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Macroeconomics notes

Aggregate demand and aggregate supply and their interaction

Aggregate Demand – the total demand for goods and services produced in an
economy at a given price level in a given time period
...

o There are several factors that affect consumption
" Income – as it increases, consumption rises (Households will also
save some of the extra income, but this saving doesn’t amount to
the extra amount which is spent
...

" Consumer confidence – when higher so is expenditure
...
g
...
If indirect taxes (e
...
V
...
T
...

Investment is made by firms on assets they’ll use to produce goods e
...

" Risk – if there is a high risk that the firm will not benefit from the
investment they make on the capital good, then it is unlikely the firm
will invest in them
" Government incentives/regulations – subsidies or corporation tax
reductions encourage investment for businesses as they have more
funds
" Interest rates – when high, investment tends to be lower:
• Firms often borrow the money they wish to invest, so high
interest rates reduce profitability
• When using their own funds, there is a greater opportunity
cost of investing in capital goods instead of putting funds into a
bank account with high interest rates
...

o There are several factors that affect government spending:
" The level of economic activity in the economy – if unemployment is
high, the government will spend more on benefits, causing a budget
deficit (when spending > revenue)
...
This will constantly push expenditure up
...
g oil (which has no substitutes) or it could be price
inelastic because of time lags before countries switch to
substitutes
...

• In the long run, if values of currency increase, imports become
cheaper and exports become more expensive for foreigners
...
However,
demand for exports will fall because they are more expensive
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" Real disposable income (income after taxes and inflation)
• A rise in income abroad will result in more exports e
...


Any change in the determinants of aggregate demand will cause the curve to
shift
...



Aggregate Supply – the total amount of goods and services which can be
supplied in an economy at different price levels over a given period of time
...

" Quantity and quality of factors of production
o If they both improve then the AS curve will shift to the right, due to
higher efficiency and productivity levels in an economy

Equilibrium: When aggregate supply is
equal to (meets) aggregate demand

Equilibrium may change:
• If there is some change in external
factors
...
g
...
This would shift the
aggregate supply curve up if the
oil price went up and vice versa)
Real GDP


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The Circular Flow of Income

• The movement of money by spending and income throughout the
economy
...


Formula :
Eventual Change in Real GDP/Initial Change in Injections

Government economic policy objectives and indicators of national
economic performance

Economic Growth: In the short run, an increase in real GDP, and in the long run,
an increase in productive capacity (the maximum output that the economy can
produce)
...
If your real
GDP is higher, you can afford to invest ore in capital goods
...


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o Inflation leads to reduced competitiveness
...

o Negative externalities (e
...
pollution) - If there is too much
growth, there are more negative externalities with companies
trying to produce more
...
e
...
if the economic growth was mainly through the city of
London, the bankers etc
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o Fast economic growth may lead to over-exploitation of finite
resources that will limit future growth
• Economic growth can be measured using GDP
o Issues of GDP as a measure include:
" Population change can distort real GDP per capita - if
overall GDP increases sue to a higher population, GDP per
capita may not be any higher
...
It could
just be higher prices due to inflation, not more production
...
But the exchange rate isn't a fair
representative as it is affected by lots of things
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Rate of Unemployment: The percentage of the total labour force that is
unemployed but actively seeking employment and willing to work
...
This is survey is carried out by the
International Labour Organisation (ILO) –if someone comes into those
categories then they are added into the ILO unemployment count
...
g raise school
leaving age to 19 so they cannot claim JSA, - numbers seem
smaller)
" It excludes people who are looking for work but are
ineligible/do not want to claim JSA
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Causes of Unemployment

• Demand side factors
o Cyclical Unemployment – unemployment arising from a lack of
aggregate demand – there is less demand for labour as there is less
demand for goods and services
To reduce Cyclical Unemployment:
" Increase government expenditure and reduce taxes (fiscal
policy), lower interest rates (monetary policy) - This would
mean Aggregate demand would be raised and so their
labour would be required once more
...
This can depend upon
whether the economy is in a boom or slump (if it is in a slump they will
be unemployed for a longer periods), the level of welfare benefits (the
more generous they are, the less urgency there is to get a new job)
...

To reduce Structural Unemployment:
" Offer grants to firms who offer jobs in certain areas
...

" Low cost homing to help workers move to areas of high
employment
...


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•
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This is because employers are less willing and able to offer jobs at that
wage, but employees are more willing and able to work at the higher
wages
...

More transfer payments – likely to contribute towards budget deficit - more
money spent on benefits and less money received in taxation
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Increase in crime - crime levels rise in recessions and fall in booms

Inflation: a sustained rise in the general price level
...

Subsequently this causes an
increase in price level from P1 to P2
...
This will cost push inflation
...
They look at
the normal things that people buy and see how they change over
an amount of time (usually 12 months)
o Retail Price Index (RPI) – a measure of inflation that is used for
adjusting pensions and other benefits
...
This is because UK goods
have raised in price more than elsewhere, so are less
competitive
...

o Value of savings
" The value of savings is going to fall
...

o Shoe leather costs
" If prices are changing all the time and inflation is high, it
means you spend more time trying to find the cheapest
supplier
...

o Fiscal drag
" If the threshold for income tax is not increased in line with
inflation, more people will become high rate tax payers (as
their wages will increase with inflation)
o Inflationary Noise
" High inflation distorts the invisible hand mechanism and
confuses firms
...
(only in terms of
the current account)
The current account is made up of:
o Trade in goods (visible trade)
o Trade in services (invisible trade)
o Investment income (e
...
g
...

• Too little or large a
change in consumer
confidence
...
g
...


Expansionary: Increased government
spending
...

Contraction:
Opposite

Monetary
Policy

The manipulation
of the interest
rates, money
supply and the
exchange rate to
influence
economic activity
and aggregate
demand
...


Expansionary:
Increase money supply (quantitative
easing) Lower interest rates
...

Government
who introduces
them may not
still be in
power when
the benefits
appear
...
Raises prices on imports in
attempt to shift demand from overseas to internal goods
Limit of supply of a good or service that can be an import or
export

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