1C Flashcards
What are 4 of the main key parties in the economy?
Consumers, Producers, Government and RBA (financial sector)
What is the circular flow of income
The circular flow of income demonstrates the interdependence between sectors and is used to explain fluctuations in GDP, employment, and inflation based on the balance of leakages and injections.
The Circular Flow model shows the relationship between different sectors of the economy. It explains how money moves between businesses, households, and other sectors, helping to predict changes in economic activity like GDP.
When is the economy in equilibrium?
When leakages = injections, variables are balanced. However, equilibrium is impossible in the short run because the economy is constantly adjusting.
When is the economy in disequilibrium?
When leakages > injections and leakages < injections.
What happens when leakages > injections?
eco is in state of Disequilibrium. The economy is contracting: output/GDP drops and unemployment increases.
What happens when injections > leakages?
eco is in state of Disequilibrium. The economy is expanding: output/GDP rises and unemployment decreases.
What happens when injections > leakages for a business POV?
Business will produce more output of goods and services, will demand more FOP, able to pay more to their employees more income.
What happens when leakages > injections for a business POV?
Business will produce less outputs of goods and services, will demand less FOP, able to pay less to their employees more income.
What was societies spread for COVID-19 - talk about injections and leakages.
Leakages Increased 📉
C dropped
Higher savings (uncertainty, job losses).
Imports fell (trade disruptions).
Taxes dropped (less income, business closures).
Injections Increased & Decreased 📈📉
Government spending rose (stimulus, healthcare).
Investment dropped (uncertainty, high risk).
Exports fell (supply chain issues).
UNDERSTANDING: WHAT INFLUENCES TAX IN TERMS OF IRL SCENARIOS?
✅ Taxes Increase When:
Government raises tax rates.
Economy grows (higher incomes, profits).
Inflation boosts tax revenue.
❌ Taxes Drop When:
Government cuts taxes.
Economy slows (job losses, lower profits).
Tax breaks/incentives are given.
What is aggregate demand?
Aggregate Demand (AD) is the total spending/demand on goods and services in an economy over a period of time. It includes consumer spending, business investment, government spending, and net exports (exports - imports).
How are leakages and injections correlated with AG?
if leakages > AG decreases, if injections > AG increases
Simply, how is inflation caused?
if the economy expands too quickly
Define inflation.
Inflation is a measure of the rate at which the average price of a basket of goods and services in an economy increases over time.
INDICATES A DECREASE IN THE PURCHASING POWER OF A NATION’S CURRENCY.
What is the Consumer Price Index (CPI)?
the consumer price index measures the changes in the price level of baskets of goods and services purchased by households.
What are the 2 types of inflation?
Cost-push and demand-pull
What is cost-push inflation?
Inflation due to increases in the ‘cost’ of FOP (wages and raw materials)
What is demand-pull inflation?
Inflation resulting from the demand for goods increasing ahead of supply (creating shortages - cyclone alfredo)
What is deflation?
Deflation is when prices of goods and services fall over time. This happens when there is less demand, lower wages, or too much supply in the economy.
what are some effects of inflation?
✅ Positive Effects:
Encourages Spending & Investment – People buy now before prices rise further.
Reduces Real Debt Burden – Loans become easier to repay as money loses value.
Boosts Business Profits – Higher prices can lead to higher revenues.
❌ Negative Effects:
Higher Cost of Living – Essentials like food and rent become more expensive.
Decreases Purchasing Power – Money buys less over time.
Can Lead to Higher Interest Rates – Central banks may raise rates to control inflation.
Hurts Savings – Money in banks loses value if interest rates don’t keep up.
what are some effects of deflation?
❌ Negative Effects:
Reduced Consumer Spending – People delay purchases, expecting prices to drop further.
Lower Business Profits – Companies earn less, leading to job cuts.
Higher Unemployment – Businesses cut costs, reducing jobs and wages.
Increased Debt Burden – Loans become harder to repay as money gains value.
Economic Slowdown – Less spending and investment lead to a weaker economy.
✅ Possible Positive Effect:
Increased Purchasing Power – Money buys more goods and services.
why does rba aim for inflation?
secures slow economic growth which is better than deflation.
does this by:
encouraging spending and investment, reduces debt burden
what are the 3 economic indicators?
gdp
unemployment
inflation
what do the economic indicators indicate?
Economic indicators show the overall health of the economy.
What is GDP?
gdp is a measure of the monetary or market value of goods and services produced in an economy
Why does the economy tend to reach equilibrium in the long run? (gdp and ad)
Because government intervention (e.g., adjusting interest rates, taxes, and spending) helps maintain economic stability. also ad will = gdp at one point because of slow growth. therefore ad=gdp=c + i + g + (x-m)
what is unemployment?
is the proportion of the labour force actively looking for employment but not being able to find a job. it measurses how well labour force is being utilised in temrs of skills, experience and availibility - forced to work in maccas is shit unemployment measure for e.g.
(desired is 4.1%)
