AS MACRO ESSAY NOTES
1. Usefulness of PED/XED/YED/PES-
how firms can use these to increase
sales and whether knowledge of
these are really useful?
2. Any two policies to address
problems of merit/demerit goods and
arguments against their effectiveness
3. Economic system, which is able to
raise welfare better?
4. Trade protection- whether it is
justified and who gains more
consumers or firms
5. Inter relationship between
exchange rate, inflation rate, current
account balance, AD and SRAS/
LRAS
6. Government policy to address
inflation/current account balance/
growth and unemployment and
effectiveness of these policies
7. Rise in TOT good or bad
,1. AD/AS
Aggregate Demand
With the help of diagrams, analyse the factors that will lead to an increase in aggregate demand in an economy,
and discuss whether this increase is more likely to have an impact on inflation or unemployment in that
economy. [12]
AD is the total demand of goods and services in an economy over a period of time. Components of
Aggregate demand are Consumption, Investment, Government Spending, Net Exports and Imports. AD=
C+I+G+X-M. An increase in C I G X and a fall in M results in a higher AD.
Increase in Consumption
- Lower income tax can increase disposable income and make consumers have higher spending power to
spend on goods and services
- Lower interest rate makes borrowing cheaper and encourages people to spend and not save
- Increase wealth and confidence of consumers about the future allows them to have higher purchasing
power and spend more
Increase in Investment
- Decrease corporate tax
- Lower interest rate makes borrowing for investment cheaper
- Increase confidence encourages business to spend more on capital goods to produce more output and
supply for the increase in demand
- Increase economic growth
Increase in Government Spending
- Tax revenue increases during economic boom
- Investments in Infrastructures and public transports such as airports or railways to develop the country
- Investments in public services like healthcare and education
Increase in Net Exports
- Increase growth in other countries make the income of people higher thus increase in demand for
exported goods
- Value of currency falls in the country compared to others make exports cheaper and imports to the country
more expensive
- Low inflation makes exports more competitive as prices products fall. This encourages more countries to
export producers of cheaper price from that country.
Increase in AD increases price level and real output, thus reducing unemployment rate. There will be a
shift in AD curve to the right.
Increase in AD depends on situation of the economy.
- If an economy has spare capacity, increase in AD will cause a large percentage increase in real GDP
but only small increase in price.
- If an economy is close to full capacity, increase in AD will cause significant price increase but little/no
change in real GDP.
- An equal change and increase in AD and AS at the same time increases real output but price level
remains unchanged.
, Aggregate Supply
Explain what is meant by aggregate supply and explain one reason why the aggregate
supply curve of an economy would shift outwards in the short run and the long run.
Aggregate supply is the total quantity of output firms will produce and sell in the economy over a
period of time. In other words, AS is the real GDP.
SRAS
The upward sloping aggregate supply curve, also known as the SRAS curve, shows a positive relationship
between price level and real GDP. As price level increases, additional profits given incentives and encourages
producers to produce and sell more.
Shift in SRAS is caused by:
- Lower cost of production (cheaper raw material prices and labor cost such as wage of workers)
- Taxation and subsidies (lower tax and subsidies from government)
LRAS
In the long run, the economy reaches maximum/full capacity. This is where capital equipment is fixed and
there is a limit to the amount of labor that can be hired in a economy. Labor productivity has been maximized
and can no longer increase
Shift in LRAS is caused by:
- Increased size of labor force
- Increase in available resources (new discovery)
- Technology advancements (increase productivity)
- Levels of education (increase in productivity and efficiency with more skilled workers)
Increase in productivity shifts LRAS to the right. As a result, firm respond to increase in demand by raising
prices.
Advantages and Disadvantages of high AD
Discuss whether an increase in aggregate demand would be of overall benefit for an economy
Advantages of high AD
Economic growth is the increase in quality and quantity of goods and services and is portrayed through an
increase in productive capacity (more choices for consumers)
- Increase in income, higher purchasing power, increase living standards
- Consumers purchase more luxury goods thus firms have more incentive or produce more and
increase potential output in the economy
- A rise in income and output means tax revenue rises. Government can also place higher indirect taxes on
luxurious goods and spend more money to improve public services such as healthcare and education
and provide more public goods (increase living standards of people)
- Lower unemployment rate where firms will employ more workers to increase level of production (SRAS)
- More investment from abroad due to increase confidence and economic outlook also increase job
opportunities
Disadvantages of high AD
- Demand-pull inflation from a rise in AD
- Worsen current account as inflation reduces competitiveness of exports and demand for imports rises
- Increase income inequality as people with higher incomes earn more but people with lower income do not
get benefits of economic growth
- Inflation causes value of money to fall and also decreases people’s confidence to spend and local firms
to invest. Confusion and uncertainty will slow down economic growth.
