Interest rates: If there is an
Income: national income is Wealth:
increase in interest rates, ,
A change in house prices: When house
AD curve shows the inverse rising, there will be an then there is likely to be less
Governments use supply-side policies to increase in consumption and prices increase across the economy,
increase the quantity or quality of factors of
relationship between the average price borrowing, resulting in a fall
consumers increase their consumption.
therefore an increase in in AD
production, shifting the LRAS curve to the level and real output or national aggregate demand. A change in the value of stocks and shares:
If the value of those shares increases then
right. This leads to higher potential output income Y: at a lower average price level,
Governments use fiscal and and can lower prices. New classical many consumers uncourage to spend more
economists favor supply-side policies for
a higher quantity is demanded.
monetary policies to influence AD,
achieving macroeconomic goals. Expectations/
either to boost growth or curb Household indebtedness
consumer confidence
inflation. easy to borrow money (easy
They will spend more
New classical economists believe the economy
12 CHANGES IN when they feel optimistic credit)
interest rates are low
always tends towards full employment. Changes in
CHANGES IN LONG- CONSUMPTION
aggregate demand primarily affect the price level, RUN AGGREGATE 1 Technological change
not output. A decrease in AD can lead to a 11 SUPPLY AGGREGATE will keep up with advances in Expectations/business
CHANGES IN confidence
deflationary gap, while an increase can lead to an
DEMAND-SIDE DEMAND technology and to remain
inflationary gap in the short run. However, the INVESTMENT competitive If businesses expect consumer
economy will eventually return to its long-run New classical POLICIES demand to rise, they will want
equilibrium. perspective 2 investing to increase potential
output and productivity
10 CHANGES IN THE CHANGES IN
LONG-RUN COMPONENTS OF GOVERNMENT
Short-run equilibrium occurs when AD The government has made a
QUILIBRIUM AD
SPENDING
equals SRAS, leading to stable output and commitment to financially support
prices. The economy stays there unless OUTPUT a given industryand spend to correct
AD or SRAS changes. market failure
CHANGES IN
9 CHAPTER 6: NET EXPORT
A new education or health policy .
Reduction in household income taxes
Reductions in corporate taxes
SHORT-RUN
GENERAL 3
Labour market reforms (Reduction in EQUILIBRIUM GOVERNMENT Income: If foreign incomes rise then
trade union power. Reduction or EQUILIBRIUM POLICIES their consumption of imported goods
and services will rise.
elimination of minimum wages,
8 AFFECTING AD
Reduction in unemployment benefits) Market – based
SUPPLY-SIDE Exchange rate: makes a country's
Deregulation policies
exports more expensive, leading to
Privatisation POLICIES fewer exports. Conversely, it makes
Policies to increase competition 4 imports cheaper, potentially
7 SHORT-RUN reducing import spending.
Investment in human capital
Interventionist SHIFTS IN 6 Trade policies: A
Research and development (R&D)
LONG-RUN AGGREGATE SUPPLY Monetary policy: A central bank can country adopting a free
Relative inflation rate: Higher US
Provision and maintenance of infrastructure supply-side policies THE LRAS trade policy can reduce
influence aggregate demand by
Direct support for businesses/industrial AGGREGATE adjusting the base rate. Lowering the tariffs on imports,
inflation compared to Canada can
policies SUPPLY 5 rate (expansionary policy) encourages allowing other countries
make US goods less competitive,
potentially reducing US export
to export more to them
SHIFTS IN SRAS borrowing and spending, while raising revenue to Canada
An outward shift in the LRAS curve signals increased it (contractionary policy) discourages
productive potential. This can be achieved through supply- borrowing and spending.
side policies, which are either interventionist or market- New classical LRAS
based, aimed at improving the quality or quantity of factors
Wage rates: An Fiscal policy: Governments can boost
of production. A change in the price level results in a
increase will result AD by lowering income taxes to
change in the level of output (the SRAS
The price of imports: in a fall in aggregate stimulate consumption, reducing
curve)
The potential output is based Rising import costs can supply. corporate taxes to encourage
entirely on the quantity and Full employment level of investment, or directly increasing
increase production costs,
quality of the factors of output represents the Government indirect public spending on investment
reducing aggregate supply the costs of raw materials: Rising
production and not on the price potential output that taxes or subsidies: Indirect projects.
prices of key raw materials, like oil, can
level could be produced if the taxes affect SRAS: higher
increase production costs across
economy were operating taxes reduce it, lower taxes
industries, negatively impacting
at full capacity increase it
aggregate supply