Output Gap An output gap is the difference between an economy’s actual and potential GDP It is said to exist when an economy is not producing at full capacity A positive output gap is where an economy’s actual output exceeds their potential output This is...
Changes in AD and AS In most economies, AD and AS both increase over time For AD, consumption and investment usually constantly increase AS mainly increases due to improved education and advances in technology Some changes can affect both AD and AAS If a firm decides...
Changes in Aggregate Supply Like with AD, changes in AS will depend upon the size of the change and the initial level of economic activity.
Changes in Aggregate Demand The three main things that effect how much impact a change in AD will have on the output of the economy, unemployment, and inflation, are: The size of the initial change The size of the multiplier The original level of economic activity...
The Circular Flow of Income The circular flow of income is a model that seeks to explain how the economy works and how changes in AD occur There are two ‘sectors’ – Households and Firms Between these two are the ‘flows’ – income, products, and factor services...
The Multiplier Effect When injections exceed leakages, AD will increase. The initial increase from AD (purely from the injection) will then be followed by a further increase in AD, when the effects of the injection occur This is the multiplier effect – The process by...
Macroeconomic Equilibrium Macroeconomic Equilibrium occurs when AD and AS are equal This means that there is no reason for the economy’s output and price level to change, as total domestic output and the price level will be stable ...
Shifts in the Aggregate Demand Curve A change in Price Level will cause a movement along the AD curve, whereas a change in any other influence will cause the AD curve to shift outwards to the left (decrease) or right (increase) A change in any of the determinants of...
Aggregate Supply Aggregate supply is the total amount that producers in an economy are willing and able to supply at a given price level in a given time period.
Shifts in the Aggregate Supply Curve A change in AS means that the total output that producers are willing to supply at any given price level alters An increase in AS means an increase in the productive capacity of the economy The main causes of this in the short run...
The Components of Aggregate Demand Consumer expenditure is also known as consumption For most countries, it is the largest component of aggregate demand. Examples of consumer expenditure include spending on items like clothing, food and insurance. Investment is the...
The Relationship Between Aggregate Demand and the Price Level Aggregate Demand is inversely related to the price level – A rise in the price level causes a fall in aggregate demand
Aggregate Demand Aggregate demand (AD) is the total demand for goods and services produced in an economy at a given price level and in a given time period. This planned expenditure on domestic output comes from households, firms, the government and foreigners. It is...