3.2 Variations in economic activity - aggregate demand and aggregate supplySyllabusFirst assessment 2022Topic3.2LevelHL
What you’ll learn7 learning objectivesChoose one objective for a focused lesson, or study the complete topic.3.2.1Aggregate demand• Aggregate demand equals consumption, investment, government spending, and net exports• AD = C + I + G + (X - M)• Diagram: AD curveSyllabus objective3.2.2Determinants of aggregate demand• Consumption depends on consumer confidence, interest rates, wealth, income taxes, household debt, and expected future prices• Investment depends on interest rates, business confidence, technology, business taxes, and corporate debt• Government spending depends on political and economic priorities• Net exports depend on trading partner income, exchange rates, and trade policies• Diagram: shifts of the AD curveSyllabus objective3.2.3Short-run aggregate supply• SRAS depends on costs of factors of production and indirect taxes• Diagram: SRAS curve• Diagram: shifts of the SRAS curveSyllabus objective3.2.4Alternative views of aggregate supply• Monetarist and new classical models use a long-run aggregate supply curve• Keynesian models use a Keynesian aggregate supply curve• Models show inflationary and deflationary or recessionary gaps• Diagram: alternative views of the AS curveSyllabus objective3.2.5Long-run shifts in aggregate supply• LRAS or Keynesian AS can shift with quantity or quality of factors, technology, efficiency, and institutions• Diagram: shifts of LRAS or Keynesian ASSyllabus objective3.2.6Macroeconomic equilibrium• Short-run equilibrium occurs where AD intersects AS• Monetarist and new classical models determine long-run full employment equilibrium at potential output• In the monetarist or new classical model, automatic adjustment returns the economy to full employment and unemployment equals the natural rate of unemployment• In the Keynesian model, deflationary or recessionary gaps can persist• Diagram: macroeconomic equilibrium in short run and long runSyllabus objective3.2.7Comparing macroeconomic models• Monetarist, new classical, and Keynesian models rely on different assumptions• Their implications differ for policy, adjustment, unemployment, and output gapsSyllabus objective