Use the aggregate supply-aggregate demand (AS-AD) model to examine the effects on real GDP and the price level of increases in American tourism to the UK.

Authors Avatar

Hamit Keswani Keswani

1.)Distinguish between the short-run and long-run aggregate supply curves, and

explain why they are important for the definition of a macroeconomic

equilibrium. Use the aggregate supply-aggregate demand (AS-AD) model to

examine the effects on real GDP and the price level of increases in American

tourism to the UK.

        The aggregate supply and aggregate demand model helps building up our  

knowledge of the three factors of macroeconomic performance which are: explain fluctuations in economic activity and how economic agents respond to economic events, provides a basis for understanding movements in the price levels (inflation), and it also helps us understand the process of economic growth. Aggregate supply and aggregate demand are concepts that help us determine the real GDP and the price level (GDP deflator), other things remaining the same. The quantity of real GDP supplied (Y) depends on three important things: The quantity of labour (N), the quantity of capital (K), and the state of technology (T). In order to explain this better we have to study in depth the two aggregate-supply branches: long-run aggregate supply and short-run aggregate supply.

        The long-run aggregate supply curve is the “relationship between the quantity of real GDP supplied and the price level in the long run when real GDP equals potential GDP”( Parkin, 2000, page 465) . The long-run aggregate supply is shown always as a vertical line and is located at potential GDP. The curve is always vertical because potential GDP is does not depend on the price level. There is no dependence because a movement along the curve is accompanied by changes in two sets of prices: the prices of good and services and the prices of factors of production. When price level changes but relative prices and real wage rate stay the same, real GDP also remains the same. (figure)      

Join now!

The short-run aggregate supply curve is the “relationship between the quantity of real GDP supplied and the price level holding all other factor prices constant (ceteris paribus).” (Parkin, 2000, page 466 So movements up and down  the short-run aggregate supply means that only the price level is changing; other factor prices are held fixed. (figure)

 

        There are movements along the LAS and SAS curves and we see this in the next figure. A rise in the prices and an equal amount of rise in the money wage rate brings movements in the LAS curve. Real GDP remains ...

This is a preview of the whole essay

Here's what a star student thought of this essay

The quality of writing here is good. The style is fluent, and the citing makes for a convincing argument. I would note that it's not necessary to reference at A-Level, but it is good practice for university and beyond. Spelling, punctuation and grammar are good, but sometimes the syntax is wrong. For example "After we saw with the AS –AD model the effects of real GDP and the price levels." there needs to be some rewording here as it's not clear what they are saying. Similarly, I'm not keen on the use of "we" and "I" in essays as it seems to lack sophistication.

The analysis here is strong. There is a good awareness of why the long-run supply curve is perfectly inelastic, and this is something examiners will be looking for. Being able to explain concepts rather than simply assert them will always gain credit. The factors affecting aggregate supply are outlined well, but I would've liked to have seen more elaboration. For example a discussion of why productivity through innovation will shift the curve right. This would show the examiner that you have a full understanding of the concept. The diagrammatical analysis here is good, and shows a variety of skills. I would advise a simple sentence such as "An increase in innovation will cause AS to shift right to AS1, causing macroeconomic equilibrium to change, with real GDP increasing from Y to Y1 and price level down from P to P1." These sentences will always gain credit and solidify your knowledge.

This essay responds well to the question, looking at the difference between the short-run and long-run curves. I wasn't too sure about the definition of the aggregate demand curve, and would advise talking about the components (Government Spending, Investment, Consumption, Exports minus Imports). The explanation given in this essay isn't the common one examiners are looking for, so I would be wary. I would've liked to have seen a Keynesian long-run supply curve, as this would've gone further in incorporating both short-run and long-run curves as shown in this essay.