1. AD/AS Model and Inflation

2. AD/AS Model Aggregate = Total Aggregate Demand = Total demand in the economy Aggregate Supply = Total supply in the economy

3. Aggregate Demand Curve Shows the total demand in an economy at each price level Price Level = general level of prices (Measures inflation) Aggregate demand is demand from each of the sectors of the economy

4. Aggregate Demand AD = consumption spending (C) + Investment spending (I) + government spending (G) + net exports[export receipts (X) – Import payments (M)] AD = C + I + G + (X-M) If any of the components increases, then AD will increase and cause the AD curve to shift to the right If any of these components decreases, the AD will decrease and cause the AD curve to shift to the left

5.  AD CC  income  direct tax/ income tax  consumer confidence  interest rates  inflationary expectations/ future prices II  interest rates  business confidence GG  Govt spending decisions XX  exchange rate  overseas demand  overseas trade barriers e.g. tariffs  tastes/ preferences MM  exchange rate  tastes preferences  NZ trade barriers e.g. tariffs What might cause a change in AD???

6. Shifts of the AD curve

7. Aggregate Supply The aggregate supply curve shows the total output in an economy at each price level The aggregate supply curve is drawn assuming that – Nominal wages (Cost of production) – Import prices (cost of imported raw materials) – Productivity ( influenced by investment and technology) Are all held constant If any of these three factors change then there will be a shift of the AS curve

8.  AS  nominal wages  Imported raw materials cost  exchange rates  overseas price  productivity  technology  skilled labour leaving NZ  Indirect Tax  GST tax  excise tax  Technology What might cause a change in AS???

9. Shifts of the AS curve

10. Equilibrium Ye PLe Occurs where AD=AS This level also indicates The price level Ple (Inflation rate) the level of employment, output and Real GDP (Ye) YF shows full employment. YF - Ye shows the level unemployment level that exists Equilibrium represents where the economy will tend to move towards. Once we are at this equilibrium the economy will stay here unless AD or AS moves. Equilibrium AD/AS YF Price Level Real GDP (Output and employment)

11. Using the AD/AS model to illustrate Inflation Inflation = any increase in the general price level in the economy There are two changes on the AD/AS model that will result in inflation 1.Increase in AD 2.Decrease in AS

12. Increase in AD (Demand Pull Inflation) Any factor that causes a rise in AD, will cause a rise in the general level of prices, this is called demand pull inflation Inflation occurring PL1 PL2

13. Decrease in AS (Cost Push Inflation) Any factor that causes a fall in AS, will cause a rise in the general level of prices, this is called cost push inflation Inflation occurring PL1 PL2

14. Demand Pull Inflation Workbook 27-29 Cost Push Inflation Workbook 32-34 Task Sheet 8 and 9