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A Level Economics (MACRO) > Aggregate Demand and Aggregate Supply > Flashcards

Aggregate Demand and Aggregate Supply Flashcards

1
Q

What is the circular flow of income

A

A model that describes the relationships between the total flow of income output and expenditures in an economy

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2
Q

What is a leakage and what are the three types of?

A

A leakage is when money flows out of the circular flow of income.
Savings Taxes and Imports

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3
Q

What is an injection and what are three types of?

A

An injection is when money flows into the circular flow of income.
Investment Government and Exports

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4
Q

What are the main assumptions of the circular flow of income?

A
  • households and firms spend all of their revenue and income and don’t save
  • closed economy (no foreign trade)
  • no government ( no taxes)
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5
Q

What are the three ways of measuring GDP?

A

Expenditure Method
Income Method
Output Method
O=E=Y

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6
Q

What is the expenditure method of measuring GDP?

A

The expenditure method measures the total expenditure on a country’s goods and services in a year using C+I+ G +(X-M)

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7
Q

What is the output method of measuring GDP?

A

The final value of all goods and services produced in an economy in a year

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8
Q

What is the income method of measuring GDP?

A

Adding up all the factor incomes earnt in an economy in a year ( wages, interest, rent and profit)

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9
Q

What is aggregate demand?

A

The total demand for a country’s goods and services at a given price level in a given time period.
(It is a measure of spending not quantities)

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10
Q

What are the components of AD

A

C+I + G+(X-M)
Consumer spending, investment, government spending, exports and imports

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11
Q

What are the 3 effects that link to now changes in price level can effect the components of AD

A

1) wealth effect
2) trade effect
3) interest effect

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12
Q

What is the wealth effect?

A

The wealth effect states that as the price level decreases the purchasing power of income increases
- (people are richer and more likely to spend money on goods and services)

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13
Q

What is the trade effect?

A

The trade effect states that as price level decreases exports become more competitive and imports become less competitive

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14
Q

What is the rate of interest effect

A

High interests rate make it more expensive for people to borrow so demand will decrease

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15
Q

What is consumption?

A

The total spending by households on goods and services in an economy
(Accounts for 66% of AD)

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16
Q

When to use MPC?

A

When writing chains of analysis about the different determinants of consumption

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17
Q

What is the marginal propensity to consume

A

The willingness of a household to spend any extra income that they earn

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18
Q

What are the determinants of consumption

A

1)level of real disposable income
2) interest rates
3) consumer confidence
4) asset prices
5) household indebtedness

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19
Q

What affects consumer confidence?

A

Job prospects and level of unemployment

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20
Q

What is the consumption function?

A

The relationship between consumer expenditure and disposable income

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21
Q

What 7 things influence how much households spend

A

Real disposable income
Wealth
Consumer confidence
Rate of interest
Age structure of pop
Distribution of income
Inflation

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22
Q

What is investment

A

Spending by firms on capital goods or any man made aid to production which adds to capital stock

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23
Q

What is gross investment

A

Total capital spending

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24
Q

What is net investment

A

Total capital spending - capital consumption ( replacement investment )

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25
Q

Benefits of investment

A

Leads to an increase in the productive capacity by inc level of capital stock

26
Q

Influences on investment

A

Rate of interest - low rates means cheaper to borrow and invest
Current profit levels
Expectations
Changes in real disposable income
Advances in technology

27
Q

Influences on government spending

A

Level of market failure
Level of economic activity
Gov spending is mainly autonomous

28
Q

What are imports

A

The purchase of goods and services from abroad that leads to an outflow of currency from the uk

29
Q

What are exports

A

The sale of goods and services to buyers from other countries leading to an inflow of currency to the uk

30
Q

Factors that influence the level of imports and exports

A

Real disposable income at home
Real disposable income abroad
Domestic price level relative to price level abroad - high inflation means exports fall imports rise
Exchange rate - stronger pound means cheaper imports
Gov restrictions on free trade - tariffs

31
Q

What is aggregate supply

A

The total amount the producers in an economy are willing and able to produce at a given price level at a given time period

32
Q

What does total quantity supplied in an economy depend on?

A

The quantities of inputs of factors of production

33
Q

What is short run aggregate supply

A

When the prices of the factors of production are assumed not to be changing
- refers to the total production of goods and services available in an economy at different price levels while some production factors and resources are fixed

34
Q

What factors shift the SRAS curve

A

Change in costs
Taxes

35
Q

What is supply side shock

A

A large change in raw material costs , wage rates , taxation that can have a significant impact on SRAS

36
Q

What is supply side shock

A

A large change in raw material costs , wage rates , taxation that can have a significant impact on SRAS

37
Q

Examples of external supply shocks

A

World oil and gas prices
Energy prices
Foodstuff prices
Import tariffs

38
Q

What is LRAS

A

All factors of production are variable
- determined by all factors of production
- represents the total possible level of real output

39
Q

What is the neo-classical / monetarist view of LRAS

A

STRAIGHT LINE
- the economy would always find its way to overall equilibrium which corresponds to a situation in which the economy is at full employment
- the LRAS is not sensitive to changes in the price level

40
Q

What is the Keynesian view of the LRAS

A
  • macroeconomy is not sufficiently flexible enough to enable continuous full employment
41
Q

What causes a shift in the LRAS curve ?

A

A change in the quality or quantity of factors of production over time
- these changes bring about changes in the productive potential of the economy

42
Q

What would increase quantity of each factor of production

A

Labour - increase in size of workforce due to migration
Land -
Capital - level of investment,
Enterprise -

43
Q

What is macroeconomic equilibrium

A

A state of national economic activity wherein aggregate demand is equal to aggregate supply

44
Q

What are assumptions of the Keynesian model

A
  • wages are sticky downwards amid workers will not readily and quickly accept pay cuts
  • therefore recession in the long run can be caused by insufficient AD
45
Q

Assumptions of the classical model

A

All markers are competitive
The economy will always quickly adjust to equilibrium
Owners of factors of production will act rationally

46
Q

What the is the National income - multiplier

A

The process by which any change in a component of AD results in a greater final change in real GDP

47
Q

Outline a key multiplier example

A
  • gov increase spending by 1billion for new homes
  • generate income for households
  • builders will spend some of this extra income earned
  • this spent income generates income for shopkeepers
    Therefore original increase in gov slenjmg sparks off further income generation and spending
48
Q

Side of mulitplier effect depends on…..

A

How much additional income is saved, returned through taxes and spent on imports

49
Q

Calculation for average propensity to save

A

S/Y

50
Q

Calculation for APT

A

T/Y

51
Q

Calaculation for APM

A

M/Y

52
Q

Calculation for APW

A

W/Y

53
Q

Calculation for APW

A

W/Y

54
Q

Calculation for MPC

A

change in C / change in Y

55
Q

Calculation for MPC

A

change in C / change in Y

56
Q

Calculation for MPW

A

change in W/ change in Y

57
Q

What always equals 1.0

A

MPC + MPW

58
Q

Formula for calculating the multiplier

A

K = 1 / MPW ( MPS + MPT + MPM)

59
Q

Formula for calculating the multiplier

A

K = 1 / MPW ( MPS + MPT + MPM)

60
Q

What is the accelerator theory

A

The accelerator effect happens when an increase in national income (GDP) results in a proportionally larger rise in capital investment spending
- higher proportion of investment spending than demand

61
Q

How do the multiplier and accelerator interact

A

A Level Economics (MACRO) (5 decks)

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