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economics > AD/AS model > Flashcards

AD/AS model Flashcards

1
Q

Main macro objectives

A
  1. price stability
  2. growth
  3. unemployment
  4. external equilibrium
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2
Q

Aggregate demand = ?

A

Consumer index + Government expenditure + Investment + (Exports-Imports)

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3
Q

Aggregate demand definition

A

total quantity of goods and services that all buyers in an economy want to buy over a period of time. cet par.

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4
Q

AD curve

A

shows relationship between total amount of real output demanded and average price level over a period of time.

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5
Q

AD downward shape effects:

A
  1. Wealth affect: APL rises, real value of money & assets decrease = people feeling poorer, output falls
  2. Interest effect: APL rises, people might increase demand for borrowing
  3. Trade effect: APL rises, exports become less competitive
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6
Q

shifts in AD curve

A
  1. fiscal policy
  2. monetary policy
  3. foreign incomes
  4. expectations
  5. external shocks
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7
Q

shift in AD curve

fiscal policy

A

gov. policy of changing G &/or T in order to affect macro economy.
i) Expansion policy - cause AD to shift to the right (increasing G & decreasing T)
ii) Contractionary policy - shift AD to left (decreasing G & increasing T)

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8
Q

shift in AD

monetary policy

A

aims to influence interest rate & money supply.

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9
Q

Shift in AD

foreign incomes

A
  1. if FIs rise, DD for exports rise = AD shift to the right (&visa versa)
  2. exchange rate changes = the price of exports & imports affected, X falls = AD shift to right

*only if Marshal Lerner criteria is applied = PED of imports = PED of exports

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10
Q

shift in AD

expectations

A

if it is expected prices will rise = AD may increase

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11
Q

shift in AD

external shocks

A

e.g. wars, disasters, cold winters

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12
Q

CAUSES

what does not cause a shift in AD

A

APL or rGDP does not cause a shift in AD. these cause a movement along the curve

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13
Q

details of shift in AD by component

consumption expenditure (C)

Consumer demand =f(CC, IR, W, PiT, HI)

A
  1. consumer confidence CC
    - level of optimism or pessimism regarding future incomes
    - can cause C to decrease shifting AD left
    - measured by an index
  2. changes in interest rates IR
    - a rise in rates = C to fall
    - may also cause savings to increase due to it being more attractive, decreasing C causing AD shift left
  3. wealth effect W
    - an increase in value of assets can increase C & decrease savings as people feel wealthier - shift AD to the right
  4. personal income tax PiT
    - PiT affects disposable income after tax
  5. household debt or indebtedness HI
    - if household debt is high, C can fall causing AD to fall.
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14
Q

details of shift in AD by component

investment expenditure (I)

business demand, I=f(IR, BC, Tech, BT, CD, legal/institutional changes)

A
  1. interest rates
    rising IR makes financing capital goods more expensive therefore investment projects are less affordable
  2. business confidence BC
    impacted by economic and political stability
  3. tech
    changes in technology, firms can be forced to invest to keep up with competitors

4.business tax BT
taxes on profits affect profitablility of investments - affects investment levels

  1. company debt levels CD
    businesses that are highly indebted will be reluctant to take on more debt “I” will fall & AD will shift left
  2. legal and institutional change
    e.g. no access to credit, lack of property rights, corruption
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15
Q

details of shift in AD by component

net exports

(X-M)

A
  1. changes in foreign incomes
    - can reduce demand for exports and reduce (X-M) & shift AD left
  2. change in exchange rates
    - if ER depreciates, exports become more competitive - exports should increase= X-M rises and AD shifts to the right.
    - opposite will happen when ER appreciates
  3. changes in trade protection levels
    - e.g. reduce in tariffs on exports or reducing quotas will likely reduce exports (X-M) rising = AD shift right
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16
Q

aggregate supply definition

A

total quantity of g&s produced in an economy over a period of time

17
Q

aggregate supply

Short run aggregate supply

SRAS

A

shows the relationship between the price level & rGDP produced by firms

18
Q

Shape of SRAS

A

positive relationship between PL & output. i.e it slopes upwards.

as PL rises, output prices are increasing BUT FoP’s are not

19
Q

Long run aggregate supply

LRAS

A

prices of g&s rise AND fop prices rise AND unployment rise at the natural rate + representing long run potential output

20
Q

Aggregate supply, shifts in AS

Factors for both SRAS & LRAS

A
  1. capital investment, quantity & quality
  2. labour, quantity & quality
  3. supply side policies
  4. legislation
21
Q

Aggregate supply, shifts in AS

ONLY SRAS

A
  1. change in fop prices
    - increase in fop prices causes SRAS to shift to the left
    - increases/decreases in labour
    - changes in exchange rate
    - LRAS is not affected bcause all prices change equally in the long run - i.e if prices of price of g&s increases price of fops increase by the same in the LR
  2. weather/disease/war
    - both affect SRAS in the case of agriculture
    - effectively increase cost of production & therefore shift SRAS to the left (& visa versa)
    - might afect labour because of working conditions
    - i.e. SUPPLY SHOCKS
    - wars can also supply side shock, increasing cost of production in different sectors
22
Q

factors that will shift AS

a shift in LRAS will cause an equal shift in SRAS

A
  1. capital
    - more machines, better tech - increase the productivity of labour & therefore shift AS to the right
  2. Labour
    - increase in quantity (migration & increased participation by women)
    - increase in quality (better training, education, health).
  3. supply side policies
  4. changes in legislation e.g. retirement age, school leaving age
23
Q

shift in AS

supply side policies

A
  1. reduce income taxes to provide a greater incentive to work
  2. reduced unemployment benefits
  3. reduce the power of trade unions in order to reduce barganing power
  4. make it easier for firms to hire & fire
  5. policies aimed at improving education & training
  6. . encourage privatization (encourage efficiency & competition)
24
Q

neo-classical economist

A

believe that if a recessionary gap or inflationary gap exists, tend to automatically be eliminated

25
Q

keynsian economist

A

believes that an economy will not always self-correct and return to the full employment level of output

economics (5 decks)

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