Aggregate Demand & Aggregate Supply Flashcards
What are included in the physical flow in the circular flow of income?
goods, services, land, labour, capital
What are included in the monetary flow in the circular flow of income?
expenditure, income
What are the injections in the circular flow of income?
exports
investment
government spending
What are the leakages in the circular flow of income?
imports
savings
taxes
What is the multiplier effect?
an initial injection into an economy has a much greater actual change in the national income
What is the difference between wealth and income?
wealth - the total value of all one’s assets
income - the flow of money e.g. salary
What are the components of Aggregate Demand (AD)?
Consumption
Investment
Government spending
Net exports (Exports - Imports)
What factors affect consumption and saving?
Income interest rates consumer confidence wealth effects taxes unemployment
How are saving and investment different?
savings are made by households
investment is firms’ expenditure
What factors affect investment?
Risk Government incentives and regulation Interest rates and access to credit Technical advances Business confidence and 'animal spirits'
What is included in ‘government spending’?
money spent on public goods and services
it doesn’t include spending on things which don’t directly contribute to output, e.g. pensions and benefits
What does a government budget deficit indicate?
spending is greater than revenue
What factors affect imports and exports?
exchange rates
changes in the state of the world economy
degree of protectionism
non-price factors e.g. quality
What does the overall size of the multiplier depend on?
the size of the leakages from the circular flow of income
What does the aggregate demand curve show?
how a change in price level will affect the amount of output that is demanded
What is the average propensity to consume?
the proportion of national income thats spent
what is the marginal propensity to save?
the proportion of any extra income that’s saved
How do you calculate the multiplier?
1/(1 - marginal propensity to consume (MPC))
Why is the LRAS curve vertical?
Because the economy is operating at full capacity so a change in price won’t affect real national output
Which type of LRAS curve is horizontal then vertical?
Keynesian
What causes the SRAS curve to shift?
changes in costs of production
Whats causes the LRAS curve to shift?
changes in factors of production, i.e. anything that affects the capacity of the economy
Examples of things that might shift the AS curve to the right are…
technological advancements more efficient production improved education and skills changes in government regulations improved healthcare increasing factor mobility promoting enterprise supply of new resources improvements in banking system
What is the accelerator effect?
when national income is growing rapidly, firms will invest heavily to increase output
Which two effects can work together?
multiplier and accelerator
An increase in AD does what?
increases output, but only in the short run
To achieve all four macroeconomic indicators, what two things need to occur at the same time?
an increase in both AD and LRAS
What will maximise the effect of the multiplier?
elastic AS, as there is lots of spare capacity, so there can be a large rise in output
If AS increases, what happens to the macroeconomic indicators?
they all improve: increased output = economic growth more jobs = lower unemployment price level will fall = lower inflation more competitive economy = improve the balance of payments
How does Keynesian AS curve affect the effects of any shifts?
the curve is L shaped so price level or output will change differently
