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Eco Final

- Aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It depends on factors like the price level, monetary policy, fiscal policy, and other influences. - The aggregate demand curve shifts when factors that influence consumption, investment, government spending, and net exports change. For example, an increase in disposable income or a decrease in taxes will shift the curve to the right by increasing consumption. - Aggregate supply is the total quantity of goods and services that firms in an economy are willing and able to supply at a given price level. It depends on factors like potential output and input costs. The short-run aggregate supply curve slopes upward due to sticky

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Tanu Mittal
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29 views

Eco Final

- Aggregate demand is the total demand for final goods and services in the economy at a given time and price level. It depends on factors like the price level, monetary policy, fiscal policy, and other influences. - The aggregate demand curve shifts when factors that influence consumption, investment, government spending, and net exports change. For example, an increase in disposable income or a decrease in taxes will shift the curve to the right by increasing consumption. - Aggregate supply is the total quantity of goods and services that firms in an economy are willing and able to supply at a given price level. It depends on factors like potential output and input costs. The short-run aggregate supply curve slopes upward due to sticky

Uploaded by

Tanu Mittal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Group members:
Leon Chung 1021222
Delia DǯSouza 1021240
Jaya Lakhani 1021241
Meghna Kumbhat 1021244
Nanditha Mohan 1021245
m   
j Js the total demand for final goods and services in the
economy at a given time and price level. Jt is the amount of
goods and services in the economy that will be purchased
at all possible price levels
j Depends on level of prices, monetary policy fiscal policy
and other factors.

j Formula:
m 

j C= Consumption Spending
j J = Jnvestment Spending
j G = Government Spending
j (X-M) = difference between spending on imports and receipts
from exports (Balance of Payments)

2
m  

3

j Mxogenous factors affecting consumption:
j Tax rates
j Jncomes Ȃ short term and expected income over lifetime
j Wage increases
j Credit
j Jnterest rates
j Wealth
j Property
j Shares
j Savings
j Bonds
J
j Spending on:
j Machinery
j M uipment
j Buildings
j Jnfrastructure
j Jnfluenced by:
j Mxpected rates of return
j Jnterest rates
j Mxpectations of future sales
j Mxpectations of future inflation rates

j Defence
j Health
j Social Welfare
j Mducation
j Foreign Aid
j Regions
j Jndustry
j Law and Order
J
j Goods and services bought from abroad
 
j Goods and services sold abroad
J
     
Monetary policy : Jncrease in money supply lowers interest
rates and improves credit conditions, inducing higher
levels of investment and consumption of durable goods

Fiscal policy : Jncreases in expenditures on goods and


services directly increase spending; tax reductions or
increases in transfers raise income and induce higher
consumptions
J
     
ë   Output growth abroad leads to an increase in net
exports.
m   stock-price or housing price produces greater
household wealth and thereby increases consumption and
also increases investment
     higher oil production decreases oil price
hence consumption and investment increases
m  
    opens new opportunities for
investment.
J Jm  mm
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j Consumption is a function of Disposable Jncome.
j When disposable income increase or Government cuts taxes, encourages people
to spend more. So AD curve shifts to Right.
j When Government raises taxes , spending reduces, AD curve shifts to Left.
j Also means, increase in Savings reduce Consumption, shifts AD curve to left.
j Reduction in Savings increase Consumption, shifts AD curve to right.

2.SHJFTS ARJSJNG FROM JNVMSTMMNT(J)


j Jnvestment is a function of the Jnterest Rate.
j Policy variable that influence AD & Jnvestment is the Money Supply.
j Jncrease in Money Supply lowers Jnterest Rates, makes borrowing less costly ,
stimulates Jnvestment spending, shifting AD curve to Right.
j Decrease in Money Supply raises the Jnterest Rates, discourages Jnvestment
spending shifting AD curve to the Left.
3$J mJJ  + +.

mm, -
j The only way government spending is changed is though fiscal policy.
j When Government spending decreases, regardless of tax policy,
Aggregate Demand decrease, thus shifting AD curve to the Left.
j When Government spending increases, Aggregate Demand increases
shifting AD curve to the Right.

4.SHJFTS ARJSJNG FROM NMT MXPORTS


(NX)
j Net Mxports = Mxports Ȃ Jmports
j Net Mxports is a function of Real Mxchange Rate.
j As Real Mxchange Rate rises, Dollar becomes stronger, Jmports rise and
Mxports fall.
j Net Mxports fall and the AD curve shift to Left. Mg: US & Jndia.
j When Mxchange Rate falls the reverse happens, shifting AD curve to
Right.
j Shifts also occur due to change in Tastes & Preferences.
m  &#
j The total supply of goods and services that firms in a
national economy plan on selling during a specific
time period. Jt is the total amount of goods and
services that firms are willing to sell at a given price
level in an economy.

j Depends on price level, productive capacity and the


level of costs.

11/21/2010 14
m  &#
PRICE
AS

Quantity

11/21/2010 15

m  &#
Aggregate supply depends fundamentally on two sets of
forces

j Potential Output
j Jnput Costs

&+
j Potential output is the maximum sustainable output
that can be produced without triggering rising
inflationary pressures

j Potential output is not the Maximum output. But


production above potential is not indefinitely
sustainable.

j Potential output is a growing target. As the economy


grows, the output also increases.
./&
&+
Jnputs Ȃ Supplies of capital, Labour, land. Potential
output comes when unemployment of labour and
other resources is at non inflammatory levels.

Technology and efficiency Ȃ Jnnovation, technological


improvement and increased efficiency.
J
j As production costs rise, business are willing to supply
a given level of output only at a higher price.
./&J
j Wages Ȃ Lower wages lead to lower production costs
which means uantity supplied will be higher at every
price level.
j Jmport prices Ȃ A decline in foreign prices or an
appreciation in the exchange rate reduces import
prices. This lowers production costs and raises AS.
j Other input costs Ȃ M.g., lower oil prices, less
environment regulations would raise the AS
(&/&&

11/21/2010 22
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THANK YOU

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