Key Terms 10 - How The Macroeconomy Works: The Circular Flow of Income, Aggregate Demand/Aggregate Supply Analysis and Related Concepts Flashcards
Saving
Income which is not spent.
Withdrawal
A leakage of spending power out of the circular flow of income into savings, taxation or imports.
Investment
Total planned spending by firms on capital goods produced within the economy.
Injection
Spending entering the circular flow of income as a result of investment, government spending and exports.
Open Economy
An economy open to international trade.
Closed Economy
An economy with no international trade.
Equilibrium National Income
The level of income at which withdrawals from the circular flow of income equal injections into the flow; also the level of output at which aggregate demand equals aggregate supply.
Aggregate Demand
Total planned spending on real output in the economy at different price levels.
Aggregate Supply
The level of real national output that producers are prepared to supply at different average price levels.
Long Run Aggregate Supply
The real output that can be supplied when the economy is on its production possibility frontier. This is when all the available factors of production are employed and producing at their ‘normal capacity’ level of output.
Rate of Interest
The reward for lending savings to somebody else (e.g. a bank) and the cost of borrowing.
Life-Cycle Theory of Consumption
A theory that explains consumption and savings in terms of how people expect their incomes to change over the whole of their life cycles.
Availability of Credit
Funds available for households and firms to borrow.
Credit Crunch
Occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to obtain financing, and leads to a rise in the cost of borrowing.
Distribution of Income
The spread of different incomes among individuals and different income groups in the economy.
