aggregate demand/supply (MACRO) Flashcards by Sajan Jasotharan

what does the circular flow of income show

.incomes flow into households in reward for the factors of production
.households use their income to buy g+s
.money flows back to firms and g+s are consumed by households

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what is national income

all the income that flows into households over a period of time

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what is national output

value of all the output produced in an economy over a period of time

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what is national expenditure

all spending by households, firms and government over a period of time

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what are the injections and leakages of the circular flow of income

injections:
.Investments
.government spending
.exports

leakages:
.savings
.taxations
.imports

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what is aggregate demand

measures the ability and willingness of all economic agents to spend in the economy

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what are the components of aggregate demand

C + I + G + (X-M)
c = consumption
i = investment
g = gov spending
X-M = exports - imports

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what is the relationship of aggregate demand and price level

inverse relationship

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AD graph

y = price level
x = real GDP

.shifts in demand are due to the components of aggregate demand

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shifts in the AD curve

consumption

investment- increase due to confidence and gov incentives

gov expenditure

net exports- when exports are higher than imports the AD will shift to the right

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what is the relationship between income and consumption

.when income rises it is likely that consumption also rises
.as consumption is a component of aggregate demand it shifts the AD curve to the right
.people might consume less due to leakages or consume more due to borrowing or past savings

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what is the marginal prospensity to consume

.the proportion of income a household chooses to spend

.low income = high marginal prospensity to consume as they need to use more of their income to buy necessities

high income = low marginal prospensity to consume as they have money left over after purchasing necessities

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evaluation of the relationship between income and consumption

.depends on:
.level of income of a household
.type of employment
.level of increase in income
.confidence in the economy
.macroeconomic factors e.g. inflation

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what are expectations

.they are what economic agents think will happen in the future
.the actions that results from expectations can very well lead to said expectations

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what is aggregate supply

total supply of all good and services produced in an economy at a given price and time

.depends on the factors of production
.SR = factors of production are variable
.LR = factors of production are fixed

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what is short run aggregate demand

the g+s that firms are willing and able to produce at a given price level in the short run

.atleast one factor of production is fixed = firms can react to changes in price level

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SRAS graph

y = price level
x = real gdp

.curve diagonal upwards right

.shifts are due to the cost/productivity of the factors of production

what is long run aggregate supply

the maximum that can be produced with all the factors of production in an economy
.it measures the maximum that an economy can produce such as the PPC

LRAS graph

y = price level
x = real gdp

.LRAS is a straight vertical line as all factors of production are being used in the LR

.shifts due to a change in quality or quantity of the FoP (like the PPC)

keynesian AS curve

y = price level
x = real gdp
.horizontal line that lead into a vertical line

.horizontal line = when there spare FoP
.vetical line = when FoP is used at full capacity

what is macroeconomic equilibrium

point where AD = AS

SR macroeconomic equilibrium

where SRAS meets AD

.shifts due to a shift in SRAS or AD

effects of a change in AD on the SR macroeconomic equilibrium

increase:
.PL and real GDP increases

decrease:
PL and real GDP decrease

effects of a change in SRAS on the SR macroeconomic equilibrium

increase:
.PL decreases
.real GDP increases

decrease:
.PL increases
.real GDP decreases

LR macroeconomic equilibrium

where LRAS meets AD

effects of change in AD in LR macroeconomical equilibrium

increases: .PL increases .no change to real GDP decreases: .PL decreases .no change to real GDP

the effect of changing LRAS on the LR macroeconomic equilibrium

increases: .PL decreases .real GDP increases decreases: .PL increases .real GDP decreases

what is the national income multiplier

ratio of a change in equilibrium real income to the autonomous change brought about it

what are the factors that determine size of the national income multipler

marginal prospesity to withdraw, save, tax, import

what is the formula for national income multipler

1/MPW

what is the accelerator

theory that the level of investment depends on the rate of change in national income/GDP e.g. increase in income = proportionaly larger increase in investment

effect of accelerator

.when economic growth is positive = incomes rise = demand is rising = firms increase their productive potential and supply capacity to meet up with demand = investement levels will rise via purchase of new capital when economic growth falls during an economic slowdown = firms destock and reduce level of investment or fully stop it

impact of national income multiplier and accelerator on economic cycle

.investment leads to greater national income due to national income multiplier .the increase in AD resluts in increased level of investment repeating the process .national income continues to rise until the productive potential of the economy is reached or the rate economic growth slows down .economic growth has reached a ceiling once it has reached the economy productive potential .economic growth has reached the floor when it has reached the minimum level during a recession ceiling and floors = turning points of the economic cycle

impact of national income multiplier and accelerator on AD

.when there is an increase in injections the AD shifts to the right .AD shifts again but by more due to the multiplier effect .size of second shift is determined by the size of the multiplier

how to calculate average and marginal prosperisity to consume, save and withdraw

apc = proportion of household income devoted to consumer spending = consumer expenditure/income aps = proportion of household income devoted to saving = 1- apc apw = total amount withdrawn from the circular flow of income = aps + apt + apm mpc = 1 - mpw mps = 1- mpc mpw = mps + mpt + mpm

what are output gaps

.the difference between actual level of real GDP and the full employment level .measure the difference between the actual output and the potential output

what is a negative output gap

when actual GDP is below potential GDP as resources are not being used to their full ability

how to show a negative output gap in a AD/AS graph

when the point where SRAS and AD meet is behind LRAS

what is a positive output gap

.when the actual real GDP is above the potential GDP .can only occur in the short run e.g. workers working overtime .in the LR it would lead to an increase in the cost of production = SRAS to shift left

causes of an output gap

negative: .when FoP are underutilised and some resources are unemployed .economic shocks e.g. COVID-19 as the consumers couldnt travel to purchase g+s leading to a fall in demand = fall in household incomes = negative multiplier effect positive: .when FoP are employed above normal levels in the short run

consequences of a output gap

positive: .lead to inflationary pressure as AD outstrips AS but only in the short run negative: .signals a lack of AD which deter firms from investing and hiring new labour affecting employment rates .consequences depend on if the cause is long term or temporary