Aggregate supply worksheet

Aggregate supply worksheet

Objective 1 and 2: define short-run aggregate supply (sras)

AS is the total amount of goods and services that all industries in the economy will produce at every given price level

Always long and short run

Short run is when all the factors of production do not change

The short run in microeconomics is the period of time when the prices of the factors of the production do not change so there is a positive relationship between output and average price levels.

Shifts in the SRAS curve

A change in anything other that price level will result in a shift of the whole sras curve

Typical examples of supply side shock

A change in wage rates

Ec. Gov increases min wage

A change in cost of raw material

-          Like oil

Define supply side shock- factors that result in changes (usually in increase) in the cost of production.

Decrease costs will cause sras to increase shift right

Increase in costs will cause sras to decrease- shift let

Typical examples of suuplu side shocks.

Changes in wage rates	Increase in wages- increase in cost of production to firms so a decrase in SRAS. IE.  Gov raises legal minimum wgae
Change in costs of raw materials	To affect SRAS the raw material must be significant. IE. Oil So an increase in price of oil decrease in SRAS
Change in price of imports	Increase import prices decrease in SRAS A fall in currency value -> more expensive imports decrease in SRAS
Changes in gov indirect taces or subsidies	Increase in taxes-> incease cost to firm -> decrease in SRAS Decrease in subsidies -> increase cost to firm-> decrease in SRAS

Equilibrium

Short run macroeconomic equilibrium occurs when aggregate demand is equal to SRAS

The long run is a time period long enough that all factor prices change

LRAS is highly dbated among economists

The two types of LRAS are:

The Keynesian LRAS curve

The neo-classical LR         AS curve

-The keynesisian LRAS curve

-          Three phases.

Objective 4: distinguish between the short run aggregate supply curve (sras) and the long run aggregate supply curve (Lras)

Short-run aggregate cupply (sras)- shows a positive relationship between level of putput and average price levels because prices of factors of production are fixed

Long-run aggregate supply curve LRAS- Represents the level of output at full employment *natural rate of unemployment) or when the economy reaches its potential output

Keynesian AS

The Keynesian AS curve shows three phases and does not really distinguish between the SR and the LR

Phase 1: perfectly elastic phase- low output levels mean industries can increase output without incurring higher average costs due to spare capacity in the economy

Phase 2: security phase- as the economy approaches Yf spare capacity is used up and FOP are scarce. Producers start competing for scarce FOP so increased output means higher costs so higher average price levels

Phase 3: Economy has reached full capacity (yf) so output cannot be increased so competition amng firms for FOP results in increase average price levels (inflation) output cannot go up without a shift in the curve

Neo-classic monetarist (the Austrian school)

-          These schools of thought believe in the efficiency of the market so promote minimal gov intervention in the allocation of resources

-          LRAS is vertical at Full employment level of output which represents potential output

-          View asserts that the potential output is based entirely on the quantity and quality (productivity) of fop and not an price level

-          So LRAS is independent of price level, Price levels might raise but level of output does not change.

The LRAS curve will shift outward if there is an improvement in the quality (increase in productivity (output per unit of input) of fop) or an increase in the quantity of the factors of production

                -Improvement in quality and increase in quantity are both often due to advances in technology- so tech improvements are vital to supply side of any economy.

Factor of production	Increase In quantity	Increase in quality
Land (all natural resources)	Land reclamation (Netherlands reclaiming the sea from the north sea) Increase access to supply Discovery of new resources	Tech advances that allow increased access or discovery of new resources Fertilizers irrigation
Labor + entrepreneurship	Increase of birth rate Immigration Decrease in natural rate of unemployment	Education Training Re-training Apprenticeship programs
capital	Investment	Tech advances that contribute to more efficient capital Resource and development

