10 How the macroeconomy works Flashcards
AD formula
C + I + G + (X - M)
Real GDP = Nominal GDP x price level previously/ price level in current year
Aggregate demand
total spending on domestic output at a given price level
Reasons why AD curve is sloping downwards
- international wealth effect
- wealth effect
- interest rate effect
What affects consumption?
- interest rates
- taxation
- wealth
- consumer confidence
- unemployment
What affects investment?
- interest rates
- business confidence
- tax
- technology
-accelerator theory
What affects government spending?
- taxation
What affects net exports?
- exchange rate
- foreign growth
- UK growth
- inflation
Multiplier
how a change in AD leads to a proportionally larger change in overall real GDP
Multiplier formula
overall change in national income/initial change in AD
1/ (1- MPC)
Aggregate supply
is total output producers are willing to supply at a given price level
Reasons why AS curve sloping upwards
- higher AC for extra cost
- greater profit for firms at a higher price level
Reasons why SRAS curve can shift
- wage rates
- raw material costs
- cost of capital goods
- corporation tax
- changes in productivity
- exchange rate changes
Reasons why LRAS shifts
- technological change
- productivity
- factor mobility
- enterprise
- economic incentives and attitudes
- the institutional structure of the economy
Institutional structure
the financial and legal systems that make it easier for businesses to set up, operate and expand
Economic shock
sudden, unexpected events that affect the macroeconomic, especially the growth rate
