Download AD/AS Model and Growth

AD/AS Model and Growth
AD/AS Model
• Price level =
average price
level of all
prices in the
economy
(Inflation)
• Real GDP=
Total output of
an economy
produced in a
year
Any increase in Real GDP shows
economic growth
Aggregate Demand – Recap
• AD = C + I + G + ( X –M )
• C = Consumption spending
– Which is affected by interest rates, disposable incomes,
inflationary expectations and consumer confidence
• I = Investment spending
– By firms. Affected by interest rates and business confidence
• G = Government spending
• X = Export receipts
• M = Import payments
– Affected by exchange rates
Aggregate Supply
• AS is affected by changes in
– Nominal wage rates
– Productivity and Technology
– Imported raw materials
Example
The effect of rising oil prices on Real
GDP
• Rising oil prices are an imported raw material.
They will cause costs of production to rise for
firms, so AS will decrease. (AS shifts left)
AS shifts left causes
A fall in real GDP ( from Y to Y1). This shows
that the output produced by firms has fallen.
Meaning there is less growth.
If producers are producing less, this will mean
they will have less demand for labour, causing
unemployment to rise. As fewer workers are
now required.
Show the effect on AD/AS what is the
effect on growth?
1. Income taxes decrease
Incomes increase – Consumption increases – AD increases – eco growth increases
2. Business confidence increases
Investment increases – AD increases – eco growth increases
3. Oil prices rice
Import cost increase – AS decreases – eco growth falls
4. Reduction in savings by Nzlanders
Savings fall- Consumption increases – AD increases – eco growth increases
5. Nominal wages increase
Wage costs increase – costs of production increase – AS decrease – eco growth falls
6. NZ dollar appreciates
AD – X fall M increase – AD FALLS
AS increases as import costs falls
7. NZ dollar depreciates
AD – X increases M decrease – AD increase
AS decreases as import costs increase
Workbooks 136 -137