10.4 - aggregate demand and the level of economic activity Flashcards
What is economic activity?
production and consumption of goods and services within the economy together with the employment of the labour, capital and other inputs that produce output
What is the multiplier?
the relationship between a change in aggregate demand and the resulting, generally, larger change in national income
What is the diagram for the multiplier effect?
AD –> AD2 –> AD3
What is the multiplier effect formula? (for the government spending)
multiplier = change in national income / initial change in government spending
What is the marginal propensity to consume?
the fraction of any increase in income which people plan to spend on the consumption of domestically produced goods and services
What is the marginal propensity to save?
the fraction of any increase in income which people plan to save rather than spend
What are the different multipliers?
investment, tax, export, import
What are the fiscal multipliers?
gov spending and tax multipliers
What is the other multiplier formula?
k = 1 / (1 - MPC)
k = 1 / MPS
What type of process is the multiplier effect?
dynamic –> takes place over a long time
What is the relationship between nominal national income, real Y and size of multiplier?
nominal national income = real national income x average price level
(Y = Py)
how does the nominal multiplier compare to the real multiplier?
the multiplier in real terms will be smaller than the nominal multiplier because part of the multiplier deflects into rising price level
What are the causes of a rightwards shift in the SRAS curve?
- fall in businesses cost of production
- fall in labour costs
- reduction in indirect taxes such as VAT
- increase in subsidies
- technical progress which improves the quality of capital goods
