Macro 3- Determinants of AD and SRAS

• Formula for AD C+I+G+(X-M)
• What causes Extensions and contractions in AD?

  Wealth effect

  Trade effect

  interest effect
• What is the wealth effect? As price level falls the purchasing power of consumers income increase which increases consumption
• What is the trade effect? When price levels fall exports become more competitive when imports become less competitive and increases revenue
• What is the interest effect? a change in the interest rates leads to a change in spending within the economy
• Determinants of Consumption

  Real disposable income

  Interest rates

  Consumer confidence

  Asset prices

  Household indebtedness
• Determinants of saving

  Real disposable income

  Interest rates

  Consumer confidence

  Range/Trustworthiness of financial institutions

  Tax incentives

  Age of population
• Determinants of investment

  Interest rates

  Business confidence

  Corporation tax

  Spare capacity

  Level of competition

  Price of capital
• Determinants of Government spending

  Current spending- maintenance of public services

  Capital spending- infrastructure

  Welfare spending- benefits

  Debt interest payments
• Determinants of net exports

  Real disposable income earned abroad

  Real disposable income earned at home

  Strong/Weak exchange rates

  Relative inflation levels
• Factors which shift SRAS

  Cost of production

  New tech

  Nominal wages

  Tax and subsidies

  Exchange rates

  Government regulation

  Productivity