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Economics all of year 1 > Macro 2/6 1st year > Flashcards

Macro 2/6 1st year Flashcards

1
Q

define aggregate demand

A

total demand of an economy goods and services at any given price level over a given period of time

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2
Q

what are the four AD components

A

Consumption (66% uk gdp)- total spending by consumers on domestic goods and services
Investment (18% uk gdp)- spending that increases the size of a nations capital stock
Gov spending (20% uk gdp)- spending by gov to inject economic activity into the economy
Net exports (-4% uk gdp)- net trade

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3
Q

what is the driving force behind performance of the uk economy

A

consumption and consumer confidence

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4
Q

how do households make purchases

A

they use disposable income

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5
Q

what is disposable income

A

the amount of income in any period that remains after deduction of taxes

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6
Q

what is the process of acquiring disposable income

A

supply of labour -> earns gross pay -> direct taxes -> take home pay

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7
Q

what is disposable income used to consume

A

Goods (physical.. durable and non durable)
Services (intangible.. financial transport educational and health)

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8
Q

what is propensity to consume

A

the proportion of disposable income which is used to buy goods and services

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9
Q

what is average propensity to consume (APC)

A

the proportion of TOTAL income that is consumed

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10
Q

what is the equation for APC

A

consumption/income

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11
Q

what is marginal propensity to consume (MPC)

A

the proportion of a CHANGE in income that is consumed

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12
Q

what is the equation for MPC

A

change in consumption/change in income

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13
Q

what is the consumption function

A

a model devised by Maynard Keynes to illustrate the relationship between consumption and disposable income

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14
Q

what are some features of the consumption function model

A
  • positive relationship between consumption and disposable income
  • doesn’t start at the origin because consumption occurs even if disposable income =0
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15
Q

what is autonomous consumption

A

some consumption that occurs even when disposable income =0 due to daily necessities

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16
Q

what is discretionary consumption

A

money spent by consumers on goods and services that aren’t necessities and depend on the amount of disposable income

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17
Q

how do you find the marginal propensity to consume from a consumption function model

A

find the gradient from any part of the slope t a given income and consumption

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18
Q

what are some determinants of consumption

A
  • level of disposable income
  • level of savings
  • interest rates
  • inflation rate
  • inflation expectations
  • stock of wealth
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19
Q

what is the relationship between savings and consumption

A

inverse relationship, as savings increase, consumption decreases

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20
Q

define savings

A

disposable income that is not spent on the consumption of goods and services

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21
Q

what is the avrg propensity to save equation

A

savings/income

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22
Q

what is marginal propensity to save equation

A

1-MPC

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23
Q

define wealth

A

a physical or financial asset that’s a stock of value and can be used to generate income

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24
Q

how does increased wealth lead to increased consumption

A

wealth increases confidence which in turn increases consumption

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25
Q

how does an increase in interest rates affect consumption

A

people will save more so consumption will go down

26
Q

how does a decrease in interest rates affect consumption

A

people will decrease saving and increase consumption

27
Q

what goes on the X and Y axis for an aggregate demand curve

A

X axis = real output
Y axis = price level

28
Q

why is the AD curve downwards sloping

A

decrease in price level = increase in real output

29
Q

what causes a movement along the ad curve

A

change in price level

30
Q

what is the trade affect and how does it affect real output

A

decrease in domestic prices = increase in demand for exports increasing net exports and AD

31
Q

what is an AD curve shift

A

a change in real output at every given price level due to any other relevant factor apart from changes in price

32
Q

what are 6 factors of an AD shift

A

confidence, exchange rates, interest rates, population changes, wealth changes, tax changes

33
Q

how do inflation rates affect consumption

A

inflation is the rate at which prices change within an economy and affects overall confidence of consumers so may decrease consumption long term

34
Q

how do demographics affect consumption

A

demographics are population dynamics, showing the larger the population and the faster the growth rate, the greater demand for goods and services

35
Q

define investment

A

spending on capital goods by firms and government

36
Q

define capital goods

A

goods used in the production of goods and services

37
Q

what is infrastructure

A

roads + rail networks

38
Q

what is human capital

A

human skill and services

39
Q

what is the importance of investment

A

economic growth and competitiveness

40
Q

how would decreasing consumer goods on a PPF with capital goods on the X axis and consumer goods on the Y axis have an affect on real output

A

increasing capital good production will in the short run decrease the ability to produce consumer goods, but in the long run, will increase capacity to produce consumer goods, therefore shifting the PPF outwards due to low costs and innovation.

41
Q

what is government spending influenced by

A

politics, economic performance, country finances, demographics and lifestyles

42
Q

define the multiplier effect

A

the process by which any expenditure generates a trail of subsequent expenditure so that the resultant change in national income will exceed the amount initially expended

43
Q

what effect does the multiplier effect have on an AD shift

A

shift is extended further than the original shift

44
Q

what is the equation for the multiplier effect

A

1/1-MPC

45
Q

define aggregate supply

A

total amount of goods and services the whole economy can supply at every given price level

46
Q

what model of AS include SRAS and LRAS

A

classical model

47
Q

define SRAS

A

total supply of goods and services at any given price level over a given period of time at a given wage rate

48
Q

define varying output

A

when production can exceed productive capacity for short periods of time

49
Q

why does increasing output in the short run cause prices to increase

A

it is difficult and costly to engage other factors, and working labour more intensely means increasing wages hence why price levels must increase

50
Q

how does cost increase and decrease cause inwards and outwards shifts in SRAS

A

costs up = inward shift
costs down = outwards shift

51
Q

what are 4 causes of shifts in AS

A

changes in wage rates, indirect taxes/subsides, exchange rates, raw materials price

52
Q

what is supply side shock

A

a sudden, unexpected and significant change in the cost of a factor of production

53
Q

what are 4 features of LRAS

A

cannot exceed capacity for long periods of time, capacity does not depend on price or costs, perfectly inelastic, vertical

54
Q

what is full employment

A

the level of output where all available factors of production are engaged in the production process

55
Q

what are inactive resources

A

resources are capable but not willing e.g. unused factories

56
Q

what causes a LRAS shift

A

a change in the productive potential of an economy due to a change in quantity or quality of a factor of production

57
Q

what is a negative output gap and what does this mean for employment rates

A

when factors are working below full level of output (equilibrium is left of LRAS). means more unemployment

58
Q

what is a positive output gap and what does this mean for employment rates

A

when factors are working above full level of output (equilibrium is right of LRAS). means lower unemployment

59
Q

what is a no output gap and what does this mean for the economies capacity

A

when factors are at the full employment level of output and the economy is at full capacity (equilibrium is on the LRAS)

60
Q

what is the relationship between real output and unemployment

A

as real output increases, unemployment decreases, so an inverse relationship

61
Q

what are the four main macro economic goals

A

growth, stable prices and inflation (between 2%-1%), low unemployment, X-M

Economics all of year 1 (6 decks)

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