Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ECON (MACRO & MICRO) > 10 How the macroeconomy works : the circular flow of income, AD/AS analysis, and related concepts (MACRO) > Flashcards

10 How the macroeconomy works : the circular flow of income, AD/AS analysis, and related concepts (MACRO) Flashcards

1
Q

what is aggregate demand

A

AD = total spending on goods/services

AD = C + I + G + (X-M)

where:

C - consumption (consumer expenditure)
I - investment (spending on capital)
G - government spending (spending on state provided goods)
X-M - exports - imports (exports are injection and imports are leakage from circular flow)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what are shocks to aggregate demand

A

Unexpected changes to levels and some are:

  • large rise/fall in exchange rate (affects export demand)
  • recession (affecting export demand)
  • slump in housing market or change in share prices
  • credit crunch (credit available for borrowing, global financial crisis)
  • unexpected cut/rise in interest rates or taxation

ALL CAUSE AD CURVE SHIFT

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

what is AD curve and what does it depict and caused by

A

AD curve showing INVERSE relationship between PL and GDP

caused by:
1. FALLING REAL INCOMES - PL rises so falling incomes
2. BALANCE OF TRADE - rise in PL of country X = foreign produced goods cheaper, fall in X rise in M and AD contraction
3. INTEREST RATE EFFECT - PL rise = inflation, increase demand for money, deflationary effect

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

factors affecting shifts in AD?

A
  1. EXPECTATIONS CHANGE (confidence falls, savings increase)
  2. CHANGES IN MONETARY POLICY (lower interest = lower cost of borrowing = more consumption/investment)
  3. FISCAL POLICY CHANGES (income tax affecting disposable income, government may increase expenditure)
  4. ECONOMIC EVENTS (overseas incomes increase = export demand increases, currency depreciates = exports cheaper and imports not)
  5. CHANGES IN HOUSEHOLD WEALTH (declining asset prices = fall in expectations)
  6. CHANGES IN SUPPLY OF CREDIT (credit availability)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what does consumption involve

A

CONSUMPTION - spending by households on goods/services

biggest component of AD, income sourced from wages, savings, investments, pensions, benefits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what can data is involved with consumption

A

SAVINGS RATIO - ratio of personal saving to disposable income
FTSE-100 INDEX - share prices of 100 largest companies on London stock exchange
VAT - tax on consumption

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what is involved with marginal propensity to consume

A

this is rate at which consumers increase spending as income increases

people with lower income have higher propensity
fall in this = lower consumption for given income level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what factors determine consumer spending

A
  • REAL INCOMES (wages rising faster than prices = higher incomes = higher purchasing power)
  • DIRECT AND INDIRECT TAXATION (cut = higher income, rise = lower income)
  • INTEREST RATES (lower = cut cost of debt = higher disposable income)
  • HOUSEHOLD WEALTH (negative wealth effect)
  • CONSUMER CONFIDENCE (low = less spending)
  • SUPPLY OF CREDIT (banks less willing to loan = interest higher)
  • DISTRIBUTION OF INCOME (marginal propensity to consume)
  • DEMOGRAPHICS (size/growth rate/age structure direct effect)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what is consumer confidence and how is it influenced

A

when low, people save more as low job security, financial crisis lower confidence

influenced by:
- economic growth
- household debt
- unemployment
- house prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

how do mortgage and interest rates affect consumer spending

A

mortgage rates fall = disposable income rise so purchasing power increases however with fixed mortgages interest rates don’t take effect immediately

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what is the wealth effect and how does it affect spending

A

wealth represents value of a stock of assets and is held in properties, shares, savings, money etc

many economists think there is a positive relationship between wealth and spending

real value of savings and income affect purchasing power

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

how would share prices affect consumer spending

A

rise in FTSE-100 might increase consumer spending if confidence increased

consumer spending power boosted from rise in share dividend payments

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what is involved with consumer borrowing

A
  1. UNSECURED BORROWING - loan/overdraft not tied to another asset eg bank loans
  2. SECURED BORROWING - lending where borrower must use another asset as collateral for loan in case of failure to pay
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

what is involved with saving in the economy

A

SAVING - household disposable income not spent

disposable income = income after taxes and benefits

high savings ratio lowers consumption and AD

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

factors affecting how much income people save

A
  • REAL INTEREST RATE (nominal rate adjusted for inflation)
  • PRICE EXPECTATIONS (deflation may = more saving)
  • AVAILABILITY OF CREDIT
  • UNEMPLOYMENT / JOB SECURITY (rising unemployment = saving more)
  • CONSUMER CONFIDENCE/ EXPECTATIONS/ UNCERTAINTY (stronger = people more willing to borrow)
  • TAXATION OF SAVINGS (interest on savings taxed)
  • TRUST IN SAVINGS INSTITUTION (deposit guarantees encourage higher saving)
  • NEED TO PAY BACK DEBT
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what is the importance of saving for an economy

