Aggregate Demand & Supply Flashcards
Explain the circular flow of income
Households provide factors of production, firms give households income in return for this, the income is used to spend money at the firm, the firm gives the households goods and services
What are the injections into the circular flow of income?
Exports
Investment
Government spending
What are the withdrawals into the circular flow of income?
Imports
Savings
Taxes
What is the multiplier effect?
When an injection is made into the circular flow, the actual change of national income is greater than the value of the initial injection
What is aggregate demand?
The total spending on all goods and services in an economy over a period of time
What is the formula for AD?
Consumption + Investment + Government Spending + (Exports - Imports)
What are the main factors that affect consumption and saving?
Income
Interest rates
Consumer confidence
Wealth effects
Taxes
Unemployment
What are the main factors that affect investment by firms?
Risk level
Government incentives & regulation
Interest rates & access to credit
Technical advances
Business confidence (animal spirits)
What are animal spirits?
Factors excluding reason and rational thinking that affect investment decisions. For example, human emotion, intuition, gut instinct
What are factors that affect imports and exports?
Exchange rate
Changes in the state of the world economy
Degree of protectionism
Non price factors
What is the formula for average propensity to consume?
Consumption / Total income
What is the formula for average propensity to save?
Amount saved / Total income
What is marginal propensity to consume?
The proportion of any extra income that’s spent on the consumption of goods & services
What is the formula for marginal propensity to consume?
Change in consumption / Change in income
What is marginal propensity to save?
The proportion of extra income that is saved
What is the formula for marginal propensity to save?
Change in savings / Change in income
What is the formula for the multiplier?
1 / 1 - MPC
What is aggregate supply?
The total output of goods and services that producers in an economy are willing and able to supply at a given price level over a period of time
What is the shape is the SRAS curve if price is inelastic?
It will be steeper
What is the shape is the SRAS curve if price is elastic?
It will be flatter
What shape is the LRAS curve?
Backwards-bending
What causes the SRAS to shift?
Any price related reasons:
Subsides
Changes in production cost
Tax changes
Exchange rate fluctuations
What causes the LRAS to shift?
Technological advancements
Labour force growth
Capital investment
Education and Training
Government policies
Natural resources
