1.2 how the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts

Question 1

accelerator

Answer 1

a change in the level of investment into capital goods, brought about by a growth of aggregate demand

Question 2

actual output

Answer 2

level of actual output produced in the economy in a year

Question 3

aggregate demand

Answer 3

total planned spending on real output produced by the economy

Question 4

aggregate supply

Answer 4

total real national output

Question 5

autonomous consumption

Answer 5

the minimum level of consumption needed in society to sustain a basic standard of living

Question 6

boom/bust policy

Answer 6

when the government enacts policies to stimulate then contract the economy

Question 7

circular flow of income

Answer 7

the circulation of national income, output and the expenditure between economic agents, such as firms and households

Question 8

credit crunch

Answer 8

low availability of credit; when borrowing becomes (significantly) more expensive

Question 9

full employment income

Answer 9

total output of an economy when output is minimised

Question 10

funding for lending scheme (FLS)

Answer 10

scheme allowing banks to borrow cheaply from the Bank of England, on the condition that they lend the money out to promote growth

Question 11

gross domestic product (GDP)

Answer 11

the sum of all goods and services produced in an economy over a period of time

Question 12

injection

Answer 12

spending power entering the circular flow of income resulting from investment, government spending and exports

Question 13

Keynesian economists

Answer 13

followers of the economist John Maynard Keynes, who believe the government should generally manage the economy

Question 14

long run aggregate supply (LRAS)

Answer 14

aggregate supply when the economy produces its productive potential

Question 15

monetarists

Answer 15

economists who believe increases in the money supply is a significant factor of inflation

Question 16

multiplier

Answer 16

the relationship between a change in aggregate demand and the resulting change in national income

Question 17

multiplier ratio

Answer 17

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

Question 17

national capital stock

Answer 17

stock of capital in the economy

Question 17

national income

Answer 17

the flow of new output produced by the economy

Question 18

national output

Answer 18

the same as national income

Question 19

national product

Answer 19

the same as national income

Question 20

nominal GDP

Answer 20

GDP measured at current market prices, without taking into account the effects of inflation

Question 21

pro-free market economists

Answer 21

opponents of Keynesian economists, who believe the government should generally leave the markets to operate freely

Question 22

real GDP

Answer 22

GDP measured, taking into account the effects of inflation

Question 23

real wage

Answer 23

the purchasing power of the nominal wage, after taking into account the effects of inflation

Question 24

real wage unemployment

Answer 24

unemployment caused by real wages being stuck above the equilibrium wage rate

Question 25

red tape

Answer 25

unnecessary business regulation

Question 26

saving

Answer 26

unspent income

Question 27

short run aggregate supply (SRAS)

Answer 27

aggregate supply when the level of capacity is fixed, through existing factors can be utilised more or less to impact real output

Question 28

short run economic growth

Answer 28

an increase in the real output by taking up slack in the economy

Question 29

sovereign wealth fund

Answer 29

government or state run fund created by profits from natural resources

Question 30

technological progress

Answer 30

when technological change results in more output for the same quantity of input

Question 31

trend growth rate

Answer 31

the level of economic growth that is sustainable, without putting upward pressure on inflation

Question 32

withdrawal

Answer 32

spending power exiting the circular flow of income resulting from savings, taxation and imports

Question 33

multiplier ratio

Answer 33

1 / 1 - MPC

Question 34

what does the multiplier ratio tell us?

Answer 34

it tells us the increase in GDP following an initial injection

Question 35

what is the UK’s multiplier ratio estimated by the Bank of England in 2016?

Answer 35

1.375 this tells us that if investment was to increase by £25bn then real GDP would increase by £34.375

Question 36

MPC

Answer 36

how much consumers will spend if given an additional £

Question 37

downward multiplier effect

Answer 37

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

Question 38

accelerator effect

Answer 38

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

Question 39

how does a fall in income cause AD to shift?

Answer 39

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

Question 40

how does a rise in income cause AD to shift?

Answer 40

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