10.4 Aggregate Demand And The Level Of Economic Activity Flashcards
What is economic activity
The production and consumption of goods and services in the economy together with the employment of labour, capital and other inputs that produce outputs
What is the link between AD and employment?
When real output increases firms have to employ more workers to produce additional goods
Diagram for affect of AD on real output
Describe this diagram
Illustrates the effect of an increase of AD on real output
Increase leads to a rise and decrease leads to a fall
Important to note:
The greater the shift in AD the greater the change in real output
The extent to which AD changes also depends on the AS curve
Multiplier def
The relationship between a change in AD and the resulting generally larger change in National income
What does the national income multiplier measure?
The relationship between an initial change in a component of AD such as gov spending or private-sector investment and the resulting generally larger change in the level of national income
Diagram for a national income multiplier on an AS/AD diagram
Describe this diagram
Gov spending shifts AD1 to AD2 then triggers multiplier process leading to AD3
The eventual size of AD is 2.5X initial gov spending
Equation for a multiplier?
Change in national income/change in gov spending
What is the marginal propensity to consume ?t
The fraction of ant increase in income which people plan to spend on the consumption of domestically produced goods and services
What is the marginal prosperity to save?
The fraction of ant increase in income which people plan to save rather than spend
Besides the gov spending multiplier what are the other multipliers
Investment multiplier
Tax multiplier
Export multiplier
Import multiplier
What are gov spending multiplier and tax multipliers known as?
Fiscal policy multipliers
What are export and import multipliers known as?
Foreign trade multipliers
Are there just national multipliers ?
No there are regional too
What is the formula for calculating a multiplier
What does higher MPC mean ?
At each stage of the multiplier process most new income is spent on consumption and only a small amount in savings
What does a low MPC and high MPs produce
The eventual growth in income is not much larger than the initial increase in AD
Describe the multiplier process
10 billion in gov spending
Received by building workers consumption rate 0.2 0.8 is not spent on consumption
The eventual increase of income resulting from gov spending =
Sum of all the stages of income generation
Equation for national nominal income
National real income X average price level
What does the size of the multiplier depend on? And why
If we are measirijg nominal national income multiplier or the real national income
multiplier
Because part of the multiplier effect deflects into a rising price level so the growth of real income is restricted from y1 to y2
