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A-Level Economics Year 1 > Circular flow, AD, AS- MM > Flashcards

Circular flow, AD, AS- MM Flashcards

1
Q

What does the circular flow of income & spending show?

A

The connections between the different sectors of the economy & the flow of goods, services & FOP between firms and households

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2
Q

What are the two types of flow?

A

1) Physical flow
2) Monetary flow

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3
Q

What is physical flow?

A

The movement of goods, services & labour

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4
Q

What is monetary flow?

A

The movement of money in return for the physical flow

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5
Q

In the real world, what 2 things do dealings with other countries cause to the circularity flow?

A

1) Outside injections into the economy
2) Leakages from the circular flow

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6
Q

What are 3 ways to measure national income?

A

1) The expenditure method
2) The income method
3) The output method

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7
Q

What is the expenditure method?

A

Adding up all expenditures spent on goods & services during a year by economic agents

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8
Q

What is the income method?

A

Adding up all the income for the FOP & income for self-employed people

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9
Q

What is the output method?

A

Subtracting inputs/payments made to the FOP of an industry from the industry’s output

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10
Q

What is the relationship between national income, national expenditure and national output?

A

They are all equal to each other

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11
Q

What is aggregate demand (AD)?

A

The total value/demand of every good and service demanded in an economy over a period of time

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12
Q

What is PL?

A

Price level, the overall level of prices in an economy

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13
Q

What relationship do PL and overall demand have?

A

Inverse relationship

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14
Q

What does an aggregate demand curve look like?

A

Slope downwards from left to right

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15
Q

What does Y stand for in an aggregate demand diagram?

A

Real income or Real GDP

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16
Q

What are the labels on an AD/AS diagram?

A

Curve down= AD
Curve diagonally up= SRAS
Curve straight up= LRAS
Y-axis= PL
X-axis= Y (Real GDP)

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17
Q

What relationship do PL and AD have?

A

An inverse/ negative relationship. One up, other down. One down, other up.

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18
Q

What is an overall increase in price level also known as?

A

Inflation

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19
Q

What are the 5 components of AD?

A

1) Consumption (C)
2) Investment (I)
3) Government expenditure(G)
4) Exports (X)
5) Imports (M)

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20
Q

What is Consumption (comp. of AD)?

A

Biggest component- total spending on goods and services by households- 60-65% of AD

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21
Q

What is investment (comp. of AD)?

A

Any addition to capital stock of economy- spending by private sector businesses, most volatile (collapses & accelerates)- 15-20% of AD

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22
Q

What is government expenditure (comp. of AD)?

A

All government spending on goods and services needed by the country, and may benefit the country in the future- doesn’t include benefits- 20-25% of AD

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23
Q

What is exports (comp. of AD)?

A

Goods and services produced in this country and are demanded by economic agents in other countries- add value to AD

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24
Q

What is imports (comp. of AD)?

A

Goods & services produced by other countries but are demanded by economic agents in this country- negative, drain AD

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25
What is the equation for AD?
AD= C+I+G+(X-M)
26
What are 3 types of leakage that take value away from AD?
1) Imports (M) 2) Savings (S) 3) Taxation (T)
27
What result does (X-M) usually have and why?
A negative number as M is usually higher than X
28
What 2 factors affect investment?
1) Interest rates- IR up, I down 2) Uncertainty
29
What 2 things is the output method also known as?
1) Value-added method 2) Production method
30
In what type of economy 1) are there 2) no leakages or injections in its circular flow?
1) Real world economy 2) Closed economy
31
In a circular flow, what 2 things flow from households to firms?
1) Consumer expenditure 2) Factors of production
32
In a circular flow, what 2 things flow from firms to households?
1) Goods & services 2) Wages, rent & dividends
33
In a circular flow, where do 1) leakages go from and 2) injections go to?
1) Households 2) Firms
34
What 5 factors might shift AD to the right?
1) Increase in C 2) Increase in I 3) Increase in G 4) Increase in X 5) A decrease in M
35
What 5 factors might shift AD to the left?
1) Decrease in C 2) Decrease in I 3) Decrease in G 4) Decrease in X 5) Increase in M
36
What 2 leakages may shift AD to the right?
1) Decrease in S 2) Decrease in T
37
What 2 leakages may shift AD to the left?
1) Increase in S 2) Increase in T
38
What does the size of how much an increase in RDI (Y) will increase C depend on?
Leakages
39
What other 2 things can affect how much a change in RDI changes C/I?
1) Expectations 2) Consumer/Business confidence
40
How does consumer/business confidence influence C/I?
Confidence=Spending, Unconfident=Save
41
What does business confidence affect?
Investment (I)
42
What does consumer confidence affect?
Consumption (C)
43
What is Aggregate Supply (AS)?
The total value of goods and services produced in an economy
44
What method of measuring national income does AD represent/ equal?
The expenditure method/ National expenditure
45
What method of measuring national income does AS represent/ equal?
The output method/ National output
46
What does an AS curve look like?
Upwards sloping left to right
47
What does a SRAS curve look like?
Upwards sloping left to right
48
What does an LRAS curve look like?
Vertical- perfectly inelastic curve
49
What is LRAS of an economy dictated by?
The capacity of the economy
50
What is the capacity of an economy determined by?
The quantity/ quality of the FOP available within the economy- assumed to be fixed
51
What is the point where LRAS meets the x-axis called?
Y'FE- (FE smaller than Y)
52
What does Y'FE represent?
Full employment level of national output at a sustainable level- where all FOP are being fully utilised
53
How can LRAS also be represented?
A PPC diagram
54
What will a change in PL do on an AS curve?
Increase= Extend Decrease= Contract
55
What causes a shift in the AS curve?
Change in determinants of AS
56
What determines the position of SRAS?
Costs of production in the economy for all firms- higher costs e.g. inflation
57
What are 5 examples of costs of production that effect all firms?
1) Wages 2) Raw materials/ commodity prices 3) Oil price 4) Business taxes (VAT) 5) Import prices (SPICED)- exchange rate dependent
58
What is the impact of costs of production to the economy?
Shocks- can change quickly
59
Why is LRAS vertical?
It represents 1 level of output the economy will always produce at in the long run
60
What 2 factors cause shifts in LRAS?
1) Q2CELL- Quantity & quality of FOP (CELL) 2) Productive efficiency
61
What 6 things of Q2CELL & productive efficiency cause a shift right in LRAS?
1) ↑ Labour productivity 2) ↑ Investment- Spending on capital goods 3) ↑ Infrastructure- efficiency 4) ↑ Quantity of labour- immigration/ incentives 5) ↑ Competition- firms reduce costs 6) New resource discoveries INCREASE IN Q&Q OF FOP
62
What 5 things of Q2CELL & productive efficiency cause a shift left in LRAS?
1) ↓ Labour productivity 2) Capital depreciation 3) War, conflict, natural disaster- Death/ destroyed infrastructure 4) Health crisis- ↓ productivity 5) Emmigration DECREASE IN Q&Q OF FOP
63
What do we assume when using AS or AD?
Ceterus Paribus
64
What do we assume for AD?
The amount of money circulating the economy remains unchanged
65
What do we assume for SRAS?
Firms are able to increase their output without increasing costs
66
When is the economy in equilibrium for AS & AD?
When AS=AD
67
Why might the LRAS curve be to the right of equilibrium?
Lots of FOP unemployed
68
Why might the LRAS curve be to the left of the equilibrium?
Economy is over-extended & FOP are being overused (unsustainable)
69
What is the best position for the economy?
AD=SRAS=LRAS
70
An increase in what is most beneficial for economic growth?
Aggregate supply
71
How do you calculate unemployment?
Y'FE-Yn
72
Why are changes in AS more sustainable than AD?
↑ AS reduces PL, ↑ AD increases PL
73
What is inflation?
A sustained increase in PL

A-Level Economics Year 1 (10 decks)

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