2 AD/AS, national income ,multiplier Flashcards
what is aggeragate supply ?
AS is the total amount of goods and services that firms are willing to produce at a given price level
there are 3 main points on the AS curve what does the first point show (low levels of output) ?
at low levels of output (recession) there would be lots of unemployed labour and capital
what is shown on the AS curve as firms produce more output?
as firms produce more output there is fewer and fewer unemployed factors of production. Resources are becoming more scarce so producers have to pay more for labour and capital.
what is shown on the AS curve where output is very high?
all of the resources of the economy are being fully employed. supply is now perfectly inelastic . Any extra demand is purely inflation
what factors cause the AS to shift ?
- production cost changes (taxes, wages, rent, energy costs)
- subsidies
what cause the AS to rise or fall?
- increase in recourses
- increase in labour workforce
- increase in capital or technological advancements
what is equilibrium on the AD/AS curve?
where the price level and real output at which AD = AS.
what is the multiplier effect / the multiplier?
where the initial increase or decrease in aggeragate demand leads to a larger final change in aggeragate demand (GDP) than the initial investment.
what is the principle that allows the multiplier effect to work?
one mans spending is another persons income.
what is the marginal propensity to import?
the % change in Yd that is spend on imports
what is the marginal propensity to tax?
the % change in income which is paid in tax
how do you work out the multiplier ?
1/MPW = 1/ MPS+MPT+MPM (save + tax + import)
1/ 1- MPC
what are some evaluation points of the multiplier?
- depends on the size of the multiplier
- time lag for money to flow around the circular flow
