4.2.2 How The Macroeconomy Works Flashcards
What is an example of a withdrawal of income from the circular flow?
Saving
Taxes
Imports
What is an example of an injection of income to the circular flow?
Government spending on merit goods
Welfare payments
Exports
What is an injection into the circular flow of income?
Money which enters the economy
What is a withdrawal from the circular flow of income?
Money which leaves the economy
What is aggregate demand?
The total demand in the economy
When does AD increase?
When:
- Consumers and firms have higher confidence levels
- If the monetary policy committee lowers interest rates
- Lower taxes causing higher disposable income
- house prices increasing and making people feel wealthier
- credit more available
- Depreciation in a currency
What does aggregate supply show?
The quantity of real GDP which is supplied at different price levels in the economy
When does the SRAS curve shift?
- Cost of employment might change
- Cost of other inputs might change
- Government regulation or intervention
What does the LRAS curve show?
The potential supply of an economy in the long run
How is economic growth shown on the LRAS curve?
What does it mean if price is above equilibrium?
There will be excess supply
What does it mean if price is below equilibrium?
There will be excess demand
What is the equation for AD?
C + I + G + (X-M)
What is C?
consumer spending
What influences consumer spending?
Interest rates
Consumer confidence
What is I?
Capital investment
What influences investment?
rate of Economic growth
BUsiness confidence
Demand for exports
Interest rates
Government and regulations
Access to credit
What is G?
Government spending
What is the accelerator effect?
Investment levels will increase if the economy is growing
What happens during recessions?
Real output of the economy falls
Economic growth is negative
What is the economic boom?
When economic growth is fast
And this could be inflationary or unsustainable
What does expansionary fiscal policy do?
Increases spending
To boost economic growth
What is exports minus imports?
The value of the current account on the balance of payments
What factors influence the level of economic activity?
Employment
Confidence
events
fiscal policy
What does the multiplier effect refer to?
A rise in aggregate demand leads to a rise in income
Formula for the multiplier
1 / (1-mpc)
What is Marginal Propensity to Consume?
How much a consumer changes their spending following a change in income
What factors influence LRAS?
- Technological advances
- Changes in relative productivity
- Changes in education and skills
- Changes in government regulation
- Migration
