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aggggregate
demadd
AD
A actual
growth
> total value of
gls
demanded in an
economy
at each GPL
.
It
shows amt. of
domestically produced gls
which
households
,
firms
gort
. &
foreigners
desire to
buy
at each GPL
why
downward
sloping
reflects
inverse
v/s btw
. GPLd aggregate aty
demanded for
gls
ASGPL
,
country's exports
become less competitive
in
imports
since
they
are
relatively cheaper
than domestic
goods ;
total
aggregate
add ↓
change
in
GPL >
movement
along
AD curve
change
in
factors other than GPL > AD
shifts
consumption
govt. expenditure
↑ ↑
AD
= c + I + G +
(X
M)
↓ ↓
investment
Net exports
consumption
spending
on
consumerg/s (eg
.
durable g , non-durable
& services
demand for non-durable
goods
are relatively
steady
as
purchase
can't be
postponed
for
long
durable
goods
is less steady >more likely
to cause A in its
expenditure
than ND
g/s
induced consumption
:
consumpt expenditure
that is affected
by
Iv)
of income
Autonomous
consumption
:-
affected
by
factors other than income
Factors
affecting
A. consumpti
cost of borrowing
a)
Availability
of credit& (v)
of interest rates
able to
grant
more loans
;
↑
ability
to spend
more on
big-ticked
items >CA
↓ in
interest
rate
; relatively
cheaper
to borrow from banks >
encourage
(
savings
become less
attractive ;↓
interest rate
=
reward of
savings
is lower
b) consumers'
expectations
abt
·
employment
,
prices & income
if
they
expect
lower
Ivls of
employment
& income ;
save more now <CX
if
prices are
expected
to rise ; spending
↑to avoid
spending
more in future
C) Govt
.
Policies
↓
direct tax
; disposabley 1 , purchasing
Power ↑)
CX
redistribution of y will
↑
disposable
y &M
total
C.
lower y grp
ur
higher
marginal
propensity
to
consume
than
higher
Y
grp
d) Tastes
& Attitudes
-buy
now
,
pay Itr'mentality
;
↑ Ivl of A. C.
e) Households'
net worth
> value of all assets liabilities/debts
more wealth accumulated
; spend
more & save less
burst
of
property market bubble
,
owner of these assets feel
proover
cutback c.
investment
acquisition
of
new fixed
capital assets
& accumulation of inventories
> investment
goods
meant to
build
up
productive
capacity ,
raise productivity ,
contribute
to economic
growth
Types
:
fixed investment
by
firms
,
investment
in inventories/stocks
by
firms
,
residential investment
↓
e. g. plant ,
factories
↑
stocks of unsold finished goods
&
↓
construction of new homes
semi-finished goods
Factors :
1
interest
rates
(lost of
borrowing)
movement
along Marginal Efficiency
of Investment (MEI)
,
used
to measure expected
rate of returns
from
add
unit of
investment
interest rate
inverse
v/s
btw. interest rate &
Ivl
of
investment
expenditure
↑
lower the interest rate
, cheaper
to finance investment
,
MEL
more profitable the investment >Im
interest
·
only
invest if
expected
rate of returns on
I
(MEI) current rate of
1 in
> investment
per
period
2. Non-interest rate determinants
Shift
of
MEL
-volatile
a)
business
expectations/sentiments
i) current demand &
expected
future demand
current demand is
good ,
future prospects
probably
looks
bright
IN
,
MEL
shifts
right
,
c .
p.
·
current demand is ↓
,
expect
bad times ahead
IV
,
MEl shifts left
ii) Political
stability
·
↑ Political
stability ,
c
.
p ., expected
return of
I wld >
encourage
I
·
worsening
political
stability
anxiety
pessimism
,
expected
return ↓ >
discourage
I
b)
Irl of tech
tech
advances
,
c
.
p .,
more
output
can be
derived
; expected
return
wid A
,
MEL shifts
right
c) Govt
·
Policies
i)
coporate tax
,
expected
rate of
after-tax return t
,
MEI shift
left
ii) Provide
grants
to new I projects ;
reduce cost
of capital
cost of Capital t ;
capital
relatively cheaper than
labour >Sub more
capital
for labour
; It
Govt
·
expenditure
1
govt. spending
on final
gls
:
recurrent
expenditures
& Public I/social
capital
Factors
:
a)
gort
. Policies
·
G ↑
if gort
pursue
an
expansionary fiscal
policy
to stimulate economic activities
govt
, spending ,
↓ in tax revenue
G↓ if
gort
.
