Macro Theme 2.4 Flashcards
(21 cards)
What is the circular flow of income
And what does it show
A concept that illustrates how money and goods and services circulates throughout the economy
It shows the connections between different economic agents and highlights the flows of income and also expenditure
What is a household and what do they spend income on
-The individuals and families within the economy
-Receive income from the factors of production they provide to firms
-income spent on goods and services
What are firms
And act do they spend revenue on
- Firms produce goods and services to meet demand
- they higher labour, use capital/ natural resources to sell goods and services
-they receive revenue from households
They then use the revenue to pay for factors of production
What is the government
-The government collect taxes from households and firms
-Also provides public goods and sometimes redistribute income
- they sometimes provide financial support to firms, injecting both income and expenditure
What are the injections into the circular flow
- Exports of goods and services
- Government spending
- Investment spending
What are leakages from the circular flow
- Imports of goods and services
- Taxation
Savings (income not spent)
When injections are greater than leakages what happens to econ growth
Increase and output is increasing is growing fast
When withdrawals are greater than injections what happens to econ growth
Output would decrease and economic growth is slower
Where is the equilibrium level of real output on a diagram
Where both the AD and AS curve intersect
If either curve is shifted the equilibrium will now change
It depends on the size of the shift and elasticity of the curve
what do classical thinkers believe about AD and AS
economy should focus on improving supply to try and improve economic growth
what do keynesian thinkers believe about AD and AS
when looking at keynesian should focus on policies to increase AD to increase real output until at full employment
what do both keynesian and neoclassical agree on
that there is full employment when the LRAS curve is vertical
although when looking at keynesian there can be equilibrium at less than full employment
what is national income
the monetary value of the flow of outputs of goods and services produced in an economy over a period of time
What is the multiplier
The multiplier process is the idea that there is an increase in AD because of an increase in injections will lead to a further rise in national income
What would the 3 stages be to a multiplier
And why does the amount of stages change
- Investment into equipment/ capital
- The companies given the money will then spend some of the money (saving the rest), and perhaps buying raw materials or employing further people
- The employees will then spend money in shops or restaurants to create new income streams for shopkeepers or restaurant owners who’ll in turn spend some of the money (saving remainder)
The number of stages and size of the multiplier depend on the size of the marginal propensity to withdraw (MPW)
What is developing and developed economies multiplier be
Developing: 1.6
Developing: 1.5
What is the negative multiplier
A withdrawal from the economy can also lead to a further fall in income
Would end up decreasing economic growth
What is Marginal propensity to withdraw (MPW) the sum of
Marginal propensity to save (MPS)
Marginal propensity to tax (MPT)
Marginal propensity to import (MPM)
What is the multiplier formula
1/1-MPC
OR
1/MPW
What’s the impact of an increase in gov spending if it is funded by increase in taxation
The size of the multiplier would fall, because the MPW will increase
The more elastic the LRAS/ SRAS curve what’s the effect on price levels and output
The smaller the effect on price levels but bigger impact on output
