Unit 7 Flashcards
(28 cards)
What shape is the ‘Classic LRAS Curve’?
A vertical straight line.
What is the difference between LR and SR AS?
Short Run - Factors of Production are fixed (labour exception)
Long Run - Factors of Production can be changed.
What does LRAS represent?
The maximum possible output an economy can produce, as determined by its factors of production.
What does the LRAS curve suggest?
That price change has no effect on output produced. Also, the economy will always produce the maximum that its factor resources will allow.
When does the LRAS curve shift?
- Labour
- Land
- Capital
- Enterprise
- Economic Incentives
- Government Intervention
What does the Keynesian curve look like?
Straight horizontal line that curves upwards to a vertical line.
What are the 3 stages of the Keynesian Curve?
ABC
A = Unused Capacity, firms will increase their output will no increase in costs. B = Limited Spare Capacity, resources become scarce and harder to attract, therefore the price begins to increase. C = Full Capacity
What are the 3 ways of measuring national income?
Output
Input
Expenditure (AD)
How do you calculate RNI?
nominal national income / average price level
Why would RNI be useful for a country?
How successful an economy is
How well off a population is
How much taxation a government can get
What is the circular flow of income?
An economic model showing the flow of goods and services, the factors of production and their payments between households and firms within an economy.
What is a closed economy?
No foreign trade and no government influence
Households and Firms
What is macroeconomic equilibrium?
AS=AD
What shifts AD?
Any change in a component of AD
What shifts SRAS?
Changes in costs of production
What information does the equilibrium give?
Level of inflation and national income
What shifts LRAS?
Any change in the quantity, quality or productivity of factors of production
What do classical economics support?
Economic policies that improve long-run aggregate supply
What is the distance between Y-FE?
Spare capacity
What do Keynesians support?
Economic policies that improve and manage aggregate demand
What is the multiplier effect?
When an initial injection into the economy causes a larger final increase in the level of RNO
How do you calculate the multiplier effect?
K = change in RNO / change in injections
What factors affect the size of the multiplier?
Interest Rates: if interest rates are high then consumption may not rise significantly as income may be saved
Tax Rates: Taxes are a withdrawal, if taxes are high consumers have less disposable income.
Imports: UK has high demand for imports, therefore this withdrawal and national income would not rise as much
Spare Capacity: If there is little spare capacity firms will be unable to meet AD
What are the main determinants of short run AS?
Price level and production costs
