The General Theory of Employment, Interest and Money argued during the Great Depression that the loss of output by the private sector as a result of a systemic shock (the Wall Street Crash of 1929) ought to be filled by government spending.
• First, he argued that with a lower ‘effective aggregate demand’, or the total amount of spending in the economy (lowered in the Crash), the private sector could subsist on a permanently reduced level of activity and involuntary unemployment, unless there was active intervention. Business lost access to capital, so it had dismissed workers.
Influenced by:Expected rates of returnInterest ratesExpectations of future salesExpectations of future inflation rates
The value of a country's total exports minus the value of its total imports. It is used to calculate a country's aggregate expenditures, or GDP, in an open economy.
•Defence•Health•Social Welfare•Education•Foreign Aid•Regions•Industry•Law and Order
The total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as "total spending".
Shifts in AD
Fiscal policy:Government Income (taxes and borrowing)Government SpendingMonetary policy: Interest Rates
The total supply of goods and services produced within an economy at a given overall price level in a given time period. It is represented by the aggregate-supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally, there is a positive relationship between aggregate supply and the price level. Rising prices are usually signals for businesses to expand production to meet a higher level of aggregate demand.
Also known as "total output".
Over the long run, only capital, labor, and technology affect the LRAS in the macroeconomic model because at this point everything in the economy is assumed to be used optimally. In most situations, the LRAS is viewed as static because it shifts the slowest of the three. The LRAS is shown as perfectly vertical, reflecting economists' belief that changes in aggregate demand (AD) have an only temporary change on the economy's total output.
During the short-run, firms possess one fixed factor of production (usually capital). This does not however prevent outward shifts in the SRAS curve, which will result in increased output/real GDP at a given price. Therefore, a positive correlation between price level and output is shown by the SRAS curve.
Equilibrium The equilibrium price level is the point at which the aggregate demand and aggregate supply curves intersect.Y0 represents the level of output that can be sustained in the long run without inflation. It is also called potential output or potential GDP.
• Stagflation occurs when output is falling at the same time that prices
• One possible cause of stagflation is an increase in costs.