Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

econs > Business Cycle and AE model > Flashcards

Business Cycle and AE model Flashcards

1
Q

What is the Business Cycle?

A

a macroeconomic model which illustrates the pattern of economic activity overtime

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Three economic indicators and describe?

A

Leading: considered to point toward future events eg share prices, housing
Co incident: occurs in real time, snapshot of current state of economy eg GDP, ue rates
Lagging: confirm or validate past economic trends, eg personal income, retail sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What two trends does the business cycle identify in econ activity?

A
  • the economy experiences long term growth over time. this is indicated by the positive slope of the long -term growth trend
  • the pattern of the economy is cyclical in nature as the model illustrates four phases
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the four phases of the business cycle?

A

Expansion
Peak
Contraction
Trough

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

7 Characteristics of expansion phase

A
  • increase in labour/wages
  • increase in consumer spending
  • 3 aggregates increases
  • econ growth increases (rising GDP)
  • cyclical UE decreases -> structural UE increases
  • demand pull inflation increases
  • IR increase
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

8 Characteristics of contraction phase

A
  • three aggregates decrease
  • economic growth decreases (falling GDP)
  • cyclical UE increases
  • demand pull inflation decreases
  • IR decreases
  • less demand = less prod of g/s
  • productive input falls
  • h/h income falls - spending falls
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

6 Characteristics of trough phase

A
  • marks start of new growth period
  • three agreggates reach its lowest point ie bottoming out
  • economic growth reaches its lowest point (real GDP)
  • cyclical ue is high
  • demand pull inflation increases
  • IR is low
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

5 Characteristics of peak phase

A
  • three agreggates reach its lowest point ie bottoming out
    -econ growth reaches its highest point(high GDP)
  • cyclical ue is low- structural ue is high
  • demand pull inflation increases
  • IR are high
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

5 Recent economic cycles in aus economy in 2014-19

A
  • slow growth
  • low inflation
  • UE fell from 6.2% in 2014 to 5.1% in 2019
  • low wage growth
  • mining investment down
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

7 Recent economic cycles in aus economy in 2020-22

A

due to pandemic:
- supply chain interruptions
- businesses shut down
- fall in consumption; increase in savings rate
- ukraine war increased econ uncertainty
- flooding in east aus
- rapid rise In inflation 2022- due to higher prices for food and energy
- upward pressure on IR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

2 Recent economic cycles in aus economy in 2023-25

A
  • inflation should moderate
  • demand for commodity may prevent downturn in aus
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

2 Causes of business cycle flunctuations

A

Endogenous cycles: they have an internal cause
- therefore some types of spending In the economy are likely to rise and fall themselves overtime

Exogenous cycles: outside influence
can be;
- positive(increase in econ aactiivty) eg mining boom
- negative (decrease in econ activity) eg covid 19 pandemic
- random (occurs spontaneously) eg natural disasters/supply shocks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is Aggregate expenditure?

A

is the sum of all expenditure on final goods and services undertaken in the economy during a specific time period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the 4 major components of AE

A
  • consumption expenditure
  • private sector investment
  • government expenditure
  • net exports
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How much does consumption expenditue account for and what it consists of

A
  • largest component of AE (53%)
  • consists of:
  • expenditure on non-durable goods
  • expenditure on durable goods
  • expenditure on services
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is expenditure on non-durable goods, examples, and how much it accounts for

A
  • consumed shortly after purchase
  • eg food,drink,fuel,clothing
  • could be regarded as essential spending
  • accounting for abt 35% of total consumption expenditure
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is expenditure on durable goods, examples and how much it accounts for

A
  • last a longer period of time
  • eg white goods(fridges,ovens), furniture, motor vehicles
  • often discretionary spending (can be postponed or brought forward)
  • accounts for 15% of consumption exp
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is expenditure on services, examples and how much it accounts for

A

-intangible and provide transitory satisfaction of want
- eg education, transport, health
- accounts for 50% of consumption exp
- some essential, some discretionary

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is private sector investment, how much does it account for and what it consists of

A
  • spending on new captial goods and additions to inventories
  • spending in national accounts
  • accounts for 18% of ae
  • consists of:
  • business investment: privately funded business spending on capital goods used in production - equipment , machinery, buildings
  • housing investment: private expenditure on new hosuin
  • inventories - unsold goods, sometimes described as ‘stock’
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is the government expenditure, how much it accounts for what what is it made up of, examples

A

accounts for 27% of ae
made up of:
- current spending (G1)
- finances business of govt,
-eg wages, salaries, purchasing g/s

  • capital spending (G2)
  • spending on public infrastructure such as power, and water supply, school, roads
  • provide for future needs
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What are net exports, how much it account for

A
  • exports of overseas purhcasing aus g/s adds to ae,
  • imports are a withdrawal from circular flow of income, reducing ae
  • often accounts for negative % of ae
  • recent years, up to 6% of GDP(Ae) due to less demand for imports(covid)
22
Q

What is the Keynesian aggregate expenditure model

A

illustrates the relationship between AE, AO, AY (AO=AY) this refers to the concept of macroeconomic equilibrium where AO = AY=AE

23
Q

7 characteristics when AE >AO, AY

A
  • spending is greater than output
  • stock rundown
  • increase in production (AE)
  • increase in demand for resources, including labour ( decrease in cyclical UE)
  • increase in income
  • increase in spending
  • econ expands and will continue to so until AE = AO = AY and the economy is at equilirbium
24
Q

6 characteristics when AE<AO,AY

A
  • spending is less than outpiut
  • stock buildup
  • decrease in prod (AE)
  • decrease in demand for resources, including labour ( increase in cyclical UE)
  • decrease in income, spending
  • econ contracts and will continue to so until AE = AO = AY and the economy is at equilirbium
25
Q

What is the AE model - 6 characterics

A
  • AE is the key determinant in the level of econ activity
  • 45 line represents Ao (=AY) - a point crosses the 45 line at equilibrium
  • AE line above zero due to survival spending
  • the ae line positively sloped as spending increases as income increases
  • economy is EQ, when the ae line intersects 45 line (AO)
  • demand model only
26
Q

What is consumption function? and equation

A
  • illustrates the amount of consumption spending at each level of income
    C=a+bY
27
Q

What is autonomous consumption?

