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economics > How The Macreoeconomy Works > Flashcards

How The Macreoeconomy Works Flashcards

1
Q

What is national income

A

The flow of new outpost produced by the economy in a time period

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2
Q

How is the flow of national output produced

A

The economy must process a stock of physic capital goods and human capital goods (land and entrepreneurship)

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3
Q

What is national capital stock

A

All physical assists owned by the nations residents as well as owned by the state e.g. schools and rosds

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4
Q

How do national income, output and expenditure measure the flow of new output produced by the economy

A

Output - measures the goods and services produced
Income - income earned by labour
Expenditure - shows amount of consumption/ spending

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5
Q

Draw a simplified circular flow model

A

Page 163

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6
Q

2 flows between households and firms

A

Labour
Goods

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7
Q

2 economic transactions between households and firms

A

Consumption
Income/ wage

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8
Q

What is a closed economy

A

No international trade

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9
Q

What is a withdrawal

A

A leakage of spending power out of the circular flow of income

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10
Q

Examples of withdrawals of the circular flow

A

Savings
Imports
Taxes

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11
Q

What are injections

A

Spending power entering the circular flow of income

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12
Q

Examples of injections

A

Govern,ent spending
FDI
Exports

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13
Q

When is national income in equilibrium

A

When planned saving equals planned investment

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14
Q

What happens when withdrawal is less than the injection

A

The resulting net injections into economy causes output and income to rise and vice versa

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15
Q

Macroeconomic equilibrium

A

AD = AS

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16
Q

Draw a diagram for macro equilibrium

A

Pg 167 7.5

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17
Q

What is an economic shock

A

An unexpected event hitting the economy
Demand or supply side
Favourable or unfavourable

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18
Q

Example of UK economic shock

A

2014 flood and storm damage costs of. £15 billion
Heavy snow causing 0.5% reduction in national output in 2010

19
Q

Components of AD

A

Consumption
Investment
Government spending
Exports minus imports

20
Q

Aggregate consumption

A

Spending by all households in the economy on consumer goods and services

21
Q

Factors influencing consumption or saving

A

Interest rates
Level of income available
Expected future income
Wealth
Confidence in the economy

22
Q

How to calculate personal savings ratio

A

Actual personal saving ./. Personal disposable income

23
Q

What is investment in macro terms

A

Planned demand for capital goods
By improving education and training firms are investing in human capital

24
Q

Factors influencing investment decisions

A

Expected future sales revenue and costs of production
Future profits
Prices of capital and labour
The nature of technical progress
Adequacy of financial institution to supply the funds for invesmtnsg

25
Q

Where does the accelarator theory come from

A

The assumption that forms wish to keep a fixed capital:output ratio (accelerator coefficient)

26
Q

Why is it called the accelerator theory

A

-firms invest in same amount so level of investment is constant
-if growth of output accelerates than investment increases as firms enlarge their capital stock and vice versa

27
Q

Link between AD and employment

A

As ad increases / output rises then firms employ more works to produce the additional goods and services

28
Q

National income multiplier

A

Measures relationship between initial change in component of AD and resulting change in level of national income

29
Q

Show the national income multiples on AD/AS curve

A

Page 178

30
Q

How to calculate multiplier

A

Change in Y / change in initial G

31
Q

Multiplier numerical example

A

G increases £10 billion tax revenue stays same
Increases people’s incomes
Everybody saves a small fraction
Leads to smaller successes and further increases
If multiplier was 2.5 than increase of national income was £25 billion
25/10=2.5

32
Q

Marginal propensity to consume

A

Fraction of the increase in disposable income that people plan to spend on goods
E.g if plan to spend 20p of £1 income increase the MPC is 0.2

33
Q

Multiplier formula

A

K= 1/1- MPC

If MPC 0.2 the multiplier is 1 / 0.8 = 1.25

34
Q

Nominal national income formulas

A

Real national income x average price level (Y=Py)

35
Q

Difference between SRAS and LRAS

A

SRAS- when the level of capital is fixed though utilisation of FOP can be altered to change real output
LRAS- economy is producing at its productive potential, if more factors become available the curve shifts

36
Q

Draw increasing AD1,2,3,4 along SRAS curve and what each means

A

Page 181

37
Q

Two microeconomic assumptions to explain. Upwards SRAS

A

All firms aim to max profit
In short run cost of producing extra units of output increases as firms produce more output

38
Q

Factors causing shift of SRAS curve right

A

Fall in business cost of production
Fall in unit unit labour costs
A reduction of indirect taxes
Increases in granted subsidies to firms
Improving quality of technical progress

39
Q

Where is the LRAS curve located

A

At the normal capacity level of output ( full production potential of economy occurs)

40
Q

Draw the LRAS and SRAS curve together

A

Page 183

41
Q

Factors that determine position oft the LRAS curve

A

State of technical progress
Quantity of capital and labour
Mobility of FOP
Economic incentives
Institutional structure e.g rule of law and efficiency of banking system

42
Q

Draw an shift in LRAS

A

Page 184

43
Q

Draw the Keynesian LRAS curve

A

Page 184 figure 7.18

44
Q

What does the horizontal part of Keynesian LRAS explain

A

That the economy can settle into an under full employment equilibrium

economics (33 decks)

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