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AD-AS Model - Coggle Diagram
AD-AS Model
Analysis in increase in AD
Excess spare capacity (from one
eq and the multiplier effect)
Initial equilibrium
Shift in AD (increase in C, G, I OR X)
Adjustment process
1) unused resources are hired at the same cost
2) no change in GPL
3) along the AS curve
4) E2 reached at AD2 = AS1
5) Real output Y1
State the multiplier effect
Limited Spare Capacity (one eq to another
and the multiplier)
Initial equilibrium
Shift in AD ( increase in C,G,I or X)
Adjustment process
1) firms will have to bid dup factor prices
2) GPL increases
3) movement along the AD and AS curve
4) E2 reached where AD2 = AS1
5) Real output increases from Y1 to Y2
State the multiplier effect
Full employment
Initial equilibrium
Shift in AD (increase in C,G,I or X)
Adjustment process
1) unable to produce more output
2) all resources have been utilized
3) upward pressure GPL
4) movement up along the AS curve
5) E2 reached at AD2 = AS1
6) Real output still remains at Yf while GPL increases to P2
Factors affecting the extent of multiplier effect
Availability of spare capacity
Size of marginal propensity to consume (MPC)
Aggregate Demand
Total spending on economy's products at different general price levels
Consists of
Investment Expenditure (I)
spending by the firms on capital goods such
as capital stock and net additions to stock
Factors
Change in interest rates
Change in expected returns
Change in business outlook or expectations
Political stability
Infrastructure
Skills in the workforce
Change in domestic GDP growth
Change in level in technology
Improve the quality of their products
Develop new products
Reduce costs of production
Government Expenditure (G)
Factors
The state of the current economy
The government plans for the future economy
The size of the government's budget
government spending on goods and services
autonomous of income
Net Exports (X-M)
Difference between export revenue and import expenditure
Factors affecting export revenue (X)
Change in foreign national income
Change in exchange rate
Change in relative price levels
Factors affecting import expenditure (M)
Change in domestic national income
Change in exchange rate
Change in relative price levels
Consumption expenditure (C)
spending by households on consumer goods
Factors
Change in availability of credit
Change in consumer confidence
Change in net taxes
Change in interest rates
Change in expected in future price changes
Change in the level income
Used to explain the multiplier effect than explaining shifts
Difference between income and wealth
Shape of AD curve and movements
along the AD curve
Wealth Effect
Interest Rate Effect
Exchange Rate Effect
Aggregate Supply
Shape of the curve
Horizontal Range
Excess Spare Capacity
Attract more resources without raising prices
Intermediate Range
limited spare capacity
experience shortages of resources as it approached full employment of resources
Vertical Range
full employment of resources
maximum output with existing resources
Shifts in AS curve
Vertical Segment
Change in quantity of resources
Investment
Immigration and population growth / greater population of working age
Change in the quality of resources
State of production technology
Horizontal Segment
Change in cost of production