1. Usefulness of PED/XED/YED/PES-
how firms can use these to increase
sales and whether knowledge of
these are really useful?
2. Any two policies to address
problems of merit/demerit goods and
arguments against their effectiveness
3. Economic system, which is able to
raise welfare better?
4. Trade protection- whether it is
justified and who gains more
consumers or firms
5. Inter relationship between
exchange rate, inflation rate, current
account balance, AD and SRAS/
LRAS
6. Government policy to address
inflation/current account balance/
growth and unemployment and
effectiveness of these policies
7. Rise in TOT good or bad
,1. AD/AS
Aggregate Demand
With the help of diagrams, analyse the factors that will lead to an increase in aggregate demand in an economy,
and discuss whether this increase is more likely to have an impact on inflation or unemployment in that
economy. [12]
AD is the total demand of goods and services in an economy over a period of time. Components of
Aggregate demand are Consumption, Investment, Government Spending, Net Exports and Imports. AD=
C+I+G+X-M. An increase in C I G X and a fall in M results in a higher AD.
Increase in Consumption
- Lower income tax can increase disposable income and make consumers have higher spending power to
spend on goods and services
- Lower interest rate makes borrowing cheaper and encourages people to spend and not save
- Increase wealth and confidence of consumers about the future allows them to have higher purchasing
power and spend more
Increase in Investment
- Decrease corporate tax
- Lower interest rate makes borrowing for investment cheaper
- Increase confidence encourages business to spend more on capital goods to produce more output and
supply for the increase in demand
- Increase economic growth
Increase in Government Spending
- Tax revenue increases during economic boom
- Investments in Infrastructures and public transports such as airports or railways to develop the country
- Investments in public services like healthcare and education
Increase in Net Exports
- Increase growth in other countries make the income of people higher thus increase in demand for
exported goods
- Value of currency falls in the country compared to others make exports cheaper and imports to the country
more expensive
- Low inflation makes exports more competitive as prices products fall. This encourages more countries to
export producers of cheaper price from that country.
Increase in AD increases price level and real output, thus reducing unemployment rate. There will be a
shift in AD curve to the right.
Increase in AD depends on situation of the economy.
- If an economy has spare capacity, increase in AD will cause a large percentage increase in real GDP
but only small increase in price.
- If an economy is close to full capacity, increase in AD will cause significant price increase but little/no
change in real GDP.
- An equal change and increase in AD and AS at the same time increases real output but price level
remains unchanged.
, Aggregate Supply
Explain what is meant by aggregate supply and explain one reason why the aggregate
supply curve of an economy would shift outwards in the short run and the long run.
Aggregate supply is the total quantity of output firms will produce and sell in the economy over a
period of time. In other words, AS is the real GDP.
SRAS
The upward sloping aggregate supply curve, also known as the SRAS curve, shows a positive relationship
between price level and real GDP. As price level increases, additional profits given incentives and encourages
producers to produce and sell more.
Shift in SRAS is caused by:
- Lower cost of production (cheaper raw material prices and labor cost such as wage of workers)
- Taxation and subsidies (lower tax and subsidies from government)
LRAS
In the long run, the economy reaches maximum/full capacity. This is where capital equipment is fixed and
there is a limit to the amount of labor that can be hired in a economy. Labor productivity has been maximized
and can no longer increase
Shift in LRAS is caused by:
- Increased size of labor force
- Increase in available resources (new discovery)
- Technology advancements (increase productivity)
- Levels of education (increase in productivity and efficiency with more skilled workers)
Increase in productivity shifts LRAS to the right. As a result, firm respond to increase in demand by raising
prices.
Advantages and Disadvantages of high AD
Discuss whether an increase in aggregate demand would be of overall benefit for an economy
Advantages of high AD
Economic growth is the increase in quality and quantity of goods and services and is portrayed through an
increase in productive capacity (more choices for consumers)
- Increase in income, higher purchasing power, increase living standards
- Consumers purchase more luxury goods thus firms have more incentive or produce more and
increase potential output in the economy
- A rise in income and output means tax revenue rises. Government can also place higher indirect taxes on
luxurious goods and spend more money to improve public services such as healthcare and education
and provide more public goods (increase living standards of people)
- Lower unemployment rate where firms will employ more workers to increase level of production (SRAS)
- More investment from abroad due to increase confidence and economic outlook also increase job
opportunities
Disadvantages of high AD
- Demand-pull inflation from a rise in AD
- Worsen current account as inflation reduces competitiveness of exports and demand for imports rises
- Increase income inequality as people with higher incomes earn more but people with lower income do not
get benefits of economic growth
- Inflation causes value of money to fall and also decreases people’s confidence to spend and local firms
to invest. Confusion and uncertainty will slow down economic growth.
