Aggregate Demand =
The level of demand across the whole economy.
When prices rise, aggregate demand falls.
Aggregate means: the sum of
The aggregate demand curve:
- it’s inverse, lower price means higher demand and vice versa
What are the elements of aggregate demand (AD):
- C - Consumption
- I - Investment
- G - Government expenditure
- X - Exports
- M - Imports
AD = C + I + G + X - M
How is Aggregate Demand effected by government spending
- it shifts the inverse curve out.
- so if the price stays the same of a product the quantity demanded will increase, because there is more money available in the economy.
Other factors that effect Aggregate Demand:
- government spending
- economic conditions in other countries
- expectations about the future
- competitiveness in the export market
- government policy
The Aggregate Supply curve =
- slopes upwards
- it’s the total supply of goods and services in a national economy
- curve moves out to the right, if the economy grows.
What factors effect Aggregate Supply?
- Factors affecting suppliers’ ability to produce
- changing costs
The long run of Aggregate Supply
At some point the Quantity supplied will be at its maximum. The price can go up, but the supply won’t increase further.
Short run Equilibrium:
The equilibrium point is where the price of the quantity supplied matches the price of the quantity demanded
Aggregate quantity =
The same as the National Income (Y), on the Aggregate Demand and Aggregate Supply diagram
Equilibrium in the long run
LRAS = long run aggregate supply, this is when supply is at its maximum, it means full employment, the economy is working at its full capacity
This doesn’t usually happen. Often demand and supply reach an equilibrium before maximum supply has been reached.
Inflationary gap::
Is when LRAS has reached its maximum, and AD hasn’t, which pushes the price up.
Government policy to manage Inflationary gap:
- increase taxes to reduce demand
Deflationary gap:
- when demand is lower than LRAS and therefore pushing prices down
- the economy is below the full employment output level; there are spare resources
Government policy to manage deflationary gap:
- reduce taxes to increase demand
Movements to the right in the AS curve - what are the effects:
- national income increases
- deflation; prices are falling
- rising employment
