BEC Macroeconomics Flashcards
Economic activity of an entire economy (nation or region).
Macroeconomics
Free-flow model in macroeconomics considers:
Individuals Businesses Government Financial sector Foreign section (imports/exports)
Amount of individual income that are not spent on domestic consumption.
Leakages (taxes, savings, imports)
Amounts of expenditures not for domestic consumption added to the domestic production.
Injections (gov spending/subsidies, investment expenses, exports)
Aggregate spending/demand curve (AD)
Demand measures the total consumer spending, business investments, gov entities, and net foreign spending on exports. Negatively sloped curve.
Consumer (consumption) spending (CS)
70% of total aggregate demand, personal income and income taxes are most important determinants
Consumption function (CF)
Relationship between consumption spending and disposable income (DI)
When CF=CS=DI, then
Consumers are spending all of their DI, when consumers are not spending all their income, DI over CS is consumer savings.
Average propensity to consume (APC)
% of disposable income spend on consumption goods (CS/DI)
Average propensity to save (APS)
% of disposable income saved (S/DI)
Marginal propensity to consume (MPC)
Change in consumption as a % of change in disposable income (change in CS/change in DI)
Marginal propensity to save (MPS)
Change in savings as a % of change in disposable income (change in S/change in DI)
Investment spending most dependent on:
Interest rate, higher interest rates associated with lower levels of spending, considered most volatile component of aggregate spending
Intentional changes by gov in tax receipts or spending, which are implemented in order to increase or decrease aggregate demand.
Discretionary fiscal policy
To increase aggregate demand:
- Increase government spending
- Decrease taxes
- Increase transfer payments (ex. SS, unemployment)
When net exports are positive (exports greater than imports)
Aggregate demand is increased, for past 20 years, US has been net IMPORT country (aggregate demand is decreased)
Factors that determine country’s level of imports/exports:
- Relative level of income/wealth= more imports
- Relative value of currency- weaker currency stimulates exports
- Relative price levels
- Restrictions and tariffs
- Relative inflationary rates- higher=higher cost of input=less exports because they cost more
Aggregate demand can shift due to the following (curve shifts, so all are factors other than price):
- Personal taxes
- Consumer confidence
- Technological advances
- Corporate taxes
- Interest rates
- Government spending
- Exchange rates/net exports
- Wealth changes
Multiplier effect
Cascading effect on demand where a single factor that causes change in aggregate demand will have multiplied affect on aggregate demand.
Initial change in spending x (1/(1-MPC))
If the conventional supply curve shifts left, there will be less supply and the price will…
Increase
Three types of supply curves:
- Classical (vertical)
- Keynesian (kink where full employment occurs)
- Conventional (upward slope where full employment occurs)
Factors that change position of supply curve:
- Resource availability- increase in economic resources= curve shifts right (more output @ same or less cost)
- Resource cost- decrease in cost, moves curve to the R
- Technological advances- increased efficiency shifts the curve to the R
An increase in the value of Chinese currency relative to US dollar would most likely cause:
Increased aggregate demand in US (fewer goods bought from China, more goods bought in US, US goods would be less expensive in China)
Aggregate demand and supply curves intersect at price and quantity that are:
Either at, above or below potential GDP (potential GDP is max amt of goods/services economy can produce), the curves intersect at actual output of economy, which can vary from potential GDP