Theme 2 - 2 Flashcards
(14 cards)
What is Aggregate Demand?
The total planned expenditure in an economy at any given possible overall price level. AD = C + I + G + (X-M)
C = consumption, I = investment, G = government spending, X = exports, M = imports.
What is Aggregate Supply?
The total quantity of goods and services firms are willing and able to produce at each price level. It is the sum of all industry supply at each level of prices.
Define Equilibrium in economics.
When the price level and the level of real output at which planned aggregate demand is equal to planned aggregate supply.
What are Injections in the circular flow of income?
Spending which is not generated by households including investment, government spending, and exports.
What are Withdrawals in the circular flow of income?
Spending by households which does not flow back to domestic firms. It includes savings, taxes, and imports.
What is the Multiplier effect?
Where an increase or decrease in Aggregate Demand due to an injection or withdrawal from the circular flow of income leads to a larger final change in National Income (GDP).
What is the Marginal Propensity to Consume (MPC)?
The proportion of a change in disposable income which is spent on goods/services in the domestic economy. (MPC = AC/AYd)
Define Marginal Propensity to Save (MPS).
The proportion that is saved out of a change in disposable income. (MPS = 4S/AYd)
What is the Multiplier Formula in a closed economy with no government?
Multiplier (k) = 1/(1-MPC) = 1/MPS
What does Marginal Propensity to Import (MPM) represent?
The proportion of a change in disposable income which is spent on imports. (MPM = AM/AYd)
Define Marginal Propensity to Tax (MPT).
The proportion of a change in income which is paid in tax. MPT = AT/AY.
What is the Marginal Propensity to Withdraw (MPW)?
(MPW) = MPS + MPM + MPT.
What is the Multiplier Formula in an open economy with government?
Multiplier (k) = 1/MPW = 1/(MPS+MPM+MPT)
How is Change in national income calculated?
Change in income = multiplier (k) x change in injection into circular flow.
