4.22 How the macroeconomy works Flashcards
What is national output
The value of the flow of goods and services from firms to households
What is national expenditure
The value of spending by households on goods and services
What is national income
The value of income paid by firms to households in return for land, labour and capital
What are the 3 ways of measuring economic activity
National output, national expenditure and national income
What are the 3 injections into the circular flow of income
Exports, government spending and investment
What are the 3 withdrawals from the circular flow of income
Imports, taxation and saving
What is the formula for AD
AD= C+I+G+(X-M)
What are the components of AD
Consumption, investment, Government spending and net exports
What is the price level
The average of prices for all goods and services in an economy
What is real national output
The output of the economy taking into account inflation
What is disposable income
The income remaining after the deduction of taxes and social security charges
What is fiscal drag
The drag of lower incomes into higher tax brackets
What is the marginal propensity to consume
The amount of an increase in earnings(by 1 point) that is spent
What is the marginal propensity to save
The amount of an increase in earnings that is saved
What is the average propensity to save
The total proportion of income that is saved
What other factors affect consumption
Consumer confidence, interest rates and the supply of credit(How easy it is to get a loan and credit cards), distribution of income and actual changes in the economy
What factors affect investment
Actual and expected demand, demand for exports, interest rates, risk, Marginal Efficiency of Capital and Technological change and competitiveness
What is Marginal Efficiency of Capital
The expected return on an investment at a given time
What is the accelerator effect
The idea that an increase in national income leads a proportionally larger change in investment
What are the factors affecting net trade
The level of income, the exchange rate, the quality and other non-price factors, Economic performance of other countries and protectionism
What are possible demand side shocks(anything that affects a component of AD)
Recession in one or more of our trading partners, a big rise or fall in our exchange rate, housing market slumps, share price collapses, unexpected rise or cuts in interest rates and tax
What is short run AS/SRAS
The amount that will be supplied when at least one factor of production is fixed
What is LRAS
The amount that will be supplied when all factors of production are variable, equivalent to the productive potential of the economy
What factors cause a shift in SRAS
Changes in cost of production(Wages, raw materials)
Changes to taxation rates that affect firms, subsidies and imported tax(VAT, Corporation tax)
Supply shocks(Natural disasters)
Tariffs
What is total supply
When all factors of production are variable
What is one formula to calculate the multiplier
1/1-MPC
What is the multiplier effect
The idea that an initial injection into the circular flow of income should stimulate a further rounds of spending leading to a larger effect on output
