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
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
