topic 2: how the macroeconomy works, circular flow of incomr, AD - AS analysis

Question 1

national income

Answer 1

total income earned by the residents of a country in a year

Question 2

circular flow of income represents

Answer 2

the spending and income circulating around the economy

Question 3

withdrawals of income

Answer 3

• savings
  -taxes
• imports

Question 4

injections of income

Answer 4

• investment
• goverment spending
• expirts

Question 5

firms supply what in the circular flow of income

Answer 5

• goods and services
• wages, rents and dividends

Question 6

households supply what in the circular flow of income

Answer 6

-factors of production
- consumer spending

Question 7

an injection in the circular flow of income is

Answer 7

money entering the economy

Question 8

a withdrawal in the circular flow of income is

Answer 8

money leaving the economy

Question 9

aggeregate demand is

Answer 9

the total demand in the economy

Question 10

what causes movements along the demand curve

Answer 10

changes in price level

Question 11

why the AD curve is downsloping

Answer 11

-wealth effect (C)
-trade effect (X-M)
-interest effect (C,I, X-M)

Question 12

what shifts the ad curve

Answer 12

changes in its components
C,I,G or X-M

Question 13

rise in economic growth occurs when

Answer 13

-higher confidence levels of consumers or firms
-if monertary policy committee lowers interest rates
-lower taxes
-increase in government spending (boosts ad)
-depreciation in a currency so m is more expensive and x is cheaper

Question 14

wealth effect

Answer 14

when price levels fall purchasing power increases making consumers feel wealthier boosting consumer spending so more goods and services are produced

Question 15

trade effect

Answer 15

As prices fall, foreign buyers find domestic goods more affordable, leading to an increase in exports. Additionally, domestic consumers are likely to reduce their purchases of relatively more expensive imported goods, substituting them with cheaper local alternatives. This increase in exports and reduction in imports raise net exports (exports minus imports), thus boosting aggregate demand. On the other hand, if the domestic price level rises, exports become less competitive, imports become more attractive, and net exports fall, which lowers aggregate demand.

Question 16

interest effect

Answer 16

When the price level falls, people need less money to buy goods and services. This reduces the demand for money, leading to a fall in interest rates. Lower interest rates encourage investment and consumption, both components of aggregate demand. On the other hand, when the price level rises, the demand for money increases, pushing up interest rates and discouraging investment and consumption.

Question 17

aggregate supply shows

Answer 17

the quantity of real GDP which is supplied at different price levels in the economy

Question 18

why is the AS curve upward sloping

Answer 18

at a higher price level producers are willing to supply more because they can earn more profits

Question 19

SRAS curve shifts when

Answer 19

there are changes in the conditions of supply
-cost of employment
-cost of other inputs eg raw materials, labour productivity
-government regulation or intervention

Question 20

sras shows the

Answer 20

planned output of an economy when price changes whilst other factors are kept constant

Question 21

the sras curve is upward sloping because

Answer 21

supply is assumed to be responsive to change in ad which is refelcted in the price level

Question 22

lras shows the

Answer 22

potential supply of an economy in the lung run. this is when other factor / inputs can change

Question 23

why is the lras curve verticle

Answer 23

because supply is assumed not to change as the price level changes

Question 24

the economy reaches a state of equilibrium when

Answer 24

the rate of withdrawals = the rate of injections which is equivalent to the point where AD=AS

Question 25

equation for aggergate demand

Answer 25

C+I+G+(X-M)

Question 26

consumer spending is

Answer 26

how much consumers spend on goods and services. the largest component of ad

Question 27

disposable income is

Answer 27

the amount of income consumers have left over after taxes and social security charges have been removed

Question 28

a consumers marginal propensity to consume

Answer 28

how much a consumer changes their spending following a change in income

Question 29

a consumers marginal propensity to save

Answer 29

the proportion of each additional pound of household income that is used for saving

Question 30

what does the consumers marginal propensity to consume added to t marginal propensity to save equal

Answer 30

1

Question 31

influences on consumer spending

Answer 31

-interest rates -consumer confidence

Question 32

influences on investment

Answer 32

-the rate of economic growth -business expectations and confidence -demand for exports -interest rates -access to credit -the influence of government and regulations

Question 33

the accelerator effect suggests that

Answer 33

the level of investment in an economy is related to the change in GDP. a higher rate of economic growth causes more investment

Question 34

influences on government expenditure

Answer 34

-the trade cycle -fiscal policy

Question 35

discretionary fiscal policy

Answer 35

policy which is implemented through one off policy changes

Question 36

automatic stabilisers

Answer 36

polices which offset fluctuations in the economy

Question 37

the main influences on the (net) trade balances

Answer 37

-real income -exchange rates -state of the world economy -degree of protectionism -non price factors

Question 38

the factors that influence the level of economic activity

Answer 38

-employment -confidence -events -other factors such as taxes and interest rates

Question 39

when does the multiplier effect occur

Answer 39

occurs when there is new demand in an economy

Question 40

the multiplier effect refers to

Answer 40

how an initial increase in AD leads to an even bigger increase in national income

Question 41

why does the multiplier effect occur

Answer 41

because one persons spending is one persons income

Question 42

the multiplier ratio

Answer 42

the ratio of the rise in national income to the initial rise in AD

Question 43

if SRAS is elastic what is the size of the multiplier

Answer 43

large

Question 44

if SRAS is inelastic what is the size of the multiplier and why

Answer 44

smaller because if AD increases prices will increase rather than a full increase in national income so a higher rate of inflation leads to higher interest rates which encourages saving rather than spending

Question 45

reverse multiplier effect

Answer 45

a withdrawal from the circular flow of income could lead to an even larger decrease in income for the economy

Question 46

formula used to calculate the multiplier

Answer 46

1/ (1-MPC)

Question 47

determinants of SRAS

Answer 47

main two are price level and production costs

Question 48

what shifts the SRAS curve

Answer 48

changes in the conditions of supply

Question 49

changes in costs of production (changes to supply which shift SRAS curve)

Answer 49

-cost of employment -cost of other inputs eg. raw materials -government regulation or intervention -net outward migration of workers causing 'brain drain' fall in business capital spending

Question 50

why is it assumed that the LRAS curve is vertical

Answer 50

it suggests that output is fixed at each level. all factors of production in the economy are fully employed in the long run

Question 51

the LRAS curve is affected by changes which ..

Answer 51

affect the quantity or quality of the factors of production

Question 52

factors affecting the long run AS

Answer 52

-technological advance -changes in relative productivity -changes in education and skills -changes in government regulations -demographic changes and migration -competition policy

Question 53

what does the keynesian view suggest

Answer 53

that the price level in the economy is fixed until the resources are fully employed