4.2.2 How The Macroeconomy Works Flashcards
What is the equation for National income?
Y=C+I+G+(X-M)
Y= national income C=consumption I=investment G=government expenditure X=exports M=imports
What % of GDP is made up of consumption?
60%
How can money enter a country?
- foreign investment
* injections-(government spending, investment and exports)
How can money leave a country?
Withdrawals-(taxes, savings and imports)
What are the 4 things in the circular flow of income?
Households
Factor services
Firms
Factor incomes
What are the 4 types of factor service?
- labour
- capital
- entrepreneur
- land
What are the 4 types of factor incomes?
- wages/salaries
- interest
- profit
- rent
What is the equation for the circular flow of Income?
Income=output=expenditure
Aggregate demand
The total demand for goods and services in an economy at a given price level and in a given period of time
What is the relationship between price level and consumption for AD?
Inversely proportional
High price=low consumption
Low price=high consumption
Aggregate supply
The total amount of goods and services (real output) produced and supplied
Economic shocks
Unexpected events they affect the economy and shifts AD
What causes a shift in the AD curve?
Change in the following given a constant price level: •consumption •investment •government spending •net exports
What causes a movement along the AD curve?
A change in price level
What causes a shift in the AS curve?
Wage rates Raw material prices Taxation Exchange rates Productivity
What causes a movement along the AS curve?
Change in price level
What causes shifts in the LRAS curve?
Change in productive potential
- technological advances
- changes in relative productivity to competing countries
- change in education and skills
- changes in government regulations
- demographic changes and migration
- competition policy
- enterprise and risk taking
- factor mobility
- economic incentives
- institutional structure of an economy
What causes a movement along the LRAS curve?
Change in price level
How is economic growth shown on an LRAS curve?
Shift right
How have supply side shocks affected the macroeconomy?
- SRAS curve shifts inwards due to rises in oil prices in 1974-75 and 1980-81
- stagflation occurred as output was falling but inflation was rising
- high unemployment
How have demand shocks affected the macroeconomy?
- in 1988 interest rates were raised to 15% and aggregate demand fell
- lead to a recession with falling output and downward pressure on prices
What does the LRAS curve represent?
The max production possibility of an economy
Full employment income
The total output of an economy when unemployment is at the government target
What happens if there are net injections into an economy
Expansion of national output
What happens when there are net withdrawals into an economy
Contraction of production
In an economy when is equilibrium achieved
When rate of withdrawals= rate of injections
At price above the equilibrium what is there?
Excess supply
At price below the equilibrium what is there
Excess demand
What is AD made up of?
AD= C + I + G + (X-M)
C= consumption I= investment G= government spending X= exports M= imports
Influences in consumer spending
- consumers marginal propensity to consume
- interest rates, however there is a time lag
- consumer confidence affected by anticipated income and inflation
What percentage of AD is made up of investment
15-20%
Influences on investment
- higher economic growth means higher investment
- higher confidence means higher investment
- lower interest rates means higher investment
- higher credit means higher investment
- lower tax means higher investment
Accelerator process
Suggests a higher rate of economic growth causes more investment
Percentage of AD which is government spending?
18-20%
Influences on government spending
- business cycle- what stage of economic growth the economy is in (boom or bust)
- fiscal policy in place
Influences on exports- imports
- higher real income leads to higher imports
- depreciation in pound, exports up imports down
- state of world economy
- protectionism
- more innovation and competitiveness leads to more exports
Multiplier process
Occurs when there is new demand in an economy, this leads to an injection of more income which leads to economic growth
Multiplier ratio
The ratio of the rise in national income to the initial rise in AD
When is the multiplier effect greatest
When the economy has lots of slate capacity so output can be produced quickly giving an elastic SRAS curve
Reverse multiplier
When a withdrawal of income leads to an even larger decrease in income in the economy
How do you calculate the multiplier process
1/(1-MPC)