Interventionist supply side policies (keynsisian)	Market based supply side policies (classic)
Investment in human capital (education) (training)	Reduction in household income taxes
Research and development Tax incentives, enforcing intellectual. Property rights or research and development in universities	Reduction in corporate taxes
Provision and maintenance of infrastructure	Labor market reform 1)reduce trade union power 2) reduce or eliminate minimum wage 3) reduce unemployment benefits
Direct support for businesses/industrial policies Anti trust laws, helping small/medium sized firms become established and grow	Deregulation
Infrastucture- large scale capital which is necessary for economic activity to take place, usually provided by government	Privatizing
	Policies to increase competition

agg demand¨

Aggregate demand	The total spending on goods and services in  a period of time at a given price level Consumption The total spending by consumers on domestic goods and services Durable and non durable Investment The addition of capital stock to the economy Replacement investmant Induced investment Government spending Depends on policies Net export Goods and servcices bought and sold by foriegners
Changes in the components of aggregate demand	Changes in income Changes in interest rates If interest rates change there is less borrowing and consumption will fall If interest rates fall people will borrow more Changes in wealth Made up of the assets peopkle own 2 main  factors for wealth A change in the housing market A change in the stocks and shares Changes in consumer confidence If people ar optimistic about the future they will spend more Household indeptness The extents to which households are willing and able to borrow money affect consumption. If interest rates are low and it is easy to borrow and spend increasing AD. If interest rates rise household will have to spend more to re-pay their loans and mortgages and spending will drop.
What causes changes in investment	Interest rates People will borrow money Changes in national income As national ncome rises more demand then more investments into new plants Tech changes Expextations Planning for the future
What causes changes in gov spending	Based on policy
What casuses changes in net export	What causes changes in Net Exports? 1 Changes in domestic national income- An increase in Y puts pressure to decrease 2 Changes in foreign income- When foreign incomes rise rightward preasrure is placed on AD because foreigners buy exports. 3 Relative currency values- If domestic currency has a high value leftward pressure is placed on AD because to foreigners goods/services seem expensive. 4 Trade policies Protectionist policies put leftward pressure on AD whereas free-trade policies place rightward pressure on AD. 5 Relative inflation rates among trading partners Hight inflation rates make goods seem expensive to foreigners.
Fiscal policy	Fiscal policy- the set of governments policies relating to its spending and taxation rate. Direct taxes-taxes on income Indirect taxes- taxes on goods and services Money supply= refers to the amount of money in circulation at a given period of time Interest rate= Base rate/discount rate/prime rate-the price charged to borrow money. The rate charged by the central bank to other banks Expansionary fiscal policy (Encourage consumption-shift AD right) Lower income tax to increase disposable income Lower corporate taxes to encourage investment Increase government spending to improve or increase public services Contractionary fiscal policy (Discourage consumption-shift AD left) Raise corporate taxes Decrease government spending
Monetarty polic	The set of official policies governing the supply of money in the economy and the level of interst rates in an economy Expansionary monetary policy Decrease the interest rate Increase the money supply Decrease the reserve ratio Buy back governments bonds Contractionary monetary policy Increase the interest rate Decrease the money supply Increase the reserve rate Sell gov bonds.

S 14 aggregate demand work sheet

S14: Aggregate Demand

Objective 1: Distinguish between demand and aggregate demand (AD).

Define demand-

the willingness and ability to buy a product at a given time.

Define aggregate demand-        

Total spending on goods and services in a period of time at a given price level.

 Microeconomic demand curve                         Macroeconomic demand curve

p

                                                                     average

                                                                   price level

                                                GDP price deflator                                                      AD

           Quantity                                          Real output=real gdp=national income=y

Objective 2: Define and describe the components of aggregate demand. *think GDP expenditure approach here.

Consumption	The total spending by consumers on domestic goods and services ·         Durable Goods-any good that’s going to be consumed over a period of time. ·         Non-Durable Goods- are goods such as rice, toilet paper and newspapers that are used immediately or in a relatively short period of time.
Investment	Defined as the addition if capita stock. Investment is carried out by the firms and there are two types: 1. Replacement investment- firms spending to maintain the productivity if their existing capital. 2. induced investment occurs when firms spend on capital to increase their output to respond to higher demand in the economy. ·         Capital Stock- includes all goods that are made by people and are used to produce other goods or services such as factories, machines, offices or computers.
Government spending	Governments at a variety of levels (federal, state/provincial) spend on a wide variety of goods and services; health, education, law and order, transport, social security, housing and defence. Depends on gov. policies.
Net exports (X-M)	Export revenues minus import expenditures (the figure can be either positive (when revenues exceed expenditure) or negative (when expenditure exceeds revenues)) If net exports is pistive it will add to AD, if it is negative, it will reduce AD

Objective 3- Explain the determinants of the components of AD.

