Aggregate Demand and Equilibrium Quiz

Aggregate Demand (AD)

• AD is the total demand for goods and services.
• Calculated as: AD = C + I + G + (X - M)
  • C: Consumption by households (influenced by MPS, MPC, interest rates, confidence, income distribution)
  • I: Investment by households (influenced by interest rates, government policies, labor rates, productivity, confidence)
  • G: Government expenditure (influenced by the state of the economy)
  • X: Export expenditure (influenced by domestic and overseas income & currency value)
  • M: Import expenditure (influenced by domestic and overseas income & currency value)

Injections and Withdrawals

• Equilibrium occurs when AD = Y (aggregate demand equals income).
• Alternative equilibrium condition: I + G + X = S + T + M (injections = leakages)
• Disequilibrium:
  • S + T + M > I + G + X: Y falls (recession)
  • S + T + M < I + G + X: Y rises (boom)

The Simple Multiplier

• Changes with injections/leakages.
• Multiplier: Final income increase is a multiple of initial expenditure increase.
• Real economy: Y = C + S + T + M
• 1 = MPC + MPS

Economic Growth

• Increase in the value of goods/services produced over time.
• Measured by changes in real GDP over time.
• Real GDP = Nominal GDP × 100 / CPI
• Economic Growth (%) = [(Real GDP current year - Real GDP previous year) / Real GDP previous year] × 100
• Different time periods to measure Australia's growth:
  • Quarterly rate (ABS calculates GDP every three months)
  • Year-on-year growth (comparison between quarters of consecutive years)
  • Annual economic growth rate (comparison between financial years)

Aggregate Supply (AS)

• AS is the economy's productive capacity (represented by Y, total income).
• Y = output (E) = total income (O).
• Y = C + S + T (consumption, savings, taxation)
• Increases to AS: new resources, population growth, efficiency improvements, new skills, government policy, technology adoption.

Improvements in Efficiency and Technology

• Microeconomic reforms improve resource allocation.
• Reforms include: reducing trade barriers, relaxing investment restrictions, tax reforms, competition policy, financial/labour/product adjustments.
• Efficiency types:
  • Technical/Productive: maximum output with minimum cost and resources.
  • Allocative: resources allocated to reflect consumer preferences and prices aligning with production costs.
  • Dynamic: adapting to changes in demand and technology.

Trends in the Business Cycle

• Business cycle: fluctuations in real GDP over time.
• Trough of cycle: lowest point of output and activity.