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AS/AD Equilibria

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University of Dublin, Trinity College

   

Introduction to Economics (EC1010)

   

Added on  2020-03-02

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This paper focuses on the impact of external debt on growth in developing countries, while for the euro area, several studies analyse the impact of fiscal variables, including government debt, on long-term interest rates or spreads against a benchmark, as an indirect channel affecting economic growth.

AS/AD Equilibria

   

University of Dublin, Trinity College

   

Introduction to Economics (EC1010)

   Added on 2020-03-02

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AS/AD 1The AS/AD modelCourseNameInstitution Affiliation
AS/AD Equilibria_1
AS/AD 2The AS/AD modelThe aggregate supply curve represents the total amount of goods and services produced by an economy at all possible price levels. The aggregate demand curve represents the amount ofgoods and services that can be purchased by the economy at all possible price levels. When both curves are put together, it represents the AS/AD equilibrium in a given economy. The equilibrium point is representative of the equilibrium price level and the real GDP. In the short run, the equilibrium occurs when the GPD quantity demanded is equal to the quantity supplied. In the long run, the real GDP should be equal to the potential GDP. The AS/AD framework shows the response to the economy in response to increase in the aggregate demand (Anderson and Peitz, 2012).An increase in the aggregate demand can result either from increased income levels or an increase in government spending or a fall in the interest rates. In the short run, the AD curve shifts to the right which makes the equilibrium price to increase as well as the real GDP to increase as well. The AD may shift to the right due to an increase in foreign income due to increased world trade. The increase in the foreign income may positively impact the exports of the country which leads to increase in the aggregate demand (Evans, 2016). This movement can be reflected in the housing market where the economy experiences an increase in the house prices. Due to the increase in the levels of income, the money wage rate may stimulate the short
AS/AD Equilibria_2
AS/AD 3run aggregate supply curve to shift leftward. A leftward shift can be caused by the increase in theprices of inputs that are used in the manufacturing of products. For example an increase in the price of the price of non-precious metals may increase the costs of production which makes the producers produce a little bit less. The equilibrium quantity demanded therefore decreases and the price level is further increased. On the other hand, in the long run, the short run aggregate supply curve shifts leftward such that the Real GDP is at the potential GDP. It therefore leads to a higher level in the price before the increase in the aggregate demand (Berentsen and Wright, 2011).The GDP can also be impacted by the monetary policy. In case of a contractionary monetary policy imposed by the ECB, the money supply in the economy decreases, this leads to a decrease in the GDP. The aggregate spending by the consumers in the market is reduced which reduces the aggregate demand leading to a rightward shift. On the other hand, an expansionary monetary policy by the ECB leads to an increase in the money supply in the economy. This leadsto an increase in the aggregate demand and therefore an increase in the GDP. In this way, the increase in consumer spending leads to a leftward shift in the aggregate demand curve that increases the equilibrium price and increase in the real GDP (Heijdra, 2017). The ECB has been implementing an expansionary monetary policy in order to stimulate the economy and support the Euro to level the inflation rates and stimulate economic recovery. In case the ECB selects to pursue an expansionary fiscal policy, there is either an increase in government spending or a decrease in the level of taxes of both. The AD curve shifts to the right as a result. However the extent of the shift due to government spending is dependent on the size of the multiplier. The shift in the AD curve due to a contractionary fiscal policy may be in order to remedy the demand pull inflation. Also in case the ECB had undertaken a debt, a
AS/AD Equilibria_3

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