2. How The Macroeconomy Works Flashcards
(51 cards)
What is aggregate demand?
Total planned spending in an economy over a period of time at any given price level
What does aggregate demand consist of?
- Consumption
- Investement
- Government expenditure
- Net exports (exports - imports)
What is the wealth effect?
Increases in the value of a households assets cause people to feel wealthier and encourages them to spend more of their current income
What is wealth?
Refers to the value of the assets held by households. Most wealth will be held in the value of property owned
What factors determine aggregate demand?
- Consumption
- Investment
- Gov expenditure
- Net exports
How does unemployment affect consumption?
If more people are unemployed and on welfare benefits, consumption will be lower
How do interest rates affect consumption?
-Interest rates rise cause an increase in household mortgage monthly payments
- Higher interest rates reduce likelihood of households engaging in credit-financed consumption
- Higher interest rates increase reward for saving - causing less consumption
How does consumer confidence affect consumption?
If households feel like their jobs are less secure in the future, they are likely to reduce their consumption
How does taxation affect consumption?
Increase taxation reduces a consumers disposable income, reducing consumption
How does wealth affect consumption?
If household wealth increases, a positive ‘wealth affect’ on households, meaning they are likely to spend more on goods/services - increasing consumption
How does interest rates affect investment?
Increased interest rates raise the cost of borrowing and reduce profitability of any investment project
How does business confidence affect investment?
If businesses expect sales to increase in the future, they are more likely to spend on investment goods to increase productive capacity to satisfy future demands
How does tax affect investment?
Companies are taxed on their profits (corporation tax), if this tax is lowered businesses will have more profits - leading to higher investment
How does technology affect investment?
- New technology will increase efficiency of production, leading to new firms investing in new technology to increase profitability
- New technology generates new markets for firms and will lead to firms investing more as a way of exploiting new opportunities
How does the accelerator theory affect investment?
If growth in national income increases, firms will need a larger productive capacity in order to produce a higher level of output to meet higher level of spending in the economy
What is the accelerator theory?
Where increases in national income lead to firms spending more on investment, in order to expand their capacity to exploit the rising income
What is the budget of balance?
The difference between government spending and the taxation revenue collected
What is budget deficit?
Government expenditure > taxation
What is budget surplus?
Government expenditure < taxation
What is balanced budget?
Government expenditure = taxation
What is exchange rate?
The price of one currency expresses in terms of another currency
What are net exports (exports - imports) affected by?
- Exchange rate
- Foreign growth
- UK growth
- Relative inflation and relative productivity
What is the multiplier process?
How a change in aggregate demand leads to a proportionately larger change in overall national income
What is the negative multiplier?
A fall in an of the components of aggregate demand leads to a proportionately larger fall in overall national income
