4.2.2 How The Macroeconomy Works

Question 1

What is the equation for National income?

Answer 1

Y=C+I+G+(X-M)

Y= national income
C=consumption
I=investment 
G=government expenditure 
X=exports
M=imports

Question 2

What % of GDP is made up of consumption?

Answer 2

60%

Question 3

How can money enter a country?

Answer 3

• foreign investment

* injections-(government spending, investment and exports)

Question 4

How can money leave a country?

Answer 4

Withdrawals-(taxes, savings and imports)

Question 5

What are the 4 things in the circular flow of income?

Answer 5

Households
Factor services
Firms
Factor incomes

Question 6

What are the 4 types of factor service?

Answer 6

• labour
• capital
• entrepreneur
• land

Question 7

What are the 4 types of factor incomes?

Answer 7

• wages/salaries
• interest
• profit
• rent

Question 8

What is the equation for the circular flow of Income?

Answer 8

Income=output=expenditure

Question 9

Aggregate demand

Answer 9

The total demand for goods and services in an economy at a given price level and in a given period of time

Question 10

What is the relationship between price level and consumption for AD?

Answer 10

Inversely proportional

High price=low consumption
Low price=high consumption

Question 11

Aggregate supply

Answer 11

The total amount of goods and services (real output) produced and supplied

Question 12

Economic shocks

Answer 12

Unexpected events they affect the economy and shifts AD

Question 13

What causes a shift in the AD curve?

Answer 13

Change in the following given a constant price level:
•consumption
•investment
•government spending 
•net exports

Question 14

What causes a movement along the AD curve?

Answer 14

A change in price level

Question 15

What causes a shift in the AS curve?

Answer 15

Wage rates
Raw material prices
Taxation
Exchange rates
Productivity

Question 16

What causes a movement along the AS curve?

Answer 16

Change in price level

Question 17

What causes shifts in the LRAS curve?

Answer 17

Change in productive potential

• technological advances
• changes in relative productivity to competing countries
• change in education and skills
• changes in government regulations
• demographic changes and migration
• competition policy
• enterprise and risk taking
• factor mobility
• economic incentives
• institutional structure of an economy

Question 18

What causes a movement along the LRAS curve?

Answer 18

Change in price level

Question 19

How is economic growth shown on an LRAS curve?

Answer 19

Shift right

Question 20

How have supply side shocks affected the macroeconomy?

Answer 20

• SRAS curve shifts inwards due to rises in oil prices in 1974-75 and 1980-81
• stagflation occurred as output was falling but inflation was rising
• high unemployment

Question 21

How have demand shocks affected the macroeconomy?

Answer 21

• in 1988 interest rates were raised to 15% and aggregate demand fell
• lead to a recession with falling output and downward pressure on prices

Question 22

What does the LRAS curve represent?

Answer 22

The max production possibility of an economy

Question 23

Full employment income

Answer 23

The total output of an economy when unemployment is at the government target

Question 24

What happens if there are net injections into an economy

Answer 24

Expansion of national output

Question 25

What happens when there are net withdrawals into an economy

Answer 25

Contraction of production

Question 26

In an economy when is equilibrium achieved

Answer 26

When rate of withdrawals= rate of injections

Question 27

At price above the equilibrium what is there?

Answer 27

Excess supply

Question 28

At price below the equilibrium what is there

Answer 28

Excess demand

Question 29

What is AD made up of?

Answer 29

AD= C + I + G + (X-M) ``` C= consumption I= investment G= government spending X= exports M= imports ```

Question 30

Influences in consumer spending

Answer 30

* consumers marginal propensity to consume * interest rates, however there is a time lag * consumer confidence affected by anticipated income and inflation

Question 31

What percentage of AD is made up of investment

Answer 31

15-20%

Question 32

Influences on investment

Answer 32

* higher economic growth means higher investment * higher confidence means higher investment * lower interest rates means higher investment * higher credit means higher investment * lower tax means higher investment

Question 33

Accelerator process

Answer 33

Suggests a higher rate of economic growth causes more investment

Question 34

Percentage of AD which is government spending?

Answer 34

18-20%

Question 35

Influences on government spending

Answer 35

* business cycle- what stage of economic growth the economy is in (boom or bust) * fiscal policy in place

Question 36

Influences on exports- imports

Answer 36

* higher real income leads to higher imports * depreciation in pound, exports up imports down * state of world economy * protectionism * more innovation and competitiveness leads to more exports

Question 37

Multiplier process

Answer 37

Occurs when there is new demand in an economy, this leads to an injection of more income which leads to economic growth

Question 38

Multiplier ratio

Answer 38

The ratio of the rise in national income to the initial rise in AD

Question 39

When is the multiplier effect greatest

Answer 39

When the economy has lots of slate capacity so output can be produced quickly giving an elastic SRAS curve

Question 40

Reverse multiplier

Answer 40

When a withdrawal of income leads to an even larger decrease in income in the economy

Question 41

How do you calculate the multiplier process

Answer 41

1/(1-MPC)