Lecture 2 Flashcards
(16 cards)
supply side of closed economy with flexible prices
firms and producers
determination of output/income
uses factors of production
AS
demand side of closed economy with flexible prices
consumers and government
determinants of C, I, G
AD
aggregate demand
the relationship between the quantity of output demanded and the aggregate price level
TOTAL DEMAND FOR GOODS AND SERVICES IN ECONOMY.
Capital (K)
total number of machines utilised in the economy by the sum of all production (eg. tools, machines, structures used in production)
Labour (L)
total number of working hours utilised in the economy by sum of all production (physical and mental efforts of workers)
production function
tells us how Y can be produced from K units and L units
assumption of Neo classical model
based on idea that prices adjust to equate demand and supply
Y=F(K,L)
K, L and Y are fixed by factor supplies and fixed level of technology
marginal product of labour
change in output that results from employing an additional unit of labour
diminishing marginal product
holding amount of capital fixed, MPL decreases as Labour increases
G
Government spending on goods and services (doesn’t include benefits as these don’t affect demand)
nominal interest rate
rate of interest that investors pay to borrow money
real interest rate
nominal r corrected for effects of inflation
- cost of borrowing
- opportunity cost of using one’s own funds to finance investment spending
b
responsiveness of investment to changes in the interest rate
what happens to investment when r increases
it decreases because we need to borrow to invest, the higher the r the higher the cost of borrowing
mpc
the amount by which consumption changes when disposable income increases by one dollar
if mpc = 0.7 then households spend 70p of each additional pound of disposable income
