topic 1 Flashcards
(16 cards)
What is the equation for Aggregate Demand (AD) in the circular flow model?
AD = Z = C + I + G + (X - IM)
C = Consumption, I = Investment, G = Government spending, X = Exports, IM = Imports. (X - IM) applies only in an open economy.
What does C represent in the equation AD = Z?
C = Consumption = Cd - IM
Cd refers to domestic consumption.
What is the consumption function formula?
C = C0 + C1(Y - T)
C0 is autonomous consumption, C1 is the marginal propensity to consume.
What does C0 represent in the consumption function?
C0 = the intercept (autonomous consumption)
It reflects consumption when income is zero.
Define marginal propensity to consume (MPC).
MPC = C1, must be between 0 and 1
It indicates the fraction of additional income that is spent on consumption.
What is the relationship between AD curve (ZZ) and the components of AD?
AD curve (ZZ) = C0 curve + G + I
This shows how the components of AD combine to form the total demand.
In the Keynesian cross, what does the equilibrium output represent?
Equilibrium output = Y = Z
It represents the point where aggregate supply equals aggregate demand.
What do the axes represent in the Keynesian Cross graph?
y-axis = Z = Aggregate demand; X-axis = Y = Aggregate income
This setup helps visualize the relationship between income and demand.
What happens at the point where the aggregate demand curve intersects the Y=Z line?
It indicates equilibrium in the Keynesian cross
At equilibrium, planned spending matches output.
What effect does a shift in government spending (G) have on the ZZ curve?
A shift in G causes a parallel shift upwards in the ZZ curve
This creates excess demand, leading to increased production and higher employment.
What was the impact of the 2020 lockdown on effective full employment?
The lockdown reduced the effective full employment level of output
This was due to a shock where not all workers could work.
What happened to the marginal propensity to save during the 2020 lockdown?
The marginal propensity to save increased
This led to a lower marginal propensity to consume.
What was the government’s response to the reduced income during the lockdown?
The government implemented the furlough scheme
This subsidized incomes to prevent unemployment.
What was the total cost of the furlough scheme launched in April 2020?
Cost £70 billion in total
The scheme aimed to support incomes until September 2021.
True or False: The Keynesian cross model considers externalities such as environmental impacts.
False
Critics argue it omits considerations of inequality and externalities.
What is the potential outcome if full employment returns to a level below the previous level after lockdown?
There is an inflationary gap
This occurs if output exceeds previous full employment levels.
