How the Macroeconomy Works- Aggregate demand and aggregate supply analysis Flashcards
(20 cards)
What is aggregate demand?
The total demand in the economy, measuring spending on goods and services by consumers, firms, the government, and overseas entities.
Aggregate demand is often represented as AD.
What happens to demand when the price level falls from P1 to P2?
Demand expands from Y1 to Y2.
What is the effect of a rise in the price level from P2 to P1 on demand?
Demand contracts from Y2 to Y1.
What causes movements along the aggregate demand curve?
Changes in the price level.
Why does the aggregate demand curve slope downward?
Because higher prices lead to a fall in the value of real incomes, making goods and services less affordable.
Other reasons include the effect of inflation on imports and higher interest rates.
List the components of aggregate demand that can shift the AD curve.
- Consumption (C)
- Investment (I)
- Government spending (G)
- Net exports (X-M)
What is indicated by a rightward shift in the aggregate demand curve?
A rise in aggregate demand.
What factors can cause an increase in aggregate demand?
- Higher consumer and firm confidence
- Lower interest rates
- Lower taxes
- Increased government spending
- Currency depreciation
- The wealth effect from rising house prices
- Increased availability of credit
What does the aggregate supply curve represent?
The quantity of real GDP supplied at different price levels.
Why is the aggregate supply curve upward sloping?
Because at a higher price level, producers are willing to supply more due to higher potential profits.
What can cause movements along the aggregate supply curve?
Changes in the price level due to changes in aggregate demand.
What are the factors that shift the short-run aggregate supply (SRAS) curve?
- Changes in employment costs (e.g., wages, taxes)
- Changes in input costs (e.g., raw materials)
- Government regulation or intervention
How do short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) differ?
- SRAS shows planned output with constant production costs
- LRAS shows potential supply when prices and costs can change
What does a rightward shift in the LRAS curve indicate?
Economic growth.
Define macroeconomic equilibrium.
The state when the rate of withdrawals equals the rate of injections, or where aggregate demand equals aggregate supply (AD = AS).
What occurs if the price is above the equilibrium?
There will be excess supply.
What happens if the price is below equilibrium?
There will be excess aggregate demand.
What is the effect of an outward shift in aggregate supply (AS)?
It lowers the average price level and increases national output.
What happens if aggregate demand (AD) shifts inwards?
The price level falls and national output decreases.
What is the result of an increase in aggregate demand?
Both the price level and national output increase.
