Macroeconomics

• what is aggregate demand?

  total spending in an economy, within a particular time period

  AD= C + I + G + (X-M)
• AD curve?

  shows a negative relationship between the price level and the level of real expenditure in an economy

  Change in price level— movement along the curve

  change other than price- shift of the curve

  rightward shift- increased AD
• wage rates on SRAS?

  increased wages= increased firm costs of production= firms respond by increasing prices

  increased wages= leftward shift

  decreased wages= decreased cost of production= firms respond by decreasing prices

  decreased wages= rightward shift in SRAS (downwards)
• raw materials on SRAS?

  increased price of raw materials=increased cost= firms icnrease prices= leftward shift of SRAS

  Decreased price of raw materials= decreased costs= firms decrease prices= rightward shift of SRAS
• indirect tax and regulation on SRAS?

  expenditure taxes: VAT on cigarettes, alcohol

  indirect tax: paud by the firm and hence increases costs

  regulation: rules, laws eg minimum wage, health and safety

  increase direct tax/ regulation= increased cost ot firms= leftward shift of SRAS
• oil prices on SRAS?

  increases oil prices= increased costs= leftward shift of SRAS

  oil prices usually fluctuate due to cartel behaviour (OPEC)
• import prices on SRAS?

  products that have volatile prices increase and decrease regularly such as wood and coal

  we have little choice but to import them, so increased costs of imports causes leftward shift of SRAS
• exchange rates on SRAS?

  changes in exchange rate affects firm costs

  depreciation of £ increases price of imports= increased costs= leftward shift of SRAS

  appreciation of £= decreased price of imports= decreased costs= rightward shift of SRAS
• productivity on SRAS?

  increased training= improved porductivity= decreased average costs= rightward shift
• factors affecting SRAS?

  wage rates

  raw material prices

  indirect tax and regulation

  oil prices

  import prices/ exchange rates

  productivity
• Keynsian curve?

  shows that its possible for macroeconomic equilibrium to be below full employment

  Keynes believed wages don't always adjust downwards during high unemployment and could take 20-30 years

  as output rises, price is initally constant as there is spare capacity, and extra resources can be employed by firms without increasing unit costs.

  as economy nears full employment, it becomes more expensive to increase supply so prices rise

  At full employment, all resources are fully utlised, prices rise not output.

  'in the long run we are dead' so intervention is needed
• classcial curve?

  in the long run there is a limit to how much firms can icnrease supply- run into capacity restraints.

  Occurs as the economy has limited quanity of factors of production so in the long run can't rise above capacity of economy

  LRAS= capacity= productive potential of economy

  Y1 is level of output achieveable when all resources are fully employed

  Assumes wages and prices are flexible, output returns to Y1.

  If below Y1, unemployment causes decreased wages from excess supply, so firms employ more and produce at lower cos— shifts SRAS curve rightwards

  unemployment= short term
• shifts of LRAS curve?

  both classical and keynsian due to same factors

  Rightward: indicates increase in capacity of economy- potential growth

  cuased by increase in quantity/ quality of factors of production

  supply side policies- government activities to increase quality/ quantity of FoPs

  Leftwar: decrease in capacity of economy- economic shrinkage

  cuased by reduction in quanity/ quality of FoPs

  eg pandemic, wars, natural disasters
• keynsian equilibroum?

  macroeconomic equilibrium occurs at the level of gdp where AD curve intersects AS curve, planned spending equals planned production

  If AD or LRAS shifts there is a new equilibrium

  Ad AD shifts right, GDP rises and prices

  shows effect of gov polcies on:

  inflation- demand-pull inflation due to higher AD

  economic growth- gap has risen

  unemployment- as GDP reaches closer to full employment, it is redcued

  trade off: by increasing AD, economic growth and lower unemployment are achieved but there is demand-pull inflation
• the multiplier?

  the amount by which an inital change in AD must be multiplied to find an eventual change in national income

  multipler process: the mechanism by which a change in AD eventually causes a greater change in national income

  an initial change in any component of AD will set of chain of linked spending known as multipler process- one persons spending is another income

  multiplier: final change in Y/ initial change in AD
• problems with multiplier?

  difficult to measure exact size, time lag between inital increase in AD and eventual increase in national income, other factors could change

  withdraws of saving, taxation and imports mean national income doesn't rise forever
• economic cycle?

  fluculation in the level of economic activity, GDP overtime- follows pattern of slumps and booms

  Recession: at least two consecutive quarters of declining GDP
• recession/ slump?

  rising unemployment, low and falling inflation, negative economci growth so low consumer confidence

  firms have lower revenues and profits so will make workers redundant

  due to low business confidence they will invest less

  Inferior goods increase in demand

  Net exports increase due to decreased demand for imports
• recoveries/ booms?

  low unemployment, demand-pull inflation, rising economic growth, higher consumer confidence

  the economy is working near full capacity, profits and revenues increase for normal goods

  high business confidence (feel good factor) increases investment

  net exports decrease as demand for imports increase
• keynsian unemployment?

  AD may fall because of: a recession, demand-side shock or government policies such as austerity or anti-inflationary policies

  AD shifts let resulting in negative multipler process and fall in GDP. Prices fall as firms cut prices to stimulate demand

  New macroeconomic equilibrium and demand-deficient unemployment
• keynsian beleifs?

  there is no automatic mechanism to return the economy to full employment and low 'animal spirits' prevent rising AD

  believed wages are sticky downwards due to minimum wages, trade unions, resistance from labour and contracts of employment

  'in the long run we are all dead'- to increase employment, government intervention should increase AD and decrease unemployment by economic policy
• classical unemployment?

  negative output gap

  AD shifts left, the economy moves down to the SRAS1 curve

  prices fall due to excess supply

  falling AD creates negative multipler effect leading to higher unemployment, creates disequilibrium in labour marker pushing down wages

  Costs of firms fall and the SRAS shifts right

  as costs fall, prices fall and the economy moves down the AD curve back to full employment at a lower price level

  Demand deficient unemployment is a short run phenomenon- the macroeconomy is self-correcting