How The Macroeconomy Works Flashcards
(35 cards)
What is the circular flow of income?
A model of the economy which shows the movement of goods and services between households and firms along with their corresponding payments in monetary terms.
What are the three ways of measuring GDP?
National Output - The value of the flow of goods and services from firms into households
National Expenditure - The value of spending by households on goods and services
National Income - The values of incomes paid by firms to households in return for factors of production (land, labour and capital).
O = E = I
What are injections?
Give the three examples.
Injections are additional spending or money which increase the total level of economic activity.
Injections include:
Govt. spending
Investment
Exports
What are Withdrawals?
Give the three examples.
The leakages of money reducing the total level of economic activity.
Withdrawals include:
Savings
Taxes
Imports
When is economic equilibrium achieved?
When injections are equal to withdrawals.
What is Aggregate Demand (AD)?
The total demand for goods and services in an economy at a given price level and time.
What are the components of AD
AD =
C + I + G + (X-M)
C = Consumption
I = Investments
G = Govt. spending
(X-M) = Net exports
Why does the demand curve always slope downwards?
Demonstrates how there is an inverse relationship between the price level and real GDP.
What are the three reasons for extensions or contractions of AD?
Wealth Effect -
As G.P.L decreases, the purchasing power of income increases causing higher consumption.
Trade Effect -
As G.P.L. decreases, exports become more competitive and imports less. There will be greater revenue from exports due to greater demand resulting higher net exports.
Interest Effect -
As G.P.L decreases, interest rates can be lowered as central banks try adjust interest rates to inflation leading to an increase in borrowing.
What is the Marginal Propensity to Consume?
the willingness of households to spend their disposable income.
What increases MPC?
Level of real disposable income
Interest rate cuts
Consumer confidence
Asset prices
Household indebtedness
What is the Marginal Propensity to Save?
the willingness of households to save and refrain from spending their disposable income.
What increases MPS?
Level of real disposable income
Interest rate hikes
Consumer confidence
Trustworthiness towards banks and financial institutions
Tax incentives
Population age structure
What is the Marginal Propensity to Invest?
The willingness of a firm to invest in capital goods to increase their productive capacity
What increases MPI?
Interest Rates (borrowing)
Business confidence
Corporation tax
Spare capacity
Level of competition
Price of capital
What is a accelerator and what is its effect?
Explains how businesses increase their investment when the economy grows and National Output rises.
N.O. increases 10%
Businesses invest
20% as they see this as an opportunity as C will rise
10% increase leads to a 20% increase in investment and the cycle repeats
What is the difference between capital, current and welfare spending?
Capital spending -
expenditure on public infrastructure making the project often tangible
Current spending -
expenditure on maintaining public services and payment of public sector wages
Welfare spending -
expenditure on benefits and pensions to support the welfare state
What affects the net exports of a nation?
Real disposable income earned abroad
Real disposable income earned at home
Strength of exchange rate
Protectionism at home or abroad (Trump Tariffs)
Relative inflation levels at home
How do you remember the effect of exchange rate on net exports?
S trong
P ound
I mports
C heap
E xports
D ear
W eak (pound)
I mports
D ear
E xports
C heap
How does the multiplier work?
A change in the components of AD can lead to a multiplied final change in the equilibrium level of GDP.
What is the formula for the multiplier?
1 / (1-MPC)
If the Govt. injects £100mn into the economy.
Each time income is generated 80% is spent
What would be the final increase in national output?
MPC = 0.8
1/ (1-0.8) = 5
5 X £100mn = £500mn
What is Aggregate Supply?
the total possible output for an economy.
Why is the AS curve upward sloping?
Producers are more likely to produce at a higher price level as they are more likely to obtain higher profits.
What is Short Run Aggregate Supply (SRAS)?
The total quantity of goods and services that firms are willing to produce in an economy at different price levels in the short run where some factors of production are fixed.