A

'’a’’
- the amount of spending when y = 0, represents survival spending

28
Q

What is marginal propensity to consume(MPC) and equation?

A

'’b’’
- the amount of spending from every additional dollar earned
-change in C/ change in Y

29
Q

What is savings function and equation?

A

illustrates the amount of savings at each level of income
- S = a + bY

30
Q

What is autonomous savings?

A

'’a’’
- the amount of saving when y = 0

31
Q

what is marginal propensity to save (MPS) and equation

A
  • amount of saving from every additional dollar earned
  • change in S/ change in Y
32
Q

What is autonomous investment

A

unaffected by changes in the level of income

33
Q

equation for income equilibrium

A

a(Auto C+I)/1-b

34
Q

finding equilibrium in table

A

when Y,O = C+I(AE)
- S=I, leakages = injections

35
Q

Adding savings to AE model

A
  • savings line below zero
  • Goes through point of x- axis where C line intersects with 45 line, and through point on Investment line where C+I line interests 45 line
36
Q

adding C + investment to AE model

A
  • C+I(AE) line above C line the same amount I line above zero
  • Equilibirum is where C+I meets 45 line
37
Q

AE model - government sector

A
  • govt expenditure -> autonomous
  • therefore, it is unaffected by changes in income
  • Taxation -> positively sloped, it will increase as income increases
38
Q

MPT and equation

A

Marginal propensity to tax
- the amount of tax from every additional dollar earned
- change in T/change in Y

39
Q

AE model - overseas sector

A
  • exports -> autonomous
  • unaffecting by changes in income
  • Imports -> positively sloped
40
Q

MPM equation

A

Marginal propensity to import
- the amount of imports from every additional dollar earned
- change in M/ change in Y

41
Q

5 charactertics when Increase in AE

A
  • the AE model can illustrate the effect of changes in AE on the economy
  • an increase in aggregate expenditure from AE to AE1 causes economy to be a disequilibrium where AE exceeds AO
  • this creates a stock rundown which causes an increase in production which increases the demand for resources and therefore increasing income
  • the economy continues to expand until it reaches a higher equilibrium level of income at YE1
  • AE increases to AE 1, YE increases to YE1
42
Q

4 characterics when Decrease in AE

A
  • a decrease in AE from AE to AE1 causes the economy to be at disequilibrium where AO exceeds AE
  • creates stock buildup which causes decrease in production which decrease the demand for resources and therefore decrease in income
  • economy continues to contract until it reaches a lower equilibrium level of income at YE1
  • AE decreases to AE1, YE decreases to YE1
43
Q

Relationship between The MPC and the slope of AE - 4

A
  • the size of the MPC will affect the slope of AE, which will then impact he lvl of economic activity in the economy
  • the more steep the AE line, the higher the MPC level of income
  • the slope of the AE is determined by the MPC
  • a more steep AE will determine a higher equilibrium level of income
44
Q

What is the multiplier effect?

A
  • describes how an autonomous change in a component of aggregate expenditure will result in a greater change (multiple effect) in aggregate income and therefore economic activity
  • due to the portion of extra income that is spent which generates further changes in aggregate income,
  • '’one mans spending is another mans income’’
45
Q

What is postive vs negative multiplier

A

positive multiple -> component on AE increases
negative multiple -> component of AE decreases

46
Q

Simple vs complex multiplier

A
  • simple multiplier (3 sectors)
  • complex multipliers (5 sectors)
47
Q

What are the 4 types of multiplier effect?

A
  • investment multiple (change in I)
  • govt multiple ( change in G)
    -trade multiple (change in X-M)
  • consumption multipier (change in C)
48
Q

How to calculate the size of the multiplier

A

k=1/1-MPC

49
Q

Explaining the mupltiplier process on AE model- positive investment multiplier -7

A
  • ae model ilustrates the multipleir process for an autonomous increase in I
  • the increase in investment caused AE to shift from AE to AE+, ‘‘ab’’
  • the increase in I led to an increase in AY shown at ‘‘bc’’
  • increase in Y leads to induced C as a portion of the extra Y is spent, shown at ‘‘cd’’
  • the extra Y spent generates urhter increase in Y shown at ‘‘de’’ as one mans spending is another mans income
  • multiplier process continues to increase both Y and C until it reaches a higher EQ lvl of Y, output at YE1
  • initial increase in I led toa multiplier effect on AY as YE increase by a greater amount (YE-YE1) than the total increase (AE TO AE+)
50
Q

THE RELATIONSHIP BETWEEN THE SIZE OF THE MULTIPLIER AND THE MPC. -3

A

-The size of the multiplier effect is determined by the size of the MPC
- Therefore, the higher the MPC the greater the multiplier effect.
- This is because a greater portion of extra income is spent generating further increases in income.

econs (6 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions