WJEC AS Level Economics: Macroeconomic Theory

Spare capacity makes SRAS elastic, meaning output can increase without significant price rises.

The size of the multiplier increases because increased demand can be met without significant price increases.

If SRAS is inelastic, the multiplier effect is lower due to prices rising faster than output.

Interest rates tend to increase as a measure to control inflation when prices go up.

A withdrawal of income from the circular flow of income leading to a larger decrease in income.

Higher interest rates typically discourage spending and borrowing, leading to slower economic activity.

If SRAS is elastic, national income increases rapidly in response to an increase in aggregate demand.

A decrease in AD typically leads to a decrease in national income, reflecting reduced economic activity.

Because SRAS is elastic, firms can increase output significantly without raising prices, leading to larger real income gains.

It leads to a decrease in economic growth as income and spending decline throughout the economy.