ADAS Flashcards
components of Aggregate demand
- consumption
-investment
-government spending
-export-import
AD=GDP
changes in consumption
MPC, MPS, MPM, MRT
components of consumption
- wealth
- expectations
- real interest rates
- household debt
- taxation
MPC
The proportion of additional income that an individual consumes.
MPC=change C/change Y
MPS
The proportion of each additional dollar of household income that is used for saving.
MPS=change Save/change Y
MPM
The change in imports induced by a change in income.
MPM= change M(import)/change Y
MRT
Refers to outflow of circular model, occurs when income is spent taxes, savings and imports.
MRT=change Taxes/change Y
MPC
The proportion of additional income that an individual consumes.
MPC=change C/change Y
investment component
- business confidence
- technology
- expectation
- business taxes
- degree of excess capacity
government spending component
fiscal policy
Net exports components
- exchange rate
- protectionism
- taxes
multiplier effect
The increase in final income arising from any new injection of spending.
tax multiplier
Represents the multiple by which GDP increases in response to a decrease, or vice-versa, in taxes charged by governments.
-MPC/MRL=-MPC/1-MPC
Aggregate supply definition
total quantity of goods and services produced in a nation at range Price level during a period of time
determinants of Aggregate supply
- wages rates
- gvt regulation
- cost of resources
- exchange rate
- business taxes
- energy cost
wealth
total assets of an individual, firm or government minus its total liabilities.
spending multiplier
Represents the multiple by which GDP increases or decreases in response to an increase and decrease in government expenditures and investment.
(k)=1/(1-MPC)
classical view on AS
If left unregulated, a weak or booming economy would “self-correct” and return to a ‘normal’ state of full-employment level of output due to the flexibility of wages and prices.
Keynesian view on AS
Opposite to Classical view on AS. The economy will not “self-correct” due to “sticky wages and prices”, meaning the government needs to have an active role in maintaining full-employment output.
Demand deficient recession
Refers to changes in the economic cycle, when the economy is blooming and unemployment rate falls
recessionary gap
A recessionary gap is a term routed in macroeconomic theory that summarizes the situation where an economy is operating at below its full-employment equilibrium. Under this condition, the level of real gross domestic product (GDP) is currently lower then it is at full-employment, which puts downward pressure on prices in the long run.
demand pull inflation
situation of AD increasing beyond the full employment level-price increase due to increase in AD
inflationary gap
macroeconomic condition that describes the distance between the current level of real gross domestic product (GDP) and full employment (long run equilibrium) real GDP
stagflation
persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.
