7.5a Economy - Macroeconomics and the Business Cycle Flashcards
Economic influences
- Macroeconomics
- Interest rates
- Exchange rates
- Inflation
Microeconomics definition
The study of smaller individual parts of the economy
Macroeconomics definition
The study of the whole economy
Aggregate demand definition
The total demand of an economy
Aggregate demand formula
Aggregate demand = Consumption (all consumer spending) + Investment (all business spending) + Government spending + Balance of payments (exports - imports)
AD = C + I + G + (X - M)
What happens if any of C, I, G or X go up?
Aggregate demand will rise because people will have more money to spend
What will a rise in aggregate demand be shown as?
A rise in national income
Ways in which money can be withdrawn from the circular flow of income
- People save their money (S)
- People have to pay tax to the government (T)
- Businesses / consumers may import products from abroad (M)
What happens if S, T or M increase and why?
Aggregate demand will fall because people have less money to spend
What will a fall in aggregate demand be shown as?
A fall in national income
How can the effects of S, T or M increasing be balanced out?
- Banks use savings (S) to invest (I)
- The government uses tax (T) to spend on the country (G)
- Money spent on imports (M) us used for other countries to buy UK exports (X)
What is another measure of national output
Gross domestic product
What happens when aggregate demand rises?
GDP rises / the economy improves
Why is a rise in GDP an opportunity for businesses?
- Increase in consumption
- Increase in investment
- Fall in saving
- Increase in government spending
- Fall in taxation
- Increase in exports
- Fall in imports
What happens when aggregate demand falls?
GDP falls / the economy worsens
Why is a fall in GDP a threat for businesses?
- Fall in consumption
- Fall in investment
- Rise in saving
- Fall in government spending
- Rise in taxation
- Decrease in exports
- Increase in imports
GDP definition
A measure of the total output of a country’s economy over a year
What is the measurement of GDP?
Where aggregate demand = aggregate supply
What can GDP be used to judge?
Where a country is on the business cycle
When does a recession occur?
`When there is a fall in economic growth for two consecutive quarters
What are the implications of a recession?
- Demand is lower than supply so prices fall to encourage sales
- Fall in investment
- Lower savings
- Less consumer spending
Strategies a business could put in place to help it through a recession:
- Reduce prices
- Reduce fixed costs
- Sell assets
- Close branches
Implications of a slump/trough:
- Less needs to be produced so factories/branches and possibly businesses are closed so unemployment increases
- Deflation may occur
Deflation definition
A long-term, sustained fall in prices
