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Aggregate Demand and Supply:

o Aggregate demand is the total planned spending on real output produced within the
economy. AD = C+I+G+(XM)
o Aggregate Supply ­ is the level of real national output that producers are prepared to
supply at different average price levels.
o Macroeconomic Equilibrium ­ the level…

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o Changes in monetary policy ­ if interest rates decrease the cost of borrowing and
the incentive to save will also decrease and increase consumption.
o Changes in Fiscal policy ­ If income tax is changed then the amount of disposable
income will change for consumers. If the tax is…

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When AD is higher than the LRAS, this is pure demand pull inflation as people are
demanding more than is able to supply.

Cost Push inflation: is a rising level caused by an increase in the costs of production,
shown by a left shift SRAS curve. Labour costs increase along…

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In an open economy, households save some of their income as shown by S and T on the
diagram. Saving is an example of a leakage.
Leakages are savings, taxation and imports. I and G are examples of injection of demand into
the economy. Injections include investments, government spending and…

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Output gaps: The difference between actual output and the trend
growth level of output. Negative output gaps occur when actual
output is below the trend growth rate level of output. Positive gaps
occur when actual output is above trend growth rate output but the
level of output still lies above…

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market, while the unemployed are the `outsiders'.
o Unionists may only care for the insiders and not the outsiders.
o The theory suggests that unions are prepared to push for higher wages whilst
unemployment is high as the insiders do not care for those who are unemployed.
o Queuing…

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o An increase in government spending and a cut in taxation increases the size of the
budget deficit or reduces the budget surplus.
o Expansionary fiscal policy ­ uses fiscal policy to increase aggregate demand and
shift the demand curve to the right.
o An increase in taxation will decrease…

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Supply side fiscal policy is used to try and shift the economy's long run aggregate supply
curve to the right, therefore shows the economy's output is increasing.

o Supply Side Policy:
Increase incentives and invest people's skills by investing in apprenticeships and
university fees.
o Increase labour and capital productivity…

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o Transfers ­ payments flowing between countries in forms such as foreign aid, grants
and gifts.
o Balance of trade goods ­ is the part of the current account measuring payments for
exports and imports of goods ­ sometimes called the balance of visible trades.
o Current account deficit ­…

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Exchange Rate The value of one currency in terms of another.
Fixed exchange rate where the price of one currency is the same as the price of other
Floating Exchange Rate an exchange rate determined by market forces.



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