AD/AS Model and Growth - Gore High School .::. Welcome
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Transcript AD/AS Model and Growth - Gore High School .::. Welcome
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