AD + AS

• What condition indicates economic equilibrium?

  Withdrawals equal injections
• What does AD = AS signify in economics?

  Aggregate demand equals aggregate supply

  
• What happens at a price above equilibrium?

  There will be excess supply
• What occurs at a price below equilibrium?

  There will be excess aggregate demand
• What are the effects of a rightward shift in AS?

  • Increases productivity and efficiency
  • Lowers average price level from Pe to P1
  • Increases national output from Ye to Y1
• What are the effects of an inward shift in AS?

  • Increases price level
  • Decreases national output
• What happens when AD shifts inwards due to less confidence?

  • Price level falls from Pe to P1
  • National output falls from Ye to Y1
• What occurs when AD increases?

  • Price level increases
  • National output increases
• What is the multiplier ratio?

  Ratio of rise in national income to AD
• What does the multiplier effect indicate?

  Initial increase in AD leads to larger income rise
• How does new demand affect the economy?

  It injects more income into the circular flow
• What are the consequences of the multiplier process?

  • Economic growth
  • Job creation
  • Higher average incomes
  • Increased spending
  • More income generated
• What does 'one person’s spending is another person’s income' imply?

  Spending creates income for others
• What is the marginal propensity to consume (MPC)?

  Proportion of additional income used for consumption
• How does a higher MPC affect the multiplier size?

  It increases the size of the multiplier
• How can the government influence the MPC?

  By changing the rate of direct tax
• What is the relationship between MPS and MPC?

  MPS plus MPC equals 1
• What happens if consumers save more than they spend?

  The size of the multiplier will be small
• What does the marginal propensity to import (MPM) indicate?

  Income spent on imports rather than domestic goods
• How does MPM affect the multiplier size?

  It reduces the size of the multiplier
• What is one formula to calculate the multiplier?

  1/(1-MPC)
• What does an open economy have in terms of withdrawals?

  Taxes, imports, and savings
• If consumers spend 0.6 of every £1, what is the multiplier?

  2.5
• How is the marginal propensity to withdraw (MPW) calculated?

  MPW = MPS + MPT + MPM
• What is another formula for calculating the multiplier?

  1/MPW
• What is the significance of the multiplier to shifts in AD?

  • Large multiplier with spare capacity
  • Small multiplier with inelastic SRAS
  • Higher inflation leads to higher interest rates
  • Discourages spending and encourages saving
• What happens if SRAS is elastic?

  Large increase in national income from AD rise
• What occurs if SRAS is inelastic?

  Prices increase instead of full income rise
• What is a 'reverse' multiplier?

  Withdrawal leads to larger income decrease
• What can a reverse multiplier lead to?

  Decrease in economic growth
• What are the potential outcomes of a reverse multiplier?

  • Larger decrease in income
  • Decline in the economy
  • Reduced economic growth