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economics a level > chapter 10 flashcards > Flashcards

chapter 10 flashcards

1
Q

what is national income

A

the flow of new output produced by an economy in a time period

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2
Q

what is the difference between real national income and nominal national income

A

nominal national income is the total amount of money the country produces from goods and services in a given period of time, while real income is the nominal income adjusted for inflation.

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3
Q

what are 2 synonyms for national income

A

national output
national expenditure

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4
Q

describe the circular flow of income

A
  • households spend their incomes on the goods and services that firms produce
  • firms pay households for labour in wages
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5
Q

what may happen in a more realistic version of the circular flow of income

A

households may withdraw money by saving and firms may have injections of investment

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6
Q

what type of economy is present in the circular flow of income + describe

A

a closed economy - has no government sector or international trade

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7
Q

what is equilibrium national income
- 2 definitions

A

-the level of income at which withdrawals equal injections into the flow of income
-the level of output at which aggregate demand equals aggregate supply

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8
Q

what causes national income to be in equilibrium, to rise and to fall

A
  • if planned saving equals planned investment, national income is in equilibrium
  • if withdrawals exceed injections, it causes income and output to fall
  • if withdrawals are less than injections, output and income will rise
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9
Q

what is aggregate demand

A

total planned demand of goods and services in the economy at a given time and price level

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10
Q

AD equation

A

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

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11
Q

what is aggregate supply

A

amount of goods and services produced within the economy at a given price level
AND
the level of real national output that producers are prepared to supply at different average price levels

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12
Q

describe an AS curve

A

the AS curve sloped upwards because all firms aim to maximise profits, and when the price of a good increases, firms will buy more of it to sell it at a high price to get more profit

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13
Q

what does the LRAS curve represent

A

the real output that can be supplied when the economy is on its PPF
- when all available factors of production are employed and are producing at their normal capacity

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14
Q

what shifts a PPF, and in which direction

A
  • an increase in the quantity or quality of factors of production such as land, labour or capital shifts the PPF outwards, and the LRAS shifts right
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15
Q

what is an economic shock

A

an unexpected shock hitting the economy, disturbing either AD or AS

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16
Q

what is aggregate consumption

A

spending by all of the households in the economy on consumer goods and services

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17
Q

what are determinants of consumption
(only terms)

A
  • interest rates
  • level of income
  • expected future income
  • wealth
  • the availability of credit
  • distribution of income
  • expectations of future inflation
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18
Q

how do interest rates determine consumption

A

interest rates rewards savers for sacrificing their consumption and the higher rate, the higher reward, and less consumption because of that

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19
Q

how does level of income determine consumption

A

when income increases, consumption increases but not by as much as income is increased by, due to saving

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20
Q

how does expected future income determine consumption

A

people plan their savings on the basis of an idea of their future income

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21
Q

how does wealth determine consumption

A

houses and shares are people’s main wealth asset, so when house prices rise, borrowing increases and consumption is likely to fall

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22
Q

how does the availability of credit determine consumption

A

if credit is cheap and interest rates are low, consumption increases as people use credit as income, however tight monetary policy and high interest rates reduce consumption

23
Q

how does the distribution of income determine consumption

A

the rich save more than the poor, affecting consumption trends

24
Q

how do expectations of future inflation determine consumption

A

uncertainty of rising inflation reduces consumption as people are saving more

25
Q

what are the two things people can do with their income

A

save or consume

26
Q

what is saving

A

the income not spent on consumption

27
Q

what is physical investment

A

buying new capital goods like machinery and office equipment

28
Q

what is financial investment

A

into shares and bonds

29
Q

what is the difference between saving and investment

A

saving is simply income not spent on coonsumption, and investment is spending by firms on capital goods or financial assets

30
Q

what are the two types of a country’s gross investment

A

replacement investment - replacing worn out capital, maintaining the size of capital stock
net investment - adds to the capital stock, increases productive potential, and is an engine of economic growth

31
Q

what are the determinants of investment

A
  • relative prices of capital and labour
  • the nature of technical progress
  • adequacy of financial institutions in supplying investment funds
  • government support
32
Q

how do the relative prices of capital and labour determine investment

A
  • if the price of capital goods or interest rates falls, firms switch to capital intensive methods of production and so investment increases
  • when the price of capital increases, firms adopt more labour-intensive production methods
33
Q

how does the adequacy of financial institutions in supplying investment funds determine investment

A

some capital investments are hard to finance so banks provide long term investment but shares and the stock market offer short term funds

34
Q

how does government support determine investment

A

they lend funds to firms to finance investment projects although they tax firms too

35
Q

describe the accelerator process

A

-The basic accelerator process is an economic theory that states that when there is increased demand for a product or service, companies will invest more money to meet that demand
-This leads to higher production, more jobs, and more income for individuals, which further stimulates demand

36
Q

what must firms do when real output increases (clue-fops)

A

they must employ more workers to produce the additional goods and services that the output increase involves

37
Q

what does an expansionary effect of an increase in aggregate demand do to employment

A

an expansionary effect of an increase in AD leads to an increase in employment

38
Q

what does an contractionary effect of an decrease in aggregate demand do to employment

A

an contractionary effect of an decrease in AD leads to an fall in employment

39
Q

what does the national income multiplier measure

A

measures the relationship between a change in aggregate demand and the resulting larger change in national income

40
Q

equation for national income multiplier

A

multiplier=change in national income/initial change in government spending

41
Q

what is the marginal propensities to consume

A

the fraction of any increase in income which people plan to spend on consumption of domestically produced goods

42
Q

what is the marginal propensity to save

A

the fraction of any increase in income which people plan to save rather than spend

43
Q

what does a fiscal policy multiplier include

A

government spending and tax multipliers

44
Q

what do foreign trade multipliers include

A

export and import multipliers

45
Q

what do regional multipliers include

A

they measure the relationship between an initial change in aggregate demand and the resulting change in regional income

46
Q

what is the multiplier formula

A

K(multiplier) = 1/1-MPC

or K = 1/MPS

47
Q

what is the equation for nominal national income

A

real national income x average price level

48
Q

give examples of things that change the SRAS curve

A

changes in costs (money wage rates, raw materials business tax) and productivity

49
Q

at YFE why can’t Y (real income/output) increase anymore

A

because the economy is producing at its full capacity

50
Q

what are some factors that cause outward shifts in the SRAS curve

A
  • fall in business costs of production (energy, materials)
  • fal in labour costs from a fall in wage costs or increase in productivity (better training)
  • reduction in taxes like VAT from government
  • increase in subsidies granted to firms by the government
  • technical progress which improves quality and productivity of capital foods
51
Q

what does the LRAS curve represent

A

the economy’s productive potential

52
Q

where is the LRAS curve located

A

at the normal capacity of output, where full productive potential of the economy is being used

53
Q

what are some factors that change the position of the LRAS curve

A
  • state of technical progress
  • quantities of capital and labour and other factors of production in the economy
  • mobility and productivity of FOP, especially labour
  • people’s attitudes to hard work
  • people’s enterprise
  • the existence of appropriate economic incentives
  • the institutional structure of the economy, involving factors such as law and efficiency of the banking system
54
Q

real life example showing the inability of banking systems to provide finance + how it relates to LRAS shifts

A

the financial crisis in 2007/8 showed the inability of banking systems to provide finance to business, shifting the LRAS left, deepening the recession

economics a level (9 decks)

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