Pursue contractionary fiscal
policy
to
reduce demand-pull
inflation
taxes/reduce govt
spending
Net
exports
(X- M
expenditure by foreign
sector
on domestically
producedg/s expenditures by
domestic
sector
on
foreign-produced
gls
(exports
imports)
Factors
:
a)
Xin
real
NY
rmb to
state
which
aspect of X
Me
.
g
.
export
revenue
foreign
NY ↑
; buy
more
imports
(demand")
,
causing export
revenue
of
domestic
country
to
rise > (X-M)
*,
C
.
P.
domestic
NYA ;
demand for
imports
,
domestic
country's expenditure
on
imports
↑ <
(X-M)
C
.
P
.
b) A in relative Price
i) A in
exchange
rate
appreciation
depreciation
of a
country's
currency
can
affect
net
exports
domestic
currency
depreciates , foreign
goods
become more
ex.
in terms of domestic
currency ,
while
, exported goods
become
cheaper
in
foreign
currencies
domestic
country
cut back on imported
goods
+ demand for its
exported goods
↑
Assuming
Marshall-Lerner
condition holds
(IPEDX
PEDMK 1)
,
net
exports
will
Long-run
As
changes
to
productive
capacity
·
shifts
classical &
intermediate
range
outward/inward
shift
of
PPC
Factors
:
1. amt. Of
resources
Capital
,
land , labour
, entrepreneurship
↑gty
of resources allows
economy
to
attain
greater
max. full
employment
(v) of national income
Shift (RAS
right
↑ size of labour force (SG's aim
of 1
populata)
↑ vol
.
of I undertaken
by
businessmen boosts AD
in
SR & AS in LR- I adds onto
capital
stock if there is net investment in economy
ISG
Proactively trying
to attract
FDI)
land reclamation
> ↑ land
for
economic
activities
state of tech
.
drives efficiency
of
production
↑ rate
of
production
↑ LRAS
XCOP-> USRAS
Productivity
of workers
refers
to
the
Irl of
output that can be
produced
in
a
given
Ivl of
input
,
c
.
p.
productivity
(vI will
output produced
in the same
amt. of
inputs,
c
.
p
.
↑ LRAS
/rightward
shift)
influence
by
education Ivls
, availability
of tech &
opportunities
for
trug
steps
to
achieve
equ
Producers
respond by hiring
more workers
↑
employment
& output >
puts
upward pressure
on
prices
as
producers
compete
for resources
2
.
Consumers
respond
by↓ their stydd
for
gls
3. Price tends towards Pe
;
real
national output tend towards Ye
change
in SRAS
GPL ·
Fall
in SRAS-
upward
shift of k
.&
I. sections
wno
change
in
prod-cap
.
↑
AD
likely
due toA Cop such as
spike
in price
of
oil
·
results in ↓ RNY from
Y , to 2
While GPLA frm P ,
to
Pc
intermediate
O
&
& real NY
↑ in
UnE(gapbtw
. Y,&
Ye
is
larger
"
ima
·
NSRAS <actual
growth
E
Change
in LRAS
GPL
AS , ASz
·
↑
LRAS reflects
rise in
prod
.
cap
. from Ye to Yf
X
Al
any 1
in
quality laty
of resources
in
economy
↑LRAS
both
Potential & actual output
↑ in ↓in GPL
↑
/↓ in UnE
depends
on how much
↑
> real NY
O "YzYf
< Ye
With
substantial
unemployed
resources available
↑ in
AD will lead
to
greater
1 in output
employment
due to
multiplier
effect ,
while GPL remains unchanged
Cautonomous
↑ in AD)