A
  • corporate savings provide cushion during recession when demand and profits fall, savings used for finance
  • savings are household wealth and provide buffer against uncertain times
17
Q

whats the paradox of thrift

A

whats beneficial to individual = damaging to economy
KEYNESIAN - saving is positive as provides funds to finance capital investment, long term growth promoted

18
Q

what is involved with spending

A
  • spending on capital goods and spending on human capital
  • spending on infrastructure
  • done by most private businesses but can come from government
19
Q

difference between gross and net investment

A

GROSS = total amount economy spends on new capital including capital depreciation

higher productive capacity for businesses meeting rising demand in future if gross higher than depreciation

GROSS - CAPITAL DEPRECIATION = NET INVESTMENT

20
Q

what are advantages of investment

A
  • injection into circular flow of income
  • can boost productivity creating additional capacity to supply
  • extra demand in investment goods, multiplier effect on GDP levels
  • investment boosting country’s competitiveness so trade balance improved
21
Q

how does investment influence AD

A

rise in capital spending = positive multiplier, boosts demand

some projects destroy jobs yet some create jobs yet high investment may not create increase in LRAS as worker training needed

if insufficient demand growing capital stock = excess capacity = downward pressure on prices/profits

22
Q

whats the accelerator effect

A

relationship between planned capital investment and rate of change of national income

change in consumer good demand usually leads to bigger change in capital good demand

rate of growth of demand falls = investment falls

23
Q

what is aggregate supply and what is SRAS/LRAS

A

AS measure volume of goods/services produced depicting ability to meet AD

SRAS shows total planned output when prices subject to change but productivity remains same, assumed to be upward sloping

LRAS shows total planned output when prices and average wage rates can change - potential PPF, assumed to be vertical

24
Q

what causes movements in AS curve

A

change in PL = movement along SRAS

if AD rises, expansion of SRAS
if AD falls, contraction of SRAS

25
Q

what causes shifts in SRAS curve

A
  • CHANGE IN UNIT LABOUR COSTS (wage costs adjusted for productivity)
  • CHANGES IN PRODUCTION COSTS
  • COMMODITY PRICES (raw materials)
  • EXCHANGE RATES (causes fluctuations in prices of imported products, fall = increased costs)
  • GOVERNMENT TAXATION/SUBSIDIES (increase in taxes = inward shift)
  • PRICE OF IMPORTS (cheaper = outward shift)
  • SHORT RUN STOCKS TO PRODUCTION (temporary non-economic factors)
26
Q

external factors influencing AS

A
  • world gas/oil prices
  • energy prices/costs
  • food prices
  • import tariffs/quotas
  • other mineral/metal costs
27
Q

what is the long run aggregate supply and what does it involve

A

ability of an economy to produce goods/services to meet demand

28
Q

what are the factors affecting LRAS

A
  • PRODUCTIVITY (efficiency of production process, determinant of economic growth, inflation and fall = rise in production costs, rise = higher wages and profts)
  • INCREASED LABOUR MARKET PARTICIPATION
  • GAINS FROM INNOVATION AND ENTERPRISE
  • CAPITAL INVESTMENT
29
Q

why is the UK lacking on productivity

A
  • low capital investment
  • banking crisis affects lending
  • slowing rates of innovation
  • persistent skills shortage
  • low market competition
  • low AD and high spare capacity
30
Q

what will increased productivity result in

A
  • lower inflation
  • higher economic growth
  • lower unemployment as higher growth
  • improved balance of trades
  • rise from extra capacity in short run
  • higher investment, increased profits
31
Q

what is involved within the Keynesian non linear aggregate supply curve

A

SRAS elastic when spare capacity high but this falls as output increases

rise in AD met easily by increased output. when SRAS perfectly inelastic economy is at full capacity

32
Q

explain macroeconomic equilibrium

A

established when AD intersects with SRAS and is where level of income flowing round system is constant

if PL too high, excess supply = unsold stocks
if PL below, excess demand = rundown of stocks so need to expand output

33
Q

what is the effects of an increase and decrease of AD

A

INCREASE = expansion of AS, higher equilibrium output and outward shift means cyclical rise in output and employment

DECREASE = lower equilibrium level of national output

34
Q

what is the effects of an increase and decrease in AS

A

INCREASE = expansion of AD, higher equilibrium and outward shift of AS

DECREASE = contraction of AS and inward shift of AS as rise in unit resource costs so lower profits. AS can fall in short and long run

ECON (MACRO & MICRO) (19 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions