TOPIC 11

Question 1

Aggregate demand

Answer 1

demand for goods and services in entire economy

Question 2

the consumption function

Answer 2

autonomous consumption and induced consumption

Question 3

autonomous consumption

Answer 3

fixed amount we spend even with no income

Question 4

induced consumption

Answer 4

dependent on income

Question 5

marginal propensity to consume

Answer 5

amount people spend from each extra dollar they earn. (slope of consunmption function) KEEPS MULTIPLIER GOING

Question 6

aggregate demand and output

Answer 6

adding investment will involve increase in output and income from a to b (C=C0 +GY) to (AD = C0 +GY + I)

Question 7

the multiplier process

Answer 7

small increases in spending lead to larger increases in economic activity

Question 8

steps of multiplier process

Answer 8

1. one persons spending is another persons income 2. extra income forms the basis for further spending (GETS SMALLER due to leakage of saving)

Question 9

whats multiplier process similar to

Answer 9

frictional reserve banking idea where comment comes to banks as deposits and fizzles out as reserves

Question 10

what does the multiplier process show

Answer 10

The multiplier shows how much bigger the total output change is compared to the initial change in spending.. When (AD) changes, the total change in output can be bigger than the first change in AD because spending by one person becomes income for others, who then spend more too.

Question 11

what reduces multiplier effect

Answer 11

taxes, imports and wage variation

Question 12

multipier equations

Answer 12

1/ (1-mpc) OR 1/mps

Question 13

Marginal propensity to save

Answer 13

the part of each extra dollar you earn that you save instead of spending. LEAKAGE

Question 14

relationship between MPC and MPS

Answer 14

MPC and MPS add up to 1; the bigger the MPS (more saving), the smaller the MPC (less spending), leading to more leakages and a weaker multiplier effect.

Question 15

Paradox of thrift

Answer 15

the more that is saved the smaller multiplier will be as new expenditure is taken out of the economy and isn’t circulating

Question 16

different types of multiplier

Answer 16

• govt expenditure (kg) and aggregate investment multiplier (Ki

Question 17

automatic stabilisers

Answer 17

aims to offset economic expansions or contractions automatically happens as AD itself changes via bus cycle

Question 18

automatic stabiliser - taxes

Answer 18

tax bands accommodate changes in income affecting consumption and investment automatically, ppl paid more higher tax brackets and consumption will slow consumption

Question 19

automatic stabiliser - unemployment benefits

Answer 19

unemployment benefits automatically increase as unemployment increases to allow smooth consumption

Question 20

pros abt automatic stabilisers

Answer 20

automatic and dont rely on govt to instigate AND they mean govt make fewer mistakes about identifying where country is in bus cycle

Question 21

cons abt automatic stabilisers

Answer 21

automatic and may not be big enough to resolve a current depression or inflation where govt needs to explicitly intervene - so only works in normal circumstances

Question 22

government spending own multiplier effect

Answer 22

fiscal multiplier - total direct and indirect change in output caused by an initial change in govt spending (respond to output increasing or decreasing in investment)

Question 23

marginal propensity to import

Answer 23

the fraction of each additional unit of household income is spent on imports

Question 24

imports and exports

Answer 24

exports flows of income into economy paid for by forgeinings buying our goods - demand effected by foreigners AND imports flows of income out of economy - demand effected by tariffs

Question 25

fiscal policy and stimulus

Answer 25

Fiscal policy is government spending or tax changes to manage the economy. Fiscal stimulus is when the government increases spending or cuts taxes to boost demand during slowdowns.

Question 26

how do trade and imports affect fiscal policy

Answer 26

Some of the increased spending goes to imports, which is a leakage, reducing the boost to domestic output and making fiscal policy less effective.

Question 27

why do foreign economies matter for fiscal policy

Answer 27

If export markets are weak, net exports fall, lowering aggregate demand. Also, stimulus can spill over to other countries through increased import demand, limiting its domestic impact.

Question 28

why do we care abt unemployment

Answer 28

-savings and benefits impact utility - not producing enough output we could (unemployed resources mean output we creating is not optimal level of output cut if it was unemployment would be close to 0)

Question 29

labour market

Answer 29

po[pulation - population of working age- labour force (not in labour force) - employed (unemployed)

Question 30

discouraged workers

Answer 30

have skills but no longer looking for jobs as not successful - hidden (not counted in not unemployment stats in not in labour force)

Question 31

unemployed

Answer 31

registered and benefit

Question 32

participation rate

Answer 32

fraction of working age in labour force - labour force/pop of work

Question 33

unemployment rate

Answer 33

fraction of labour force thats unemployed - unemployed/ labour force

Question 34

employment rate

Answer 34

fraction of working age po that is employed - employed / pop of working age

Question 35

frictional unemployment

Answer 35

moving between jobs - natural and needs no intervention

Question 36

structural unemployment

Answer 36

job market skills changed and old skills not wanted due to change in d of goods or technology improvement - need to retrain old skills to new demands

Question 37

cylical unemployment

Answer 37

unemployment related to position in business cycle - high in recession and low in boom - likely intervention to involve increase or decrease in AD

Question 38

discouraged worker effect

Answer 38

if increase in AD and moving out of long trough might find AD output is in creasing and also unemplyemt and discouraged worked think more likely to get a job so register and part of stats