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Unit 3 Macroeconomic(Variations in economic activity—aggregate demand and…
Unit 3 Macroeconomic(Variations in economic activity—aggregate demand and aggregate supply)
formula
Aggregate demand = C + I + G + (X − M)
Aggregate demand
AD is the total value of goods and services demanded by different groups at a given price level in an economy. It is the sum of the expenditure categories that make up GDP at a specific price level.
effect
income effect
When consumers’ real income increases as the price of a product declines, so consumers can buy more of a product; one explanation for the law of demand.
substitution effect
When consumers substitute relatively lower-priced goods when the prices of those goods decline, thereby consuming more of them; an explanation for the law of demand.
The wealth effect
The impact of citizen wealth on their aggregate propensity to demand in the economy.
The interest rate effect
The impact of interest rates on the spending and savings habits of citizens, affecting their propensity to demand in the economy.
The net balance effect
The effect of the relative price level of imports and exports on people’s propensity to demand in the economy.
consumption
The expenditure by households on goods and services in the product market.
Real interest rates
The interest rate with inflation taken into account
Unemployment
The threat of becoming unemployed is a big factor of concern for people, but also for annual real incomes.
Confidence
When consumers start feeling anxious about the economy or their own economic prospects, they may choose to reduce their consumption, causing a leftward shift of the AD curve and reduced national output.
Personal taxes
The amount that we have to pay in tax to the government varies from country to country but, generally, most countries pay for public services using the revenue earned from taxes.
inflation
A sustained increase in the general price level over a period of time.
Investment
Investment is the expenditure by firms on capital stock, such as building factories and purchasing machinery. It is the planned investment for expansion.
Exchange rates
The value of a currency in terms of another
trade policies
The regulations and agreements that control imports and exports to foreign countries. This may include protectionism as well as trade agreements that create trading blocs
protectionism
A set of policies designed to protect domestic firms from the competition of foreign firms in the domestic firms market. This includes policy action such as tariffs, quotas and subsidies.
aggregate supply
AS refers to the total output that all firms in a country are able to produce at any given price level.
short-run aggregate supply
SRAS is the supply of the nation in the short run, or when resource prices for most firms will remain constant.
short-run aggregate supply curve
resource prices
government intervention
government subsidies
supply shocks.
Governments may provide subsidies to firms in order for them to be able to expand on their productive resources
factors
the degree of private to public ownership of resources
degree of competition
quantity and quality of government regulations
bureaucracy (or the lack of it)
inflationary gap
Where the economy overheats, and produces above full employment. It creates upward pressure on the price level.
Unit 3 Macroeconomic(Variations in economic activity—aggregate demand and aggregate supply)
recessionary
A recessionary gap is where the economy slows and operates below full employment. It creates unemployment.
deflationary gap
This occurs when aggregate demand falls and creates a negative output gap (meaning that output is below the full employment level). During this period, there can be downward pressure on the price level, hence the use of the word ‘deflationary’ in the term.
business cycle
The boom–bust cyclical nature of the economy.
recessionary gap