• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

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.

Extracts from this document...

Introduction

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. ...read more.

Middle

� "changes in producer taxes and subsidies" � "changes in inflation expectations - a rise in inflation expectations is likely to boost wage levels and cause AS to shift inwards" (Internet table) Macroeconomic equilibrium is achieved when there is a combination of aggregate supply and aggregate demand. There is macroeconomic equilibrium for aggregate supply which is: long-run equilibrium and short-run equilibrium. Long-run equilibrium is "the state towards which the economy is heading" (Parkin, 2000, page 468) and short-run equilibrium "describes the state of the economy at each point in time on its path towards long-run macroeconomic equilibrium." (Parkin, 2000, page 468) Short-run macroeconomic equilibrium occurs when the quantity of real GDP is equal to the short-run quantity of real GDP supplied at the point of intersection of the aggregate demand curve and the SAS curve (AD=SAS). The next figure will show how (P) represents the price level (GDP deflator) and (Y )is real GDP. We see in the diagram that if the price level is above equilibrium there will be a surplus of goods and if the price level is below equilibrium there will be a shortage of goods. ...read more.

Conclusion

In the long run, real GDP equals potential GDP and there is full employment. This curve is vertical and it only changes when potential GDP changes. In the short run, real GDP deviates from potential GDP. Shot -run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when wage rates and other factor prices are constant. Change in potential GDP changes both long-run and short-run aggregate supply. We have also studied the aggregate demand curve. The aggregate demand curve slopes downward because the higher the price level, the smaller the quantity of real GDP demanded. We have also seen how the AD and AS curves are important for macroeconomic equilibrium. In a long-run macroeconomic equilibrium, real GDP equals potential GDP and aggregate demand determines the price level. In a short-run macroeconomic equilibrium, real GDP and the price level are determined simultaneously. After we saw with the AS -AD model the effects of real GDP and the price levels. BOOK Michael Parkin, Melanie Powell, Kent Matthews. Economics. UK: Pearson Education Limited 2003, (c) 2000. David Begg, Stanley Fischer, Rudiger Dornbusch, Economics.UK: McGraw-Hill Online Learning Centre, (c) 2002. WEBSITE Aggregate Supply http://www.revisionguru.co.uk/economics/aggsupply1.htm. (12/03/2005) Business.com http://www.business.com (13/03/2005) ?? ?? ?? ?? 1 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Here's what a star student thought of this essay

4 star(s)

Response to the question

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, ...

Read full review

Response to the question

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.

Level of analysis

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.

Quality of writing

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.


Did you find this review helpful? Join our team of reviewers and help other students learn

Reviewed by groat 25/03/2012

Read less
Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Marked by a teacher

    I will be evaluating on the article "UK inflation drops to Bank target" by ...

    3 star(s)

    All data and information support the concepts tightly like in the case of cost-push inflation. I also manage to do a successful cross reference with The Guardian and UK National Statistics website whereby the data and information from BBC correspond perfectly with those from the two other sources.

  2. Peer reviewed

    Economic and Social consequences of Unemployment

    5 star(s)

    It is believed that a country can keep a low rate of unemployment by keeping a high inflation rate (relationship suggested by Phillips curve). This low rate of unemployment is known as natural unemployment.

  1. What are the Government's main economic objectives?

    will be adopted. The CPI is recognised to be more precise ad reliable, taking better account of factors neglected under the RPIX. It is also internationally recognised and makes the UK rates comparable with the rest of the Euro Zone and America. This change means the new target level for inflation will be two per cent.

  2. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    Instead of obtaining the $25,000 fee to be smuggled in advance, many immigrants are charge only $2,000 in advance, with the balance due upon successful entry into Japan. The boat trip from Fujian to Japan normally takes one week. In order to pay off smuggling fees, some Chinese immigrants commit crimes in Japan.

  1. Euro Currency and Tourism

    Also, most of the money that is received from tax by the government is spent in already wealthy cities and so many villages and rural areas still remain poor. This also means shanty towns are built as most new jobs and tourist jobs are in major cities.

  2. ECONOMICS PAST PAPER QUESTIONS WITH ANSWERS - price elasticity and inflation.

    It may be difficult to change quantities supplied in response to a price increase in the short run. This is obvious if one considers agricultural products. Suppose that the price of an agricultural product rises unexpectedly.

  1. Various Macro-Economic Questions and answers

    It can be calculated via GDP per capita, which is just an easier way to compare between economies as population of the economies is taken into account. If GDP rises, it is called economic growth, a negative change in GDP means there has been a shrink in the size of

  2. Explain why a change in the budget deficit may lead to a more than ...

    leading to a decline in investments if firms become less willing to take risks without the government offering some form of support. On the hand, it is possible that a decreased budget deficit may indicate a healthy economy, while would result in the opposite described, as consumers/firms may in reality

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work