m mmm
Group members:
Leon Chung 1021222
Delia DǯSouza 1021240
Jaya Lakhani 1021241
Meghna Kumbhat 1021244
Nanditha Mohan 1021245
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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:
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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)
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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.
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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
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opens new opportunities for
investment.
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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 + +.
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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.
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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
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PRICE
AS
Quantity
11/21/2010 15
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Aggregate supply depends fundamentally on two sets of
forces
j Potential Output
j Jnput Costs
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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.
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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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