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    AD AS Notes

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    AD AS Notes

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    AD AS Notes

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    mohammedaflalhi

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    You are on page 1of 5

    INDIAN SCHOOL BOUSHER

    ECONOMICS (030)
    CH- AGGREGATE DEMAND AND ITS
    COMPONENENTS
    SL.NO QUESTIONS AND ANSWERS

    1 What is Aggregate Demand?


     Aggregate Demand refers to the total demand for all final
    goods and services in an economy during a fiscal year (1-4-
    24 to 31-3-25).
     AD indicates all kinds of expenditures and expenditure or
    cost curve is upward sloping. Therefore, AD curve is also
    upward sloping.

    Schedule: Diagram:

    Y
    (Income C I AD= C+I
    )
    0 20 10 30
    20 25 10 35
    40 30 10 40
    60 35 10 45
    80 40 10 50
    2 List the components of Aggregate Demand.

    1.Private Final Consumption Expenditure (PFCE)


     lt is also called household expenditure.
     lt depends on the level of disposable income of
    household.
     Higher the level of Disposable income, higher will be
    private final consumption expenditure and vice versa.
    (Disposable income= Income- Income tax)

    2. Private Investment Expenditure (PIE)


    It refers to expenditure by private investors on the purchase of
    such goods which add to their stock of capital i.e. investment.

    3. Government Expenditure
    (a) Government final consumption expenditure (G): It
    refers to the expenditure incurred by government on consumer
    goods to meet public needs like law and order, education,
    health, transport, defense, etc.

    (b) Government investment expenditure (G): It refers to


    the expenditure incurred by the government on Capital goods.
    These expenditure are need to develop the economy. Like
    construction of highways, roads, hospital building, school,
    power plant, etc.

    4. Net Export (X-M)


    Expenditure by the foreigners on our goods is added to total
    expenditure (AD) while expenditure on imports is subtracted. So
    difference between export and imports is considered as a
    component of Aggregate Demand.

    So AD = C+1+G+ (X-M)
    But in two sector economy (i.e household and firms), AD = C+I
    3 What are the different types of investments?

    The two types of investments are:-


    1. Induced investment
     Refers to investment which is made
    with the motive of profit.
     It is generally done in private sector.
     It depends upon level of income.
     Induced investment curve is upward
    sloping.

    2. Autonomous investment
     Refers to investment which is made
    with the motive of social welfare.
     It is generally done by the
    government.
     The investment is made irrespective of the level of income.
     Autonomous investment curve is parallel to X-axis.

    4 What is Aggregate Supply?


     It is the total production or supply of all goods and services
    in the economy during a fiscal year.
     AS = C+S
     Components of AS are:-
    i) Consumption (C): It is the part of income which is spent
    on consumption.
    ii) Savings (S): It is the part of income which is not
    consumed i.e.saved.
    Schedule: Diagram:
    Y C S AS
    0 60 -60 0
    100 100 0 100
    200 170 30 200
    300 210 90 300
    400 200 120 400
      In the adjacent diagram,
    when Consumption (C) =
    National Income(Y), savings
    are zero. This is known as
    break-even point.
     This is shown by point E in the diagram.
     Thus break even point indicates a point where consumption
    becomes equal to income (Y=C) or consumption curve cuts
    the income curve.

    5 Why is AS a 450 curve? OR Why is the significance of the


    450 curve?
     AS= C+S
    Therefore, AS = Y since Y=C+S also
     X- axis denotes Y(income) or output.
    Y- axis denotes AS.
     In all levels, the values of Y and AS are the same.
     When we plot the values of X and Y coordinates, they are the
    same.
     It gives a straight line that starts from the orgin and is
    equidistant from X-axis and Y-axis.
    6 Equilibrium of income has two approaches. Explain them in
    detail.

    1. AD=AS
    In this approach, equilibrium level of output (GDP) is achieved
    when AD=AS

    Schedule: Diagram:

    Y C I AD S AS
    100 150 50 200 -50 100
    200 200 50 250 0 200
    300 250 50 300 50 300
    400 300 50 350 100 400
    500 350 50 400 150 500

    2. S=1
    In saving investment approach, equilibrium level of output (GDP) is
    achieved when planned investment i.e. S=I

    Schedule: Diagram:

    Y S I
    0 -10 10
    100 0 10
    200 10 10
    300 20 10

    7 What are the two cases of demand?

    1.Excess demand
     Refers to a situation when AD>AS corresponding to the full
    employment level of output in the economy.
     Inflationary gap is AD1-AD
    2. Deficient demand
     Refers to a situation when AD<AS corresponding to the full
    employment level of output in the economy.
     Deflationary gap is AD- AD1

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