Macroeconomics Flashcards
(38 cards)
Injections
When money flows into an economy
Withdrawals
When money flows out of an economy
Types of Injections
Government Spending
Investment
Imports
Types of Withdrawals
Savings
Taxes
Imports
What can be determined from a Circular Flow of Income Model?
National Income = National Expenditure = National Output
How is National Output measured?
Using Real GDP
Real GDP
Real Gross Domestic Product shows the total number of G&S produced in a year
Components of AD
AD = C + I + G + (X-M)
Consumption
Investment
Government Spending
Net Exports
Effect of decreased income
Income decreases | Less income tax for gov
Consumer spending decreases | Less VAT for gov
Less profit for firms | Less corporate tax for gov
Multiplier effect
An initial increase in injections leads to a larger increase in aggregate demand
Ex: £8.8B on London Olympics | More workers | More disposable income | more consumption | more profit for firms | more income tax rev |more corporate tax rev | increase gov spending | more workers | 16.5B increase in GDP
Multiplier Ratio without MPC
Total Change in Real GDP / Initial injection
Multiplier Ratio with MPC
1/(1-MPC)
Downward multiplier effect
Initial increase in withdrawals leads to a larger decrease in Real GDP
Accelerator effect
Increase in GDP leads to an acceleration of Investment
Benefit payments
Not Government spending as the government is transferring the money so falls under consumption. Increase in benefits leads to increased consumer spending. However there is an opportunity cost for the government, give up spending on other projects
Shifts in AD
Income
Benefits
Interest rates
Consumer confidence
Investor Confidence
Wealth Effect
Pensions
Government Spending
Wealth Effect in the US
6%
For every $100 wealth increases, spending increases by $6
Ricardo Sousa findings
The wealth effect in Europe is approximately 0%. Less people in Europe own their own homes. Increase in house prices will make home-owners spend more. However, renters are likely to try and save more and so they are likely to spend less.
Savings Ratio
Total savings/Income after Tax
Three parts of the Keynesian LRAS Curve
Spare capacity, Bottleneck, Full employment
Shifts in SRAS vs LRAS
Cost of production vs change in the productivity or the quantity of the factors of production.
Determinants of supply of currency
Tourism abroad and Imports
Determinants of demand of currency
Domestic Tourism and Exports
Government Objectives
Inflation Rate
