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Determinants of aggregate supply

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❶A higher price level increases the demand for loanable funds and, consequently, increases the interest rate, which is the cost of credit.

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Aggregate Supply


Priority Of Transaction 1. Composites And Verification 1. Disclosure And Scope 1. Requirements And Recommendations 1.

Fundamentals Of Compliance And Conclusion 2. Pegged Exchange Rate Systems 5. Revenue Recognition Principles 6. Revenue Recognition Special Cases 6. Earnings Per Share 6. Components and Format of the Balance Sheet 6. Measurement Bases of Assets and Liabilities 6. Balance Sheet Ratios 6. Cash Flow Measures 6.

Cash Flow from Operations 6. Cash Flow Statement Analysis 6. Cash Flow from Investing and Financing 6. Financial Analysis Tools and Techniques 6.

Activity, Operational and Liquidity Ratios 6. Return on Equity 6. Fixed Income Investments The Tradeoff Theory of Leverage The Business Cycle The Industry Life Cycle Intramarket Sector Spreads The foreign purchases effect contributes to our argument for why the AD is downward sloping. Anything that changes the price level triggers these three effects and is represented by movement along a given AD curve.

There are other factors that influence aggregate demand besides the price level, and these factors are referred to as determinants of AD. When these other factors change, they cause a shift in the entire AD curve and are sometimes called aggregate demand shifters. The graph below illustrates what a change in a determinant of aggregate demand will do to the position of the aggregate demand curve.

As we consider each of the determinants remember that those factors that cause an increase in AD will shift the curve outward and to the right and those factors that cause a decrease in AD will shift the curve inward and to the left. There are several factors that could increase or decrease consumption that are unrelated to changes in the price level.

For instance, increases in consumer wealth would increase consumption at each price level and would be illustrated by a rightward shift in AD. Decreases in consumer wealth would have the opposite effect. Increases in consumer indebtedness would decrease consumption and shift the aggregate demand curve to the left, while decreases in indebtedness would have the opposite effect.

Increases in taxes will decrease consumption and shift the AD curve to the left while decreases in taxes will increase consumption and shift the AD curve to the right. Consumer expectations about the future of the economy can have a strong impact on consumptions. Optimism about the economy will increase consumption and shift the AD curve to the right, while widespread pessimism dampens consumer spending and shifts the AD curve to the left. You can probably think of other factors that will shift the AD curve because they impact consumption independent of the price level.

There are several factors unrelated to changes in the price level that could increase or decrease Investment and thereby shift the AD curve. For instance, any change in the interest rate not brought about by a change in the price level would change the level of investment in the economy, and shift the AD curve. Increases in the interest rate will reduce investment demand; decreases in the interest rate will increase investment demand. Business taxes can be structured to either encourage investment shifting the AD to the right or discourage investment shifting AD to the left.

Technological improvements in an industry might make old equipment obsolete and stimulate investment, shifting AD to the right. Finally, like the impact of expectations on consumers, optimism or pessimism on the part of business owners can lead to increases or decreases in investment activity and shift the AD curve to the right or left. The political process will sometimes lead to increases or decreases in the level of government spending. Increases in government spending will shift the AD curve to the right; decreases in government spending will shift the AD curve to the left.

There are two important factors unrelated to the price level that could increase or decrease the level of Net Exports and thereby shift the AD Curve.

The first has to do with changes in national income abroad. As income abroad grows relative to income in the United States, foreigners are able to buy US products more easily and Americans can afford fewer foreign goods. Net exports will go up, shifting the AD curve to the right.

If incomes abroad fall relative to income in the US, the AD curve will shift left due to a decrease in net exports. The second factor has to do with exchange rates, or the relative value of our currency to the currency of a trading partner. If the value of the yen relative to the dollar changes so that it takes Yen to buy one US dollar, this will decrease the amount that Japanese citizens will buy in the US, and increase the amount that US citizens can buy in Japan.

This change in the exchange rate will cause net exports to fall and the AD curve to shift to the left. If the Japanese Yen were to appreciate relative to the dollar, net exports would rise and the AD curve would shift to the right. Return to the course in I-Learn and complete the activity that corresponds with this material. Aggregate Supply AS is a curve showing the level of real domestic output available at each possible price level.

Typically AS is depicted with an unusual looking graph like the one shown below. There is a specific reason for why the AS has this peculiar shape. The various ranges depict three different states in which the economy may find itself. The three states of the economy can all be thought of in relation to what is called the full-employment level of output, labeled Qf in the graph below.

We will now discuss each of the three ranges of the AS. In the Keynesian range of AS, we are at outputs which are substantially below Qf. This horizontal range implies an economy in severe recession or depression. Remember that Keynes wrote his General Theory during the heights of the Great Depression, so the range of AS that is associated with his name corresponds to such an economy. Assume that you were running a factory during a severe recession with high unemployment, and you decided that you would like to increase output.

You realize that, to increase output, you are going to have to employ more inputs, primarily more labor—however, a similar argument could be made about high unemployment of any of the other factors of production. You go to the factory door, open it, and find thousands of unemployed workers standing in line, wanting to work at your factory. How much would you have to pay them to get them to go to work for you? Certainly, you would not have to pay them more than the going wage rate in the market, right?

Essentially, you could hire as many unemployed resources as you would like without bidding up wages and prices, because of the substantial unemployment. The horizontal or Keynesian AS illustrates the idea of the economy being able to increase real output with no increase in the price level during periods of high unemployment.

In the Classical Range of AS, we are at or very near the full-employment level of output. This range is named after the Classical Economists who assumed that the economy, in the long run, would always achieve full employment. Assume again that you are running a factory, only this time, the economy is at full-employment. You go to the factory door and open it to find nobody waiting in line. There does not appear to be anyone looking for a job because everyone already has one!

How much are you going to have to pay these workers to get them to do that? Most likely you will have to pay them more than they are currently making. It is used with the firm's total cost curve to determine economic profit.

The marginal revenue curve, a key factor for determining the profit-maximizing level of a firm's output, is derived directly from the total revenue curve.

This curve is constructed to capture the relation between total revenue and the level of output, holding other variables constant. Clicking the pound sign " " will generate a list of every term beginning with a number.

Let's drop in for a brief respite -- and lunch. Manny is bubbling profusely about the vitality of his business. Last month he turned a profit.


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Determinants of Aggregate Supply. Changes in labor force: Anything that causes the amount of workers to increase in an economy will cause aggregate supply to increase or shift to the right. If the labor force decreases, the overall supply of .

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Aggregate supply determinants are held constant when the aggregate supply curves are constructed. A change in any of these determinants causes a shift of either the short-run aggregate supply curve, the long-run aggregate supply curve, or both. Learn aggregate supply determinants with free interactive flashcards. Choose from different sets of aggregate supply determinants flashcards on Quizlet.

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The best videos and questions to learn about Determinants of aggregate supply. Get smarter on Socratic. The ability to produce is summarized by the long run Aggregate Supply (AS) function based on the level of technology and availability of factor inputs. The ability to spend is summarized by the Aggregate Demand (AD) relationship which represents combinations of income and interest rates such that product markets and financial markets are in .