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Macro 2 - Aggregate Demand and Supply
Macro 2 - Aggregate Demand and Supply
Macro 2 - Aggregate Demand and Supply
Note: This set of notes is meant to concise with just enough information for “A” level
students. It is best used as a cheat sheet, complementary with official school notes.
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Macro 2: Aggregate Demand and Supply, and Economic Growth
1.1 Aggregate Supply is the total output firms in an economy are willing
and able to supply at different price levels in a given period .
Figure 1
1.2 AS is the output which firms produce after the price level and factor
prices have been fully adjusted after any shift in Aggregate Demand.
1.4 Their view is that in the long run, the economy can operate at any level
of output and not necessarily at its full capacity (Q2 in Figure 1).
1.5 Figure 1 shows that if output expands from Q to Q1, output can be raised
without increasing the price level, as employment is low allowing firms
to attract resources without raising their prices.
1.7 At Q2, the economy reaches the maximum output it can produce with
existing resources.
1.8 A change in the price level causes a movement along the AS curve.
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Macro 2: Aggregate Demand and Supply, and Economic Growth
1.9 The AS curve will shift to the right if there is an increase in the:
a. quantity of resources
b. quality of resources
c. improvement in the level of technical expertise.
Figure 2
2.4 The AD curve is downward sloping from left to right (as shown in Figure
2) because a lower price will:
a. Stimulate consumption and investments.
b. Increase exports as they become more price competitive.
c. Reduce imports as domestic products become more price
competitive.
1.10 A change in the price level causes a movement along the AD curve.
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Macro 2: Aggregate Demand and Supply, and Economic Growth
3.2 GDP is the total money value of all final goods and services produced
within the geographical boundary of a country, regardless of whether the
resources are owned by its residents or foreigners.
3.3 The GDP growth rate for the current year can be expressed as:
where,
4. Potential Growth
4.2 It means that the country's full employment level of income has
increased.
4.3 Potential growth can be illustrated graphically using either the PPC or
the AD-AS diagram:
a. An outward shift in the PPC shifts means the economy is now
capable of producing more of both consumer goods and capital
goods as shown in Figure 3.
b. A rightward shift in the AS curve from AS1 to AS2 means that
full employment level of real output increases from Yf1 to Yf2 , as
shown in Figure 4.
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Macro 2: Aggregate Demand and Supply, and Economic Growth
Figure 3
Figure 4
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Macro 2: Aggregate Demand and Supply, and Economic Growth
5. Actual Growth
5.1 A country's growth rate refers to the actual growth which is measured
by the percentage annual increase in real GDP.
5.3 For output to continue rising, AS must rise in line with increases in AD.
If it does not, the economy will hit a supply constraint and will likely
experience inflation.
Figure 5
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Macro 2: Aggregate Demand and Supply, and Economic Growth
6.3 Government’s fiscal health (i.e. budget position) will improve as tax
revenue increases when income, employment and output increases.
6.7 As society becomes more affluent, it may become less preoccupied with
private consumption and become more environmentally conscious.
Economic growth also enables more resources to explore safer and
cleaner production methods.
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Macro 2: Aggregate Demand and Supply, and Economic Growth
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