2.4 - National Income Content Flashcards
2.3 - Aggregate Supply
What is short run aggregate supply?
The total amount of output in the economy at any given price at a moment in time. (cost of production).
2.3 - Aggregate Supply
Why is the (classical) SRAS curve upward sloping?
To increase AS, this takes time - e.g. to build new facilities.
∴ ↑ AS, ↑ costs
2.3 - Aggregate Supply
Classical LRAS graph:
2.3 - Aggregate Supply
Keynesian LRAS graph:
Causes of AS-led growth:
Quantity + quality of fop: CELL
Improved productive efficiency (e.g. due to competition).
Q²CELL
2.3 - Aggregate Supply
Why is keynesian LRAS graph curved?
As AD increases, more pressure is put on FoP, causing increased prices.
Bottlenecks e.g. not enough skilled labour.
Diminishing returns to production.
2.3 - Aggregate Supply
What is an outward shift of the Keynesian LRAS curve equivalent to?
An outward shift on a PPF
2.3 - Aggregate Supply
Give 6 factors that could shift LRAS outwards:
- Tech. advances.
- Increase in relative productivity.
- More skilled workforce / education to improve occupational mobility to reduce structural unemployment.
- Change in govt. regulation.
- Demographic changes + migration.
- Policies inc. competition (inc quality + lower prices).
2.3 - Aggregate Supply
How could an increase in the UK’s relative productivity shift LRAS outwards?
It could encourage investment into production of that good.
Also increases quality of labour / quality of FoP.
2.3 - Aggregate Supply
What is hysteresis?
The economy never fully recovers from a deep recession.
Loss of potential employment, as workers become discouraged, natural rate of unemployment increases.
Inward shift in LRAS.
2.3 - Aggregate Supply
What are the factors affecting SRAS? (CREST)
Cost of raw materials
Regulations
Exchange rates
Supply Shocks
Taxes
2.4 - National Income
What are the injections to the circular flow of income?
- Government spending
- Exports
- Investment
2.4 - National Income
Define circular flow of income
The flow of money in the economy between different sectors - households, firms, .+ identification of features, such as withdrawals or injections from the circular flow.
2.4 - National Income
What are injections?
The money in the circular flow of income which enters the country.
2.4 - National Income
What are withdrawals?
Money in the circular flow of income leaving the economy.
2.4 - National Income
Draw the circular flow of income diagram
2.4 - National Income
Explain the difference between income and wealth
Income is a flow of money
Wealth is a stock of assets
2.4 - National Income
How does the multiplier effect lead to a further increase in AD and national income?
- Initial injection increases AD.
- Multiplier creates income for people, facilitating spending.
- Leads to another increase in AD.
- Multiplier creates more income for people, facilitating spending.
- AD settles at a new equilibrium.
2.4 - National Income
What is the symbol given to the multiplier (effect)?
K
2.4 - National Income
What does the extra consumption, due to multiplier effect create?
Extra jobs, increasing output.
2.4 - National Income
When does a negative multiplier effect occur?
When withdrawals are made.
(Government cuts in fiscal spending will lead to an even bigger decrease in economic activity).
2.4 - National Income
Where do the government target injections?
On those that will have the largest effect on the multiplier.
(Largest MPC).
(Example is redistributing income to those on lower incomes with higher MPCs).
2.4 - National Income
Give the 3 evaluations of the multiplier effect:
- Uncertainty: impossible for govt. to know exact effect of injection / size of multiplier.
- Time lag: Between the increase in income and spending, people won’t spend straight away.
- Depends on the elasticity of the supply curve (inelastic leads to big PL ↑).
Could also talk about liquidity trap theory - preference to save, rather than spend will mean no multiplier occurs.
2.4 - National Income
What would be the effects of an inelastic supply curve on the multiplier? (Good eval using Keynesian diagram).
Larger increase in PL, economy has to have sufficient spare capacity, in order to minimise price level increases.
2.4 - National Income
What would the effect of an elastic supply curve be on the multiplier?
Smaller increase in PL, as there is sufficient spare capacity.
2.4 - National Income
Define multiplier effect:
A more than proportional increase in national income, that results from an injection of spending.
2.4 - National Income
Define de-multiplier
A more than proportional decrease in national income, that results from withdrawal of spending.
2.4 - National Income
What effects the multiplier? (WEECCR)
- Wealth Effect.
- Employment and job security.
- Expectations of future price changes (e.g. persistent deflation).
- Consumer Confidence.
- Consumer credit and mortgage payments (cost / availability of).
- Real disposable income.
2.4 - National Income
What must be in the economy for the multiplier to have the desired effect?
Sufficient spare capacity.
(More spare capacity / more elastic LRAS curve, larger the effect).
2.4 - National Income
What is the multiplier formula?
- 1/1-MPC
- 1/MPW (MPS + MPM + MPT)
2.4 - National Income
The planned investment in the redevelopment of Dover Port will cost £115 million. The Chief Executive said it will lead to many ‘new job opportunities for local people and a transformed waterfront experiece’ with new cafés, bars and shops.
Using the example above, explain how the multiplier process leads to an incrase in aggregate demand. (4)
(2020 paper)
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Knowledge/Understanding
-> Multiplier effect is when an initial change in aggregate demand can have a greater final impact on equilibrium national income.
-> Injection of money from investment goes round the circular flow of income, leading to a greater effect on AD. - Application - 115m investment. Construction workers will consume local businesses.
- Analysis - One person’s spending money is another person’s incomes.
