Process

ie. Reverse K Process

Answer 11

1. AD ↓ through C & I
2. Firms experience unplanned buildup of stocks
3. Demand for labour ↓
4. Firms ↓ production by hiring ↓ labour
5. Income of workers ↓ as they are paid ↓ wages by firms
6. [Reverse Multiplier Principle] Since one’s cut in spending is another’s loss in income, many rounds of ↓ spending & respending occurs
7. Job & income creation ↓
8. RNY ↓ mtp.
9. AEG not achieved

Question 12

AS Curve

Criteria for ←/→ vs. ↑/↓ shift

Answer 12

←/→ shift: COP
↑/↓ shift: Quality/ quantity of labour → Productive capacity