1. A.S 3.5

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 Deamand AD = consumption spending (c) + Investment spending (I) + government spending (g) + net exports[exports (x) – Imports (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

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 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

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. Task sheets 3, 4 and 6 – Aggregate demand Task sheet 5 and 7 – Aggregate Supply Workbooks page 193

12. 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

13. 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

14. 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

15. Task sheet 8 and 9 Workbooks 194 – 196

16. Using the AD/AS model to illustrate Economic Growth Economic growth = increase in the amount of goods and services produced in an economy (Shown as an increase in Real GDP) Gross Domestic Product (GDP) = Total value of all goods and services produced in an economy in a year Nominal GDP = Current dollar value of the production of goods and services produced Real GDP = Nominal GDP with the effects of inflation removed

17. Changes to AD curve and Growth -Any increase in AD will cause an increase in economic growth. -If any component of AD increases then growth will occur -E.G. An increase in consumption spending, causes firms to increase output to meet the increase in demand. This causes firms to increase employment resulting in an increase in incomes. Output increases so RGDP increases

18. Increase in AD Ye PLe AD’ PL1 Y1 Any increase in Real GDP shows economic growth

19. Changes to AS and Growth The factor that will increase AS curve (Cause a shift to the right) will result in economic growth – Costs of production fall – Productivity/ Technology Increases – NZ dollar appreciates (Costs of imported raw materials fall)

20. Increase in AS PLe Y1 Ye AS’ PL1 e.g. NZ dollar Appreciates Cost of imported raw materials fall, so firms costs of production decreases. Firms respond by increasing supply as its now more profitable due to costs falling. (Profit = Revenue –Costs) Causes AS curve to shift to the right from AS to AS’ as supply increases. Causes real GDP to increase from Ye to Y1 resulting in economic growth.

21. Read and highlight page 204 Complete pages 205 -207

22. AD/AS and Unemployment Unemployment = People who don’t have a job and are actively seeking employment

23. PEAK/ BOOM TROUGH Economic activity % Change in RGDP Time Upturn/recovery Downturn PEAK/ BOOM TROUGH Downturn Upturn/recovery THE BUSINESS CYCLE

24.  Peak / upswing –  High Economic Activity  Low unemployment  High Investment  Consumer and business confidence is high.  High Inflationary Pressure  Downturn/Recession  Reduced economic activity  High Unemployment  Reduced investment  Unemployment increasing  Consumer and business confidence is low  Disinflation or deflation occurring The Business Cycle

25. Recessionary Gap Yf shows full employment When the economy is in a recession, demand for goods and services falls. Therefore producers lay off workers as their profits begin to fall. Unemployment rises. This is shown as the gap between Y and Yf Price Level YfY Unemployment Recessionary Gap PL

26. Why is a Recessionary (Defaltionary) gap unfavourable? Equilibrium income is below full employment level of income resulting in  Unemployment  Idle Factories This is a concern to the government because, even though the economy is in equilibrium there is under-utilised resources in the economy i.e. unemployed workers

27. Closing the recessionary Gap To decrease unemployment we need an increase in output to occur. Any factor that will lead to an increase in output (RGDP) will close the recessionary Gap Occur from either – Increase in AD – Increase in AS

28. Read and Highlight page 220 Complete pages 221 - 222

29. Trade and the Current Account Balance

30.  We have several different exchange rates, one for each currency.  It measures how much we would get in terms of the other currency per $1 NZ.

31.  If an exchange rate increases, our $NZ is appreciating.  This means that we are now getting more of the other currency per $1 NZ.  Causes exports to become more expensive for foreign consumers  Causes imports to become cheaper for us.  If an exchange rate is decreasing, our $NZ is depreciating.  This means that we are now getting less of the other currency per $1 NZ.  Causes exports to become cheaper and more competitive overseas  Causes imports to become more expensive for us

32.  When we buy goods or services from other countries we must pay them in their currency. Therefore we must sell (SUPPLY) our dollar in return for the other currency.  Hence why we have exchange rates, we need to know how much of other countries currency we would get in return for every $1 NZ.  This also works in reverse: when other countries want to buy our exports they must sell their currency in return for our $NZ (DEMAND for the $NZ) in order to pay for the goods.

