The situation in the economy at a particular time to help you identify some of the causes and effects of changes in the economy
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What are the components of AD?
C + I + G (X - M)
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How will rising AD and AS affect the curves?
It will shift it to the rigjt
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How will AS increase?
If the workforce is growing, if education and training facilities improve, if investment is growing and if technology is creating extra capacity, freeing up land, better infrastructure, new resources
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What effect does inflation have on the AS curve?
It will shift it upwards as prices rise but capacity does not grow
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What is full capacity output?
The maximum output that can be produced when all available resources are fully employed
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What will rising AD result in?
Economic growth, for as long as there is spare capacity in the economy
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What happens when AD gets close to full capacity output?
Shortages will develop, skilled people and other inputs will be scarce, the number of vacancies will increase, pushing wages up and increasing inflation
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What happens when there is rising AD?
Inflation rises, imports may rise/exports will fall as the demand in the domestic market is high, prices will go up/profits increase, unemployment will be low
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What will happen when AD reaches full capacity?
The government will implement contractionary policies to slow inflation
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How can AD be slowed?
Higher taxes and interest rates, people may save more, unemployment will rise, prices will start to fall as real income falls
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What is the risk of slowing AD too much?
It can cause too much unemployment which can cause widespread distress
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What is a positive multiplier effect?
When increased spending generates more income and spending
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What can the AD/AS model help explain?
The effect of a change in an injection or a leakage, predict the impact of change on output, employment and prices, explain the effect of technology or natural disasters and illustrate the economic cycle
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To get the full picture of the effect on AD/AS what else must one consider?
The impact of globalisation and trade, business reactions to uncertainty, changing inequality, abrupt changes and changes in fiscal and monetary policy
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