increases.

AD will shift to the left. This will also happen if the value of the sterling
if the UK economy is growing and incomes are rising, imports will increase and
cheaper exports will shift AD to the right.
exports/ imports are affected by the value of the pound. SPICED and WPIDEC.
the right. If the countries are in recession, we would expect a shift to the left.
are growing, demand for UK exports should increase, shifting the AD curve to
UK exports depend on AD in its major trading partners so if European economies
net exports (X-M):
while a cut in govt. spending will shift it to the left.
govt investment into schools and hospitals will shift the AD curve to the right,
less.
this reduction was so that tax rates could decrease and the govt. would borrow
companies e.g. royal mail AND austerity cuts
over the last 50 years, govt. spending has reduced due to privatisation of
mainly spending on public and merit goods and local govt. services.
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Government expenditure and net exports
1 of 4
Aggregate demand
the AD curve sloped downwards because: when prices fall consumers feel wealthier because their
disposable incomes will buy more. This increases consumption.
factors affecting AD:
investment - the decision to invest is affected by a no. of difference factors:
the rate of interest: a fall here will shift the AD curve to the right, as borrowing is cheaper
and firms will invest in new equipment to improve their competitive position.
Business expectations: if interest rates are low, businesses will expect more future sales as
demand will increase. These positive expetations will increase I, shifting the AD curve to the
right.
the rate of technical progress: new equipment and tech development can increase I as it
makes them more competitive and efficient.
the rate of change of income: affects firms' demand and at full capacity, an increase in
demand will increase I as firms will produce more to meet demand. As the price of the
required machinery is likely to be more than the value of the good produced, I will be a
large injection and will shift AD to the right, producing a multiplier effect. Coupled with the
accelerator effect can lead to sizeable fluctuations in demand.
 left.
an increase in corporation tax will increase firms' costs and shift it to the
a rise in the price of imported raw materials will shift it to the left.
and will will reduce AS shifting the curve to the left.
an increase in the interest rate will make it more expensive to invest/borrow
left.
an increase in wage rates will increase firms' costs and shift the curve to the
factors affecting SRAS:
prices of factors of production are assumed to be unchanged.
SRAS - the total quantity that will be supplied at different price levels when the
on the other hand, the classical view has LRAS and SRAS.
becomes scarce.
would remain fairly stable up to full employment and then rise as labour
This type of diagram could be a 'Keynesian' diagram as his view was that wages
employment and is unable to produce any more g/s.
where the curve becomes VERTICAL, the economy is operating at full
increase, prices rise so the curve slopes upwards at a STEEPER rate.
As the labour market tightens and required labour becomes scarce, wages
production at a particular price level.
shows the total output that an economy can produce using available factors of
this curve slopes upwards from left to right.

3 of 4
Aggregate supply - short run..

4 of 4
long run AS..

in the LRAS, factor prices can change. LRAS is the output that can be produced with the full
employment of resources i.e. the productive capacity.
Classical economists believe that the LRAS curve will become vertical BEFORE full employment is
reached as there will be some workers who prefer not to work and to stay on benefits rather than
work for low wages. i.e. actual output may not reach the economy's productive capacity. These
people are referred to as 'voluntarily unemployed'. Here, the level of output where the curve
becomes vertical is called the 'natural rate of unemployment'.
factors affecting the LRAS: a rightward shift shows rising real output and econ growth.
an increase in the amount of capital equipment will increase output and shift the curve to
the right. The increase in capital could have been caused by lower interest. Natural disasters
can wipe out capital stock, reducing output and GDP of the economy (left shift)
better technology produces capital equip that is more productive, which increases labour
thus increasing efficiency, shifting the curve to the right. Anything
that increases
labour output e.g. increased investment in education and training...
attitudes:lots of entrepreneurial individuals can increase AS. Also, a good institutional
economy structure e.g. in the US economy where low interest rates provide an incentive for
new individuals to set up their own businesses and not rely on the state so much.
productivity: policies to persuade people to work reduce the natural rate of unemployment
(right shift) e.g. reducing benefit rates