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Aggregate Demand/Supply - Coggle Diagram
Aggregate Demand/Supply
Definition: Total amount of real output that consumer, firm, government and foreign countries to buy at each possible price level over particular time period.
Consumption spending
Consumer confidence
Changes in consumer confidence > If consumers are optimistic about the future, they are likely to spend more on buying goods and services, AD curve will shift to the right
Interest rates
An increase in interest rates makes borrowing cost more expensive, resulting i lower consumer spending. Ad curve shift to the left
Wealth
An increase in consumer wealth (increase in value of homes) makes people feel wealthier, consumer spend more, AD curve shift to the right
Personal income taxes
If government increases income taxes, consumer disposable income will fall, therefore, consumption spending decrease, AD curve shift to the left
Household indebtness
If consumers have a high level of debt (taking out loans), they are under pressure to pay back their loans plus interest, purchasing power will decrease, they will likely to reduce expenditure, consumption spending will decrease, AD curve will shift to the left
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Investment spending
Business confidence
If businesses are optimistic, they spend more on investment. AD curve will shift to the right
Interest rate
Increase in interest rate raise the cost of borrowing, force businesses to reduce investment spending financed by borrowing. AD curve shift to the left
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Business taxes
If the government increases taxes on profits of businesses, firms' after-tax profits fall, investment spending decrease. AD curve shift to the left
Institutional changes
Increasing access to credit (the ability to borrow) and securing property rights would result in increases in investment spending. AD curve shift to the right
Corporate indebtedness
If businesses have high levels of debt due to past borrowing, they will be less willing to make investments. AD curve shift to the left
Government spending
Political priorities
Government may decide to increase or decrease its expenditure in response to changes in its priorities. Increase government spending will shift AD curve to the right
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Net export
National income abroad
If country B's national income increases, it will import more goods and services from country A, so that country A's exports will increase. AD curve in country A shifts to the right
Exchange rates
Price of currency in country A increase, becoming more expensive relative to currency of country B. Country B now finds country A's output more expensive, so it imports less from country A. Exports country A will fall, AD curve shift to the left
Trade protection
Suppose country A trade freely with country B. However, country B's government decides to impose restrictions on imports from country A. Country A exports will fall, AD curve shift to the left
Definition: total quantity of goods and services produced in an economy (real GDP) over a particular time period at different price levels
Wages: If wages increase, firm's cost of production rise, SRAS curve shift to the left
non labour resource prices: An increase in price of resources will increase the cost of production. SRAS curve shift to the left
Indirect tax: Higher indirect tax will increase production costs, SRAS curve will shift to the left
Subsidies: Increase in subsidies will reduce cost per unit of products, SRAS curve will shift to the right
Supply shock: a war can result in destruction of physical capital, leading to lower output produces, SRAS curve shift to the left
Deflationary (recessionary gap): It happened when ay price level, real GDP is less than potential GDP. Firms require less labour for their production; unemployment is greater than natural rate of unemployment
Inflationary gap: real GDP greater than potential GDP; unemployment less than natural rate of unemployment -too much demand in economy, greater quantity of output, firms hire more workers
Full employment level: economy is producing its potential GDP, unemployment is equal to the natural rate of unemployment
Increase in quantities of FOP: If physical capital or quantity of land increases, economy is capable of producing more real GDP, the LRAS curve and Keynesian AS curve shift to the right
Improvement in the quality of FOP: Greater levels of education, skills or health lead to an improvement in the quality of labour. More highly skilled workers will produce more output
Improvements in technology: Improved in technology of production means that the factors of production using it can produce more output. AS curve shift to the right
Increases in efficiency: When an economy increases its efficiency in production, it makes better use of its scarce resources, as a result produce a greater quantity of output
Institutional changes: The degree of private ownership of resources, the degree of competition can affect the quantity of output produced.
Reduction in natural rate of unemployment: The natural rate of unemployment is the unemployment that is normal for the economy. The natural rate of unemployment differs from country to country, it is decreases, the economy making better use of resources producing more output