33.  This means that the ‘market’ (demand and supply) for our NZ dollar determines the exchange rate.  Things that will increase the demand for the $NZ: Exports increase (more demand for our $NZ to pay for these) Foreigners investing in NZ (they must invest in NZ in our currency) i.e. our interest rate is high. Borrowing from abroad (they must lend us the money in $NZ in order for us to use it) Increase in tourists coming to NZ.

34.  Things that will increase the supply of the $NZ: Imports increase (we need to sell more of our $ to get more of the foreign currency to pay for these) NZer’s invest more overseas (we must invest in the currency that the country uses i.e. Japan-Yen) Paying back loans to overseas lenders. More NZer’s traveling overseas (we must sell our $NZ to get the currency to spend in the country we are traveling overseas).

36. Appreciation of NZ dollar Depreciation of NZ dollar

37.  This measures the purchasing power of a nation’s exports (in terms of what we receive for exports and what we pay for our imports).  T of T = Index of export prices × 1000 Index of imported prices  When it becomes more expensive to buy imports our purchasing power decreases (ToT).  When it becomes less expensive to buy imports our purchasing power increases (ToT).

38. Balance of Payments Where New Zealand's international transactions are summarised International transactions include the value of – Inflows and outflows of money – Financial assets and liabilities

39. Balance of Payments Financial Account Capital Account Current Account

40. 1 st part to the current account Balance on goods Measures relationship between nations exports and imports of GOODS. Calculated as Export receipts – Import Payments Exports of goods Export receipts Imports of Goods Import Payments

41. 2 nd part to the current account Balance on services We sell our services overseas and we buy other services from overseas. They include tourism, insurance and transport. Calculated as services receipts – service payments Exports of services Export receipts Import payments Import of Services

42. 3 rd part to Current Account Balance on Incomes New Zealand Producers invest money in overseas businesses in order to earn income, and overseas producers do the same in NZ. Net result of this = Balance on Incomes Calculated as Income from investments aboard – incomes paid to foreign investors e.g. Interest on savings loans and dividends on shares

43. 4 th part to current account Balance on current transfers Nz makes payments to overseas governments in the form of international aid. E.g Aid to assist Fiji for devastating cyclone. Transfers also include pension payments received by the NZ government from overseas governments for their citizens that now live in NZ.

44. Current Account Balance on goods Balance On services Balance on income Balance on current ‘ transfers Value of exported goods minus value imported goods Usually positive Includes all tangible items that can be seen, moved or stored Value exported services minus value of imported services e.g. Transport, insurance, education etc. Tourists from overseas who spend money in NZ contribute to our exports of services Value of investment income received from investments overseas minus investment income paid to foreign investors e.g. Interest on savings loans and dividends on shares Value of transfers received by NZlanders minus value of transfers paid to others overseas. e.g. Money transfers from Govt aid, gifts etc

45. How to calculate Current Account Balance on Current Account = Balance on goods + Balance on services + Balance on Incomes + Balance on current transfers

46. Current account balance 1999-2006 Positive balances indicate a surplus, negative balances are in deficit -The goods balance has gone from a surplus of $2.1 billion in 2001 to a deficit of $4.2 billion in 2006 -- Mainly driven from rising imports -- Service balance went from deficit to small surplus -- Investment income deficit increased to over 11billion in 2006 -- result of increasing income earned by foreign investors (high foreign investment)

47. Current Account Balance  Is consistently in deficit. NZ has experienced current account deficits since the 1970s. NZ has a large foregin ownership of NZ companies The Balance on Income account negative (More money leaving NZ than coming into NZ) This deficit has to be paid for in some way, from overseas borrowing, foreign investment or assets sales Foreign Investment causes interest rates to rise. This reduces AD and decreases economic growth.

48. Read and Highlight 213 and 214 Workbook page 215