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9 Cards in this Set
- Front
- Back
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Aggregate demand (definition) |
The total amount that households, firms, government, and overseas buyers spend on Australian-made goods at each price level |
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Difference between AD and aggregate expenditure |
AD includes unplanned changes in inventories whereas AE does not |
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Reasons for AD curve (negative relationship) |
Income effect >> As price increases ceteris paribus, consumers real income falls and so they are only able to purchase a lower quantity of output: AD falls as price level rises Interest rate effect >> As price increases, the demand for loanable funds rises, this causes interest rates to increase. Higher rates will reduce consumption and investment, causing AD to fall Net export effect >> A price increases, Aus-made g/s become less internationally competitive and so consumers will shift to cheaper overseas-made items |
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Aggregate supply (definition) |
The total amount of output firms are willing to offer for sale at each price level |
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3 stages of the AS curve |
Keynesian, Intermediate, Classical |
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Keynesian range |
When the level of economic activity is very low, there will be a high rate of unemployment. This means that it will be relatively easy for firms to gain the resources they need to expand production, without incurring high per-unit costs. |
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Intermediate range |
As factor markets tighten, firms need to start offering higher wages (or better working conditions) to entice additional workers to join their firm. This raises the firm's cost-per-unit, so they will charge higher prices to protect profits. |
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Classical range |
The economy has reached full employment. If one firm wishes to expand their production, they can obtain extra resources by poaching them from another firm. Costs of production will rise as wages rise, causing firms to charge higher prices. |
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Macroeconomic equilibrium |
When the economy is operating at the intersection of AD and AS. |
