Macro Models Flashcards by Robert Riechert Sixth

the definition of: Income

Income is the flow of money received by a person or economy each year.

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the definition of: Wealth

Wealth is the sum, or stock, of a person or economy’s assets.

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what is the definition of assets

Items that you own.

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What is the Circular Flow Equation

National income = national expenditure = national output

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What is meant by factor incomes

Money paid by firms to households in return for factors of production.

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What is the definition of real gdp

Real GDP stands for Real Gross Domestic Product. Real GDP measures the value of an economy’s national output, adjusted for inflation

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What are the three types of withdrawals in the circular flow of income model

Savings
Imports
Taxes

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What are savings within the Circular Flow of Income

Disposable income that is not spent by households. Savings are a leakage.

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What are imports within the Circular Flow of Income?

Spending on foreign goods and services. Imports are a leakage.

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What are injections within the Circular Flow of Income?

when money is injected into the circular flow.

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What are the different types of injections into the circular flow of income?

Government spending
Investment
Exports

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What is investment within the Circular Flow of Income?

When Banks use our savings to invest back into our firms, injecting money into the circular flow.

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What is the share of each component of Aggregate Demand?

Consumption = 60%

Investment = 14%

Government Spending = 25%

Exports minus Imports = 1%

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Net investment

Net investment = Gross investment - Depreciation

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the definition of: Multiplier Effect

The multiplier effect is when an initial increase in an injection leads to a much bigger, overall effect on the economy.

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the definition of: Disposable Income

Income minus taxes.

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What is national income equal to

National Expenditure = National Output

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Outline the processes in the circular flow model

Firms buy factors of production, like labour and land, from households. In return, they pay households factor incomes, like wages and rent

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What are Exports within the Circular Flow of Income?

When firms export goods abroad, foreign consumers pay us, so money is injected into our economy.

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What is meant by net investment

GrossInvestment−Depreciation

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What is meant by aggregate demand

The total demand for all goods and services within an economy

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definition of: Multiplier Ratio

The multiplier ratio shows the increase in GDP following an initial injection into the economy.

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What are the three ways of calculating the multiplier ratio

= 1/(1-MPC)

= 1/MPW

= 1/(MPS + MPT + MPM)

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Marginal Propensity to Save

The proportion of additional income that is saved.

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Marginal Propensity to Import

The proportion of additional income that is used on imports

Marginal Propensity to Tax

The proportion of additional income that is taxed.

Marginal Propensity to Consume

The proportion of additional income that is spent on consumption

Marginal Propensity to Withdraw

The proportion of additional income that is withdrawn from the economy (saved, taxed or spent on imports)

MPW formula (2)

MPW = MPS + MPT + MPM MPW = 1 - MPC

the definition of: Interest Rate (Saving)

The percentage of your savings paid to you by the bank.

Interest Rate (Borrowing)

The percentage of the amount you borrow that you need to pay to the bank.

What happens to saving borrowing and consumption when interest rates increase?

Saving Borrowing Consumption Increase Decrease Decrease

What is meant by the Downward Multiplier Effect

The downward multiplier effect is where an initial increase in withdrawals leads to a larger decrease in aggregate demand.

What is meant by animal spirits

refer to investor confidence, when animal spirits are high investor confidence is high.

What is meant by the wealth effect

When changes in consumers’ wealth affect their confidence and spending.

What is the Savings Ratio

The savings ratio gives the percentage of a consumer’s disposable income that is saved.

What is the formula for the savings ratio

Savings ratio = (Total Savings/Disposable Income) x 100

What are the components of AD

CIGX-M

definition of: Aggregate Supply

Total amount produced in an economy.

Within the context of Keynesian LRAS what is spare capacity?

When the economy is producing below its maximum potential output

Within the context of Keynesian LRAS what is a bottleneck?

When the economy is nearly producing at its maximum potential output bendy part of Keynesian LRAS).

Within the context of Keynesian LRAS what is full employment?

When the economy is producing at its maximum potential output

What causes the SRAS curve to shift?

if there is a change in the cost of production in an economy.

Explain the wealth effect in Europe

The wealth effect in Europe is approximately 0%.

describes the downward multiplier effect?

An initial increase in withdrawals leads to a larger decrease in aggregate demand.

summary of the multiplier effect

An initial injection promotes further rounds of spending causing aggregate demand to increase by more than the initial injection

How do we workout multiplier ratio with change in real gdp and initial injection

Change in real gdp / initial injection

What is the share of each component of Aggregate Demand?

Consumption = 60% Investment = 14% Government Spending = 25% Exports minus Imports = 1%

What are the three types of aggregate supply curve?

SRAS, neoclassical LRAS and Keynesian LRAS

What is true for the horizontal start part of the keynesian lras

Lots of available resources which is why real gdp increase without affecting price level

What is true at the point where keyensia lras is perfectelly vertical

economy is at full employment

As the keynesian lras begins to slope upwards this is known as a bottleneck what causes this bottleneck

output is increasing and so resources begin to run out.

Why does the short run aggregate supply curve slope upwards?

Increasing output increases costs in the short run and so price level increases

What is the short run?

A period where at least one factor of production is fixed

Oil, gas, coal, wheat, steel and corn, are all examples of

Commodities.

What are benefits?

Payments made to unemployed or low income workers shown as an increase in consumption in the AD formula

Important characteristics of Neoclassical LRAS

The LRAS curve is vertical, reflecting the idea that in the long run, the economy's output is determined by its productive capacity economy operates at full employment output

When do we shift sras

when costs change

when do we shift lras

whenever the productivity or quantity of factors of production changes

What was the dot com bubble

What % is VAT in the uk

20%

what effect would and increased VAT have on sras and lras

sras would shift left, lras would remain the same

What does the exchange rate of a currency tell us

An exchange rate tells us the price of one currency in terms of another.

What are the y and x axis labelled as for a exchange rate diagram

Y: Exchange rate X: Quantity of currency

What is the supply of a currency is determined by

Tourism abroad and imports

The demand of a currency is determined by

domestic tourism and exports

An appreciation of the exchange rate will occur if

Demand for pounds shifts right and/or supply of pounds shifts left

A depreciation of the exchange rate will occur if

Demand for pounds decreases and/or supply of pounds increases

what is speculation in the context of currencies

Speculation is when investors predict changes in an exchange rate to make a profit .

As the price of imported goods increases, the rate of inflation in the UK

increases

As the pound depreciates what happens to the demand for uk exports

Exports become cheaper for foreigners meaning the demand for exports from the uk increases

What are the axis labelled for a labour market diagram

Y: Wage X: Quantity of labour

What is excess supply known as in the labour market?

excess supply is known as unemployment

Who supplies labour

Workers

In a labour market, wages increase so that they are now at the equilibrium. What happens to the demand and supply of labour

Supply of labour increases, whilst demand drops

explain why the labour demand curve is downward sloping ?

A decrease in wage increases the number of workers that firms want to employ