7 how the macroeconomy works Flashcards
national capital stock definition
the stock of capital goods,
wealth definition
the stock of assets which have value at a point in time, as distinct from income which is a flow generated over a period of time
national income definition
the flow of new output produced by the economy in a particular time period, usually a year
national output definition
the same as national income, namely the flow of new output produced by the economy in a particular time period, usually a year
national product definition
another name for national income and national output
consumption definition
total planned spending by households on consumer goods and services produced within the economy
3 way to measure the flow of new output
national income = national output = national expenditure
circular flow model
2 economic agents
- households
- firms
- page 163 or ezyeconomics video
closed economy definition
an economy with no international trade
investment definition
total planned spending by firms on capital goods produced within the economy
injection definition
spending entering the circular flow of income as a result of investment, government spending and exports
when is national income in equilibrium
saving + taxation + imports
investment + government spending + exports
or
when AD = AS
open economy definition
an economy open to international trade
what are the 3 injections into the circular flow of income model
- government spending
- investment
- exports
what are the 3 leakages into the circular flow of income model
- saving
- taxation
- imports
reflationary policies definition
policies that increase aggregate demand with the intention of increasing real output and employment
inflation definition
a continuing rise in the price level
aggregate demand definition
the total demand for consumer and capital goods and services (real output) at any given price within an economy
aggregate supply definition
the level of real national output that producers are prepared to supply at different average price levels
economic shock definition
an unexpected event hitting the economy:
- demand-side
- supply-side
can be both favorable or unfavorable
rate of interest definition
the reward for saving and the cost of borrowing
aggregate demand equation
AD = C + I + G + (X-M)
What are the 8 factors affecting consumption
- level of interest rates
- level of income
- expected future income
- wealth effect
- consumer confidence
- availability of credit
- distribution of income
- expectations of future inflation
availability of credit definition
funds available for households and firms to borrow
credit crunch definition
occurs when there is a lack of funds available in the credit market, difficult for borrowers to obtain money and costs more
distribution of income definition
the spread of different incomes among individuals and different income groups within the economy
how does the wealth effect affect consumption
house prices increases people feel wealthier like they have more money, spend more
house prices decrease they feel like they have less money, spend less
accelerator theory definition
a change in the level of investment in new capital goods is caused by a change in the rate of growth of national income or aggregate demand, meaning a further shift in AD
what affects the rate of growth of national income
aggregate demand,
- AD increases
- national income rises
- investment rises
- accelerator theory
multiplier definition
The process by which expenditure generates a trail of subsequent expenditure so that the resultant change in national income will exceed the amount initially expended.
aggregate demand and national income multiplier equation
change in national income / initial change in government spending
1 / 1-mpc
marginal propensity to consume definition
the fraction of an increase in disposable income that people plan to spend on domestically produced goods
marginal propensity to consume multiplier formula
1 / 1 - MPC
short-run aggregate supply definition
aggregate supply when the level of capital is fixed, though utilisation of existing factors of production can be altered so as to change the level of real output
long-run aggregate supply definition
aggregate supply when the economy is producing at its production potential.
if more factors of production become available or productivity rises, the LRAS curve shjifts to the right
what are the 2 reasons the SRAS curve is sloping upwards
- firms want to maximise profits
- in the short run, the cost of producing extra units of output increases as firms produce more output
deflation definition
a sustained fall in the average price level over a period of time
what causes the SRAS to shift
- change in costs
increase / subsidies
what factors determine the position of the LRAS
- the quantity and quality of labour and capital
- mobility of factors of production
- productivity of factors of production
- appropriate economic incentives
