7 how the macroeconomy works

Question 1

national capital stock definition

Answer 1

the stock of capital goods,

Question 2

wealth definition

Answer 2

the stock of assets which have value at a point in time, as distinct from income which is a flow generated over a period of time

Question 3

national income definition

Answer 3

the flow of new output produced by the economy in a particular time period, usually a year

Question 4

national output definition

Answer 4

the same as national income, namely the flow of new output produced by the economy in a particular time period, usually a year

Question 5

national product definition

Answer 5

another name for national income and national output

Question 6

consumption definition

Answer 6

total planned spending by households on consumer goods and services produced within the economy

Question 7

3 way to measure the flow of new output

Answer 7

national income = national output = national expenditure

Question 8

circular flow model

Answer 8

2 economic agents
- households
- firms
- page 163 or ezyeconomics video

Question 9

closed economy definition

Answer 9

an economy with no international trade

Question 10

investment definition

Answer 10

total planned spending by firms on capital goods produced within the economy

Question 11

injection definition

Answer 11

spending entering the circular flow of income as a result of investment, government spending and exports

Question 12

when is national income in equilibrium

Answer 12

saving + taxation + imports

investment + government spending + exports

or
when AD = AS

Question 13

open economy definition

Answer 13

an economy open to international trade

Question 14

what are the 3 injections into the circular flow of income model

Answer 14

• government spending
• investment
• exports

Question 15

what are the 3 leakages into the circular flow of income model

Answer 15

• saving
• taxation
• imports

Question 16

reflationary policies definition

Answer 16

policies that increase aggregate demand with the intention of increasing real output and employment

Question 17

inflation definition

Answer 17

a continuing rise in the price level

Question 18

aggregate demand definition

Answer 18

the total demand for consumer and capital goods and services (real output) at any given price within an economy

Question 19

aggregate supply definition

Answer 19

the level of real national output that producers are prepared to supply at different average price levels

Question 20

economic shock definition

Answer 20

an unexpected event hitting the economy:
- demand-side
- supply-side
can be both favorable or unfavorable

Question 21

rate of interest definition

Answer 21

the reward for saving and the cost of borrowing

Question 22

aggregate demand equation

Answer 22

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

Question 23

What are the 8 factors affecting consumption

Answer 23

• level of interest rates
• level of income
• expected future income
• wealth effect
• consumer confidence
• availability of credit
• distribution of income
• expectations of future inflation

Question 24

availability of credit definition

Answer 24

funds available for households and firms to borrow

Question 25

credit crunch definition

Answer 25

occurs when there is a lack of funds available in the credit market, difficult for borrowers to obtain money and costs more

Question 26

distribution of income definition

Answer 26

the spread of different incomes among individuals and different income groups within the economy

Question 27

how does the wealth effect affect consumption

Answer 27

house prices increases people feel wealthier like they have more money, spend more house prices decrease they feel like they have less money, spend less

Question 28

accelerator theory definition

Answer 28

a change in the level of investment in new capital goods is caused by a change in the rate of growth of national income or aggregate demand, meaning a further shift in AD

Question 29

what affects the rate of growth of national income

Answer 29

aggregate demand, - AD increases - national income rises - investment rises - accelerator theory

Question 30

multiplier definition

Answer 30

The process by which expenditure generates a trail of subsequent expenditure so that the resultant change in national income will exceed the amount initially expended.

Question 31

aggregate demand and national income multiplier equation

Answer 31

change in national income / initial change in government spending 1 / 1-mpc

Question 32

marginal propensity to consume definition

Answer 32

the fraction of an increase in disposable income that people plan to spend on domestically produced goods

Question 33

marginal propensity to consume multiplier formula

Answer 33

1 / 1 - MPC

Question 34

short-run aggregate supply definition

Answer 34

aggregate supply when the level of capital is fixed, though utilisation of existing factors of production can be altered so as to change the level of real output

Question 35

long-run aggregate supply definition

Answer 35

aggregate supply when the economy is producing at its production potential. if more factors of production become available or productivity rises, the LRAS curve shjifts to the right

Question 36

what are the 2 reasons the SRAS curve is sloping upwards

Answer 36

- firms want to maximise profits - in the short run, the cost of producing extra units of output increases as firms produce more output

Question 37

deflation definition

Answer 37

a sustained fall in the average price level over a period of time

Question 38

what causes the SRAS to shift

Answer 38

- change in costs increase / subsidies

Question 39

what factors determine the position of the LRAS

Answer 39

- the quantity and quality of labour and capital - mobility of factors of production - productivity of factors of production - appropriate economic incentives