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Economics > Ch 7- Macroeconomic Activity > Flashcards

Ch 7- Macroeconomic Activity Flashcards

0
Q

What happens if aggregate demand is too high relative to aggregate supply?

A

If aggregate demand is too high (relative to aggregate supply), then problems such as inflation occur
Because the amount of people want to spend exceeds the amount of goods and services that can be produced.

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1
Q

Define aggregate demand

A

The total amount of spending in the economy by consumers, firms, the government and overseas sectors.

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3
Q

What are the factors affecting consumption? (5)

A

THE FACTORS AFFECTING CONSUMPTION

  • expectations
  • levels of disposable income (Yd)
  • the cost of credit
  • stock of personal wealth
  • government policies
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4
Q

What are the factors affecting investment? (4)

A

FACTORS AFFECTING INVESTMENT

  • interest rates
  • government policy
  • profitability
  • business expectations
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5
Q

What are the factors affecting government expenditure? (2)

A

FACTORS AFFECTING GOVERNMENT EXPENDITURE

  • prevailing economic conditions
  • cyclical fluctuations
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6
Q

What are the factors affecting net exports? (5)

A

FACTORS AFFECTING NET EXPORTS

  • exchange rates
  • domestic economic performance
  • international economic performance
  • government policies
  • terms of trade
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7
Q

What happens if aggregate demand is low relative to aggregate supply?

A

Society faces slow growth and unemployment.

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9
Q

What are the assumptions of a simple circular flow model?

A

ASSUMPTIONS OF SIMPLE CFM

  • there are only two sectors
  • households spend all income (no saving)
  • no government sector
  • no overseas trade
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10
Q

What are the two types of flows in the simple CFM?

A

REAL FLOW- goods, services and resources

MONEY FLOW- flow of spending and income

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11
Q

What is the factor market?

A

The factor market is the buying and selling of the factors of production or resources.

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12
Q

What is the product market?

A

The product market is the buying and selling of goods and services.

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13
Q

Defines savings

A

Savings is the portion of income not spent on goods and services for current consumption.

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14
Q

Define investment

A

The expenditure on goods and services which are not intended for current consumption.

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15
Q

Define leakages

A

Leakages reduce the flow of money between households and firms

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16
Q

Define expenditure

A

The amount of money spent

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17
Q

What happens when macroeconomic equilibrium occurs?

Ch 7

A

Equilibrium means that the macroeconomic system is in balance.

When the some of output equals the sum of income which must in turn equal the sum of expenditure

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18
Q

What happens when leakages exceed injections?

A
  • economy shrinks
  • total spending is less than output (overproduction)
  • Firms cut production
  • Households receive less income.

(Producer output and household income will fall)

19
Q

What happens when injections exceed leakages?

A

-the economy expands, causing the level of income to increase.
- spending is greater than output (underproduction)
-Firms will react by increasing production.
- incomes paid to households would rise.
(Producer output and household income will increase)

20
Q

What is the relationship between output, income and expenditure in the circular flow?

A

The value of output produced by firms must equals the value of income paid to resource owners, which must equal the value of spending by households to produce output.

[sum of] O = [sum of] Y = [sum of] E

21
Q

What does Y = C + L mean

A

Output equals to the sum of consumption and leakages

22
Q

How to calculate GDP (aggregate expenditure)

A

AE= C + I + G + ( X - M )

23
Q

Define leakage

A

Money leaving the circular flow

24
Q

Define injection

A

Money entering the circular flow

25
Q

Why does expectations affect consumption?

A

Affects purchase of consumer durables

26
Q

Why does cost of credit affect consumption?

A

Cheap credit = more consumption

- lower interest rates mean loan repayments lower

27
Q

Why does the levels of disposable income affect consumption?

A

Because more income = more consumption

28
Q

Why does the stock of wealth affect Consumption?

A

Because high stock of personal wealth increases consumer confidence

29
Q

Why does interest rates affect investment?

A

Lower interest rates means loan repayments are lower = increased investment

30
Q

Why does government policy affect investment?

A

Levels of taxation on profits, government incentives (subsidies, tax protection, etc.)

31
Q

Why does business expectations affect investment?

A

If expectations are positive, investment will increase

32
Q

Why does prevailing economic conditions affect government expenditure?

A

Poor economic performance leads to greater need for welfare

33
Q

Why does exchange rates affect net exports?

A

When AUD appreciates it makes exports more expensive and imports cheaper

34
Q

Why does domestic economic performance affect net exports?

A

Because changes in levels of output affects the price of exports and if our economy doing badly, decrease in demand for imports

35
Q

Why does cyclical fluctuations affect government expenditure?

A

This is when the government makes discretionary changes in taxation and spending.

36
Q

Why does government policies affect net exports ?

A

Government policies affect exports because of tariffs (taxes on imports and exports) and quotas make it more expensive to export as well as import

37
Q

Why does international economic performance affect net exports?

A

International economic performance affects demand for our exports and our demand for imports

38
Q

Why does terms of trade affect net exports?

A

If Australian productions are in demand overseas, the terms of trade rises and process improve, meaning the value of exports rise.

39
Q

What is terms of trade?

A

Ratio of an index of country’s export prices to an index of its import prices.

40
Q

What are the characteristics of a boom?

A

BOOM

  • high level of consumption
  • high expectations
  • high level of imports
  • Inflationary pressure
  • low unemployment
41
Q

What is the equation for aggregate expenditure?

A

AE = C + I + G + ( X + M )

44
Q

What are the macroeconomic goals? (4)

A

MACROECONOMIC GOALS

  • growth (3-5%)
  • inflation (2-3%)
  • unemployment low
  • balance of payment

Economics (7 decks)

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