Aggregate demand and supply

macroeconomics

Aggregate demand and supply

Aggregate demand

definition: the total planed spending on real output produced within the economy

AD=C+I+G+(X-M)

consumption: the total planed spending by households on real output produced within the economy

investment:the total planed spending by firms on real output produced within the economy

diagram(downward sloping)

i.when price fall consumers experience a wealth effect they feel better off because their income can buy more goods or services. The wealth effect will increase the consumption

ii.Export: A fall in the price of UK goods also lower the price of UK exports so more will sell abroad.also import will become more expensive so demand for domestically produced goods will increase

2.The determinants of consumption and household saving

1.saving：income which is not spent

i.interest rates

definition: the rewards for lending savings to someone else eg.A bank and the cost of borrowing

the rate of interest reward savers for sacrificing the current consumption ,and the higher the rate of interest the greater the reward.Thus ,at particular level of income the amount saved will increase as the real rate of interest rises and the amount consumed will fall

ii.the level of income

richer spend less than their income even through their total spending is greater than the poor and the rich are positive savers

iii.wealth: the stock of assets or things that have value,which people own

The An increase in house prices usually causes home-owners to consume more and to save less from the current flow of income

iv.consumer confidence

the consumer's view about future has marked effect on what they do with their limited income.when consumers optimism increase household generally spend more and save less.

government boost economy by enhancing credibility of government economy policy

v.the availability of credit

if the credit become easily and cheaply consumption increases as people supplement current income by borrowing on credit created by banking system.

controls on bank lending and hire purchase control.

iv inflation

investment the total planed spending by firms on final goods or services

the determinants of the rate of interest

1. the rate of interest

as borrowing will be cheaper and firms will wish to invest in new equipment to maintain or improve their competitive position.and increase in rate of interest will deter some investment

2. Business confidence

positive expection: business expect the future sales and profits to improve due to factors like increased aggregate demand(interest rate fall) ----are likely increase their inverstment

Negative expection: business expect the future sale and profits to be less due to factors like falling aggregate demand

3. the rate of technical progress

new equipment and technological development are likely to lead to increase business investment.As firm without the state of art equipment will lose sales to those that have it

4. t

Net export

1. UK major trading partner

if the UK major trading partners are in recession AD curve will shift leftward

2.value of pound sterling

if the sterling has fallen in value against euro UK exports will be cheaper in Europe and sales should increase shift AD rightward

Government expenditure

Aggregate supply

definition:is the level of real national output that producers are prepared to supply at different average price levels

Short run aggregate supply

output increases but price rise relatively slowly

An increase in demand will have larger effect on ouput than prices

factor that affecting short run aggregate supply

i. an increase in money wage rate

ii.an increase in the rate of interest

iii. a rise in the price of imported raw material

iv.an increase in corporation tax

the long run aggregate

when all factors of production are fully employed and the productive capacity of economy is reached

factor affecting LRAS

i.an increase in the amount of capital investment

ii.Technology as improved technology produces capital equipment that is more productive than previous capital equipment

iiiattitude

ivpolicies that persuade a large proportioan of labour force to work will reduce the natural rate of unemployment (eg reduce income tax and real value of
unemployment benefits to encourage more labour to participate economy

v.productivity,increase productivity will increase the output of labour over time

and five macroequilibrium diagram