First chapter of part 2 of the book: A study of the whole economy. The nature of that aggregate demandand aggregate supply and how they interact to affect output, unemplyment and inflation.
Aggregate demand(AD): total demand for a contry's goods and services at a given price level and in a given time period.
Calculate AD: C + I + G + (X – M)
The components of aggregate demand
C = Consumer expenditure:
Real disposable income
Confidence and expectations
The rate of interest
Distribution of income(give from the rich too the poor, bcause poor spend a higher%)
(Saving:(stop buying things)
Real distposable income(higher income=higher savings)
The rate of intrest
Confidence and expectations about the feature
Range of financial institutions(put their money somewhere to save them)
Government policies(tax free schemes?)
I = Investment: (from companyes when:)
Changes in real distposable income(increasing → demand for goods/services increases)
Expectations, feel optimistic
Capacity utilisation: the extent to which firms are using their capital goods
Current profit levels: provide the finance to invest or contribute to firms optimism about feature.
Corporation tax: tax on a firms profit
The rate of interest
Advances in technology: unit cost would fall.
Price of capital equipment, reduction in the price of.... → more money to expand their capacity
G = Government spending:
War, terrorists etc, can increase government spending
Voters pressure on the government to spend money on health, education transport
Level of economic activity in the economy, high unemplyment → G rise its spending
Governments view on the extent of market failure and its ability to correct it
(X – M)= Net Exports
Real disposable income abroad
Real disposable income at home
The domestic price level. Value of export might be higher than imports and vise verca.
The exchange rate: price of one currency in terms of another currency
Government restictions on free trade. Tariff: A tax on imports.
The realationship between aggregate demand and the price level
AD is inversely related to the price level. A rse in the price level causes a fall, contraction, in aggregate demand and a fall in the price level results in a rise or extension, in aggregate demand.
AD is downward sloping:
The wealth effect
The rate of intrest effect
The international trade effect
Aggregate supply: AS: The total amount that producers in an economy are willing and able to supply at a given price level in a given time period.
Shifts in the AS curve
Main cause- short run: Change in the costs of production
Main cause- long run: Productive capacity: Changes in the quantitu and quality of resources.
Productivity: Output/production, of a good or service per worker per unit of a factor of production in a given time peroid.
Privatisation: Transfer of assets from the public to the privvate sector.
Macroeconomic equilibrium: A situaton where AD equals AS and real GDP is not changing.
(Real GDP:the contry's output measured in constant prices and so adjusted for inflation.
Demand pull: AD shift to the right
Cost push: AS shift to the left
The circular flow of income: Movement of spending and income throughout the economy.
Income earned by households is spendt on buying goods/services from firms. Or going to:
Leakages: (withdrawals of possible spending from the circular flow of income) Savings, imports and taxes.
Firms use on production and:
Injections: additions of extra spending into the circular flow of income: Investment, government spending and exports.
The multiplier effect: The process by which any change in a component of aggregate demand results in a greater final change in real GDP.
Changes in AD:
Effected by the output of an economy, unemplyment and inflation:
the size of the intial change
the size of the multiplier
the orginal level of economic activity.
Changes in AS:
Depend on the size of the change and the initial level of economic activity. An increase in AS occourring when the economy is at, or close to full capacity will raise the output of the economy and lower the price level. Rises mainly due to advances in technology and improved education.
Changes in AD and AS
AD grows more rapidly than the growth in productive capacity → inflation.
Overheating: The growth in AD outstripping the growth in AS, resulting in inflation.
def: The difference between an economy's actual and potential real GDP. (when an economy is not producing at full capacity.)
Trend growth: The expected increase in potential output over time.