1.2 how the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts Flashcards
accelerator
a change in the level of investment into capital goods, brought about by a growth of aggregate demand
actual output
level of actual output produced in the economy in a year
aggregate demand
total planned spending on real output produced by the economy
aggregate supply
total real national output
autonomous consumption
the minimum level of consumption needed in society to sustain a basic standard of living
boom/bust policy
when the government enacts policies to stimulate then contract the economy
circular flow of income
the circulation of national income, output and the expenditure between economic agents, such as firms and households
credit crunch
low availability of credit; when borrowing becomes (significantly) more expensive
full employment income
total output of an economy when output is minimised
funding for lending scheme (FLS)
scheme allowing banks to borrow cheaply from the Bank of England, on the condition that they lend the money out to promote growth
gross domestic product (GDP)
the sum of all goods and services produced in an economy over a period of time
injection
spending power entering the circular flow of income resulting from investment, government spending and exports
Keynesian economists
followers of the economist John Maynard Keynes, who believe the government should generally manage the economy
long run aggregate supply (LRAS)
aggregate supply when the economy produces its productive potential
monetarists
economists who believe increases in the money supply is a significant factor of inflation
multiplier
the relationship between a change in aggregate demand and the resulting change in national income
multiplier ratio
number of times a rise in national income is larger than the rise in the initial injection of AD, which led to the rise in national income
national capital stock
stock of capital in the economy
national income
the flow of new output produced by the economy
national output
the same as national income
national product
the same as national income
nominal GDP
GDP measured at current market prices, without taking into account the effects of inflation
pro-free market economists
opponents of Keynesian economists, who believe the government should generally leave the markets to operate freely
real GDP
GDP measured, taking into account the effects of inflation
real wage
the purchasing power of the nominal wage, after taking into account the effects of inflation
real wage unemployment
unemployment caused by real wages being stuck above the equilibrium wage rate
red tape
unnecessary business regulation
saving
unspent income
short run aggregate supply (SRAS)
aggregate supply when the level of capacity is fixed, through existing factors can be utilised more or less to impact real output
short run economic growth
an increase in the real output by taking up slack in the economy
sovereign wealth fund
government or state run fund created by profits from natural resources
technological progress
when technological change results in more output for the same quantity of input
trend growth rate
the level of economic growth that is sustainable, without putting upward pressure on inflation
withdrawal
spending power exiting the circular flow of income resulting from savings, taxation and imports
multiplier ratio
1 / 1 - MPC
what does the multiplier ratio tell us?
it tells us the increase in GDP following an initial injection
what is the UK’s multiplier ratio estimated by the Bank of England in 2016?
1.375
this tells us that if investment was to increase by £25bn then real GDP would increase by £34.375
MPC
how much consumers will spend if given an additional £
downward multiplier effect
increase in withdrawals, AD shifts in, AD shifts in even further
when an initial increase in withdrawals leads to a much worse, overall downward effect on the economy
accelerator effect
when real GDP increases it signals to firms that consumers are demanding more goods so, firms will invest in new capital, like machinery, so that they are able to produce more consumer goods
increase in real GDP accelerates investment
how does a fall in income cause AD to shift?
fall in income, consumption decreases, AD decreases
firms make fewer sales and profit
investment falls
receive less income tax if incomes fall
government receives less money in VAT
less corporation tax revenue
how does a rise in income cause AD to shift?
an increase in income is likely to increase consumption which will increase AD
firms make more sales, more money to expand
more profits, more tax revenue
