7.5a - Economy (Macroeconomics and the Business Cycle) Flashcards
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
Consumption + investment + government spending + (exports - imports)
What happens if C, I, G or X goes up?
Aggregate demand will increase because people have more money to spend
What does the growth potential of an economy depend on?
Amount and quality of economic resources available (e.g. labour and fixed assets)
How can governments encourage short-term growth?
- Cutting taxes
- Cutting interest rates
How can money be withdrawn from the circular flow of income?
- People save their money
- People pay tax to the government
- Imports from abroad
What happens if S, T or M increase?
Aggregate demand will fall because people have less money to spend
How can the effects of S, T or M rising be balanced out?
- Banks using savings (S) to invest (I)
- Government uses tax (T) to spend on the country (G)
- Money spent on imports (M) is used for other countries to buy UK exports (X)
How is aggregate demand measured?
- GDP
- Price levels and national output
Advantages of GDP increasing:
- Increase in consumption
- Increase in investment
- Increase in government spending
- Fall in saving
- Fall in taxation
- Increase in exports
- Fall in imports
Disadvantages of GDP worsening:
- Fall in consumption
- Fall in investment
- Fall in government spending
- Rise in saving
- Rise in taxation
- Fall in exports
- Rise in imports
GDP definition
A measure of the total output of a country’s economy over a year
What can GDP be used to judge?
Where a business is on the business cycle
What influences the extent to which a business is affected by the business cycle?
YED of their products (inelastic products will not see demand affected much)
When does a recession occur?
When there is a fall in economic growth for two consecutive quarters
What strategies could a business put in place to help it through a recession?
- Reduce prices
- Reduce fixed costs
- Sell assets
- Close branches
What can happen during a slump/trough?
- Factories/branches and possibly businesses are closed so unemployment increases
- Deflation may occur
What can happen during a boom/peak?
- Increase in prices due to demand being higher than supply
- Businesses may expand
- Higher profits
- Resources can be limited
What strategies could a business put in place to help it benefit from a boom?
- Increase prices
- Release luxury products
- Increase capacity
- Improve current assets
