Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Michaela smart
Economics

6/12/14

Discuss the extent to which an increase in aggregate demand may
affect output, unemployment and inflation
Aggregate demand is the total demand for a country’s goods and services ar a
given level and in a given time period
...
A change in any of these will affect AD
...
Real GDP is the country’s output measured in constant pries
and so adjusted for inflation
...

An increase in AD to AD1 would increase national output and decrease
unemployment
...
Thus increasing the number
of people in work and thus decreasing unemployment
...
This increase in AD would not however affect
inflation, this is because at AD the economy was operating at well under full
employment; in other words the output gap was substantial
...
If
national income increases this shows that output has increased as GDP is equal
to income, output and expenditure
...
Output has increased because more people will be
demanding more goods and services so more need to be produced and more
are sold
...
This increase in price level is demand-pull inflation because the
inflation is caused by an increase in AD rather than an increase in the costs of
production
...
The government does not
want AD to increase without LRAS increasing as inflation occurs without and an
increase in output, shown as Y1 being in the same place as Y2
...
Therefore for a company to
expand they must bid for workers and workers are able to demand higher
wages and therefore have an increased income and spend more, thus
increasing consumer expenditure subsequently increasing AD
...
This also means than an increase in AD1 to AD2 will not affect
unemployment and all the people who are willing, able and actively seeking
work are employed
...

Over all the effect of an increase in AD depends upon the extent to which AD
increases, a very large increase in AD for example from AD to AD2 would cause
inflation, decreased unemployment and increased output
...
However if the economy is operating at full employment then
any increase in AD will lead to inflation without increasing output or inflation
...
If the LRSA increased to LRAS3 then inflation would not
occur if AD increase to AD2
...
In the SRAS any increase
in AD will lead to an increase in employment, inflation and output
...




---