MACRO EQUILIBRIUM ANALYSIS - TOPIC 2 Flashcards
(19 cards)
WHAT IS AD?
THE TOTAL DEMAND OF NEW GOODS AND SERVICES IN AN ECONOMY OVER A PERIOD OF TIME.
WHAT IS THE FORMULA FOR AD?
CONSUMPTION + INVESTMENT + GOVT SPENDING + EXPORTS - IMPORTS
WHAT IS CONSUMPTION?
SPENDING BY HOUSEHOLDS ON DOMESTICALLY PRODUCED GOODS AND SERVICES.
WHAT PERCENTAGE OF AD IS CONSUMPTION?
60%
WHAT IS INVESTMENT?
SPENDING BY FIRMS AND GOVT ON CAPITAL GOODS.
WHAT PERCENTAGE OF AD DOES INVESTMENT TAKE?
15-20%
WHAT PERCENTAGE OF AD IS GOVT SPENDING?
18-20%
WHAT PERCENTAGE OF AD IS THE TRADE BALANCE?
5%
WHY IS THE AD CURVE THAT SHAPE?
- IF PRICE LEVEL IS HIGH, CONSUMPTION FALLS AS PURCHASING POWER WILL NOT GO AS FAR WITH HIGHER PRICES.
- EXPORTS WILL FALL AND IMPORTS WILL RISE AS UK GOODS ARE EXPENSIVE RELATIVE TO OTHER COUNTRIES
WHY IS CLASSICAL LRAS THAT SHAPE?
CLASSICAL ECONOMISTS E.G HAYEK BELIEVE THAT IN THE LONG RUN, THE ECONOMY WILL ALWAYS SELF CORRECT SO ECONOMY WILL ALWAYS BE OPERATING AT FULL CAPACITY AS IT IS UTILISING ALL FACTORS OF PRODUCTION.
WHY IS SRAS THAT SHAPE?
IN THE SHORT RUN, INCREASING PRODUCTION IS LIKELY TO INCREASE COSTS AND HENCE PRICES.
WHY IS KEYNESIAN LRAS THAT SHAPE?
KEYNESIANS BELIEVE THAT FIRMS WON’T ALWAYS PRODUCE AT MAX OUTPUT SO SPARE CAPACITY IS CREATED. AS DEMAND INCREASES, OUTPUT INCREASES WITHOUT SIGNIFICANT IMPACTS ON INFLATION UP UNTIL THE POINT WHERE ALL RESOURCES ARE USED UP. AT THIS POINT, KEYNESIAN LRAS BECOMES PERFECTLY INELASTIC.
WHAT CAUSES SHIFTS IN SRAS?
CHANGE IN PRODUCTION COSTS FOR FIRMS.
WHAT ARE EXAMPLES OF FACTORS THAT SHIFT SRAS?
- CHANGES IN RAW MATERIAL PRICES
- CHANGES IN INDIRECT TAXES
- CHANGES IN LABOUR COSTS
- CHANGES IN SUBSIDIES
- CHANGES IN REGULATIONS
WHAT CAUSES SHIFTS IN LRAS?
CHANGES IN QUALITY OR QUANTITY OF THE FACTORS OF PRODUCTION
WHAT IS A BOTTLENECK?
WHEN THERE IS LIMITED SUPPLY OF 1 FACTOR OF PRODUCTION.
WHAT ARE EXAMPLES OF BOTTLENECKS?
- LACK OF RAW MATERIALS
- LACK OF SKILLED LABOUR (E.G NOT ENOUGH NURSES POST BREXIT)
- INSUFFICIENT CAPITAL
WHAT IS MEANT BY SPARE CAPACITY?
UNDER UTILISATION OF FOP SO THERE’S ROOM TO INCREASE OUTPUT AS THE ECONOMY ISN’T OPERATING AT FULL EMPLOYMENT.
CAN DRAW A PPF TO SHOW SPARE CAPACITY.
WHAT ARE ANIMAL SPIRITS?
TERM USED BY KEYNES TO DESCRIBE THE IRRATIONAL AND INSTINCTUAL FACTORS THAT AFFECT ECONOMIC DECISIONS - USED TO EXPLAIN Y THE TRAE CYCLE MAY BE VOLATILE OVER TIME.
