Chapter 10 Flashcards
Difference between level and rate of change
Level- current
Rate of change- Change per year
The three ways of measuring flow of new output in an economy
Income approach: sums the factor income recieved (national income)
Output approach: Summing totals of actual goods and services produced by an economy
Expenditure approach: How factor incomes such as wage and profits are spent on goods and services (C+I+G(X-M))
How is GDP measured
Output approach , flow of new output
Draw the circular flow of income , open economy
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Define withdrawal and injection
Withdrawal:
- Savings
- Taxation
- Imports
Injection:
- Gov spending
- Investment
- Exports
What is meant by equilibrium of national income
Where injections equal leakages
Define full employment income
Level of income when the economy is producing on its PPF
When will output and income rise
When withdrawal is less than injection
Define AD
Total planned spending on real output in the economy
Define reflationary policies
Policies to increase AD and increase real output and employment
Define AS
Level of real national output that producers are prepared to supply
What is the equation of AD
C+I+G(X-M) Consumption Investment Gov spending X exports M imports
Draw aggregate demand
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Draw aggregate supply
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Why is AS upwards sloping
Firms aim to profit maximise
Cost of producing extra units of output increases firms produce more output
What happens to national income when AD and AS shift
The level changes,
More AD means more national income
Less AD means less national income
What does LRAS show
Real output supplied when an economy is on its PPF, all factors of production are employed
Draw LRAS
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How does LRAS move
When PPF moves outwards
When is there equilibrium in national income
Withdrawals=injections
AS=AD
Define economic shock
When an unexpected event hits the economy (supply or demand side)
Determinants of consumption (part of AD)
- Interest rates (saving or consuming)
- Level of income
- Expected future income (planning to save or spend)
- Wealth- stock of it influences consumption
- Consumer confidence
- Availability of credit (how easy it is to borrow money)
- Distribution of income (rich vs poor)
- Expectancy of future inflation (fear of rising inflation increases saving)
Determinants of saving
Decision by people to postpone consumption
Difference between saving and investment
Saving: income not spent on consumption
Investment: Physical (capital) and financial
Two parts of country’s gross investments
- Replacing capital
- Buying new capital
Factors that influence investment
- Price of labour vs capital
- Technical progress
What is the accelerator process
Change in the level of investment in new capital goods induced by change in national income or output
What is the national income multiplies
Measures the relationship between an initial change in a component of AD and how there is a larger change in level of national income
How is multiplier measured
Change in national income/initial change in AD
Draw the national income multiplier
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Define marginal propensity to save and consume
Up to 1
Fraction of any increase in income of which people plan to save or spend
Why might SRAS move rightward
- Fall in cost of production
- Fall in unit labour cost
- Reduction in indirect taxes
- Subsidies
- Technical progress
Why might LRAS shift
- State of technical progress
- Mobility of labour
- People’s attitude less
- Quantities of factors
Explain the Keynesian LRAS curve
Low levels of output and employment there is still spare capacity in the economy so firms can still increase output without increasing cost per unit
Draw Keynesian LRAS
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