Unit 3.2 - Variations in Economic Activity: Aggregate Demand & Aggregate Supply
What you need to know and understand:
Key concepts:
Concepts to understand:
- Aggregate demand (AD)
- Aggregate demand curve
- Components of AD: consumption (C) + investment (I) + government spending (G) + net exports (total exports [X] - total imports [M])
- Determinants of AD components
- C: consumer confidence, interest rates, wealth, income taxes, level of household indebtedness, expectations of future price level
- I: interest rates, business confidence, technology, business taxes, level of corporate indebtedness
- G: political and economic priorities
- X - M: income of trading partners, exchange rates, trade policies
- Shifts of the AD curve caused by changes in determinants
- Short-run aggregate supply (SRAS) curve and determinants of the SRAS curve
- costs of factors of production
- indirect taxes
- Shifts of the SRAS curve
- Alternative views of aggregate supply (AS)
- Monetarist/new classical view of the long-run aggregate supply (LRAS) curve
- Keynesian view of the AS curve
- Inflationary and deflationary/recessionary gaps
- Shifts of the AS curve over the long-run (monetarist/new classical LRAS) or over the long term (Keynesian AS)
- Changes in the quantity and/or quality of factors of production
- Improvements in technology
- Increases in efficiency
- Changes in institutions
- Macroeconomic equilibrium
- Short-run equilibrium
- Equilibrium in the monetarist/new classical model
- Determination of long-run equilibrium at full employment level of output (potential output)
- Automatic adjustment to full employment equilibrium
- Unemployment at full employment equilibrium is equal to the natural rate of unemployment
- Equilibrium in the Keynesian model
- Persistence of deflationary/recessionary gaps: equilibrium level of output might not equal the full employment level of output
- Assumptions and implications of the monetarist/new classical and Keynesian models
Key concepts:
- Scarcity
- Choice
- Efficiency
- Equity
- Economic well-being
- Sustainability
- Change
- Interdependence
- Intervention
Concepts to understand:
- Change in the conditions of the demand and supply sides of the economy cause economic activity to vary over time.
- Fluctuations in economic activity impact the economic well-being of individuals and societies.
- Different schools of macroeconomic thought identify different causes and offer different solutions for macroeconomic problems.