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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.

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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.

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Here's what a star student thought of this essay

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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, ...

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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.


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Reviewed by groat 25/03/2012

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