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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