What causes changes in Consumption?
1	Changes in income-	When national income goes up, aggregate demand goes up.
2	Changes in interest rates-	When interests rates goes up, aggregate demand goes down
3	Changes in wealth-	An increase in wealth results in a rightward shift of the AD curve Wealth goes up demand up
4	Changes in expectations /consumer confidence-	Optimism about the economic future results in more spending now: ogton measure by consumer confidence index
5	Household indebtedness-	The extents to which households are willing and able to borrow money affect consumption. If interest rates are low and it is easy to borrow and spend increasing AD. If interest rates rise household will have to spend more to re-pay their loans and mortgages and spending will drop.

What causes changes in Investment?
1	Changes in Interest Rates	When it goes u demand goes down
2	Changes in level of National Income	If it goes up demand goes up
3	Technological Changes	When it goes up demand goes up
4	Changes in expectations /business confidence-	When it goes up demand goes up

What causes changes in Government Spending?
1	Changes in policy-	Dependent on policy

What causes changes in Net Exports?
1	Changes in domestic national income-	An increase in Y puts pressure to decrease
2	Changes in foreign income-	When foreign incomes rise rightward preasrure is placed on AD because foreigners buy exports.
3	Relative currency values-	If domestic currency has a high value leftward pressure is placed on AD because to foreigners goods/services seem expensive.
4	Trade policies	Protectionist policies put leftward pressure on AD whereas free-trade policies place rightward pressure on AD.
5	Relative inflation rates among trading partners	Hight inflation rates make goods seem expensive to foreigners.

Determinants at a Glance

C ∆s in Y ∆s in i (interest rate) ∆s in consumer confidence ∆s in wealth Household indebtedness

I ∆s in Y ∆s in i (interest rate) ∆s in business confidence Technological changes

G ∆s in government policies

X-M ∆s in Y ∆s in foreign Y ∆s in exchange rates ∆s in trade policies Relative inflation rates

Objective 5: Illustrate shifts of the AD curve.                                                                       AD shifts right/left/uncertain

1	Congress cuts taxes	right
2	Interest rates rise	left
3	Government spending to increase; president promises no increase in taxes.	right
4	Consumer confidence jumps	right
5	Stock market collapses	left
6	Productivity rises for fourth straight year	right
7	Value of the pound increases sharply	left

Objective 7: Explain how governments can use monetary and fiscal policy to alter the level of AD in an economy.

Fiscal policy- the set of governments policies relating to its spending and taxation rate.

Direct taxes-taxes on income

Indirect taxes- taxes on goods and services

Money supply= refers to the amount of money in circulation at a given period of time

Interest rate= Base rate/discount rate/prime rate-the price charged to borrow money. The rate charged by the central bank to other banks

Expansionary fiscal policy

(Encourage consumption-shift AD right)

Lower income tax to increase disposable income

Lower corporate taxes to encourage investment

Increase government spending to improve or increase public services

Contractionary fiscal policy

(Discourage consumption-shift AD left)

Raise corporate taxes

Decrease government spending

Expansionary monetary policy

Decrease the interest rate

Increase the money supply

Decrease the reserve ratio

Buy back governments bonds

Contractionary monetary policy

Increase the interest rate

Decrease the money supply

Increase the reserve rate

Sell gov bonds.

Objective 8- Explain the Nature of a government budget

Government budget-refers to the total spending by all levels of government and is split into three categories

1.       Capital expenditure- includes spending that adds the capital stock of the economy, ie. Upfrading ahighway or school

2.       Current expenditure- on going spenind such as purchases of textbooks or wages to  publice sector employees

3.       Transfer payments-

Gov revenue comes from

Taxes- direct income

Tariffs- taxes on imported goods

Profits- or sales of nationalized businesses

Rent- of gov owned buildings or land

-          Governments lay out their national budgets yearly showing their expected revenues and expenditure this is called the fiscal stance

-          Budget surplus- when governments earns more than it spends

-          Budget deficit- when governments spends more than it earns

-          Balanced budget- when governments earning equal what they spend

To finance or run a budget deficit the government musr borrow money from

a)      Household

b)      Firms

c)       Foreign countries

-          To do this they sell gov bonds

-          People buy bonds as  as a form of saving; they lend money to the government and are eventually paid back along with extra payment

-          The national debt is the sum of budget deficits over time.