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A-Level Economics Year 1 > Circular flow, AD, AS- MM > Flashcards

Circular flow, AD, AS- MM Flashcards

1
Q

What does the circular flow of income & spending show?

A

The connections between the different sectors of the economy & the flow of goods, services & FOP between firms and households

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2
Q

What are the two types of flow?

A

1) Physical flow
2) Monetary flow

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3
Q

What is physical flow?

A

The movement of goods, services & labour

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4
Q

What is monetary flow?

A

The movement of money in return for the physical flow

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5
Q

In the real world, what 2 things do dealings with other countries cause to the circularity flow?

A

1) Outside injections into the economy
2) Leakages from the circular flow

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6
Q

What are 3 ways to measure national income?

A

1) The expenditure method
2) The income method
3) The output method

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7
Q

What is the expenditure method?

A

Adding up all expenditures spent on goods & services during a year by economic agents

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8
Q

What is the income method?

A

Adding up all the income for the FOP & income for self-employed people

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9
Q

What is the output method?

A

Subtracting inputs/payments made to the FOP of an industry from the industry’s output

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10
Q

What is the relationship between national income, national expenditure and national output?

A

They are all equal to each other

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11
Q

What is aggregate demand (AD)?

A

The total value/demand of every good and service demanded in an economy over a period of time

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12
Q

What is PL?

A

Price level, the overall level of prices in an economy

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13
Q

What relationship do PL and overall demand have?

A

Inverse relationship

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14
Q

What does an aggregate demand curve look like?

A

Slope downwards from left to right

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15
Q

What does Y stand for in an aggregate demand diagram?

A

Real income or Real GDP

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16
Q

What are the labels on an AD/AS diagram?

A

Curve down= AD
Curve diagonally up= SRAS
Curve straight up= LRAS
Y-axis= PL
X-axis= Y (Real GDP)

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17
Q

What relationship do PL and AD have?

A

An inverse/ negative relationship. One up, other down. One down, other up.

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18
Q

What is an overall increase in price level also known as?

A

Inflation

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19
Q

What are the 5 components of AD?

A

1) Consumption (C)
2) Investment (I)
3) Government expenditure(G)
4) Exports (X)
5) Imports (M)

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20
Q

What is Consumption (comp. of AD)?

A

Biggest component- total spending on goods and services by households- 60-65% of AD

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21
Q

What is investment (comp. of AD)?

A

Any addition to capital stock of economy- spending by private sector businesses, most volatile (collapses & accelerates)- 15-20% of AD

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22
Q

What is government expenditure (comp. of AD)?

A

All government spending on goods and services needed by the country, and may benefit the country in the future- doesn’t include benefits- 20-25% of AD

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23
Q

What is exports (comp. of AD)?

A

Goods and services produced in this country and are demanded by economic agents in other countries- add value to AD

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24
Q

What is imports (comp. of AD)?

A

Goods & services produced by other countries but are demanded by economic agents in this country- negative, drain AD

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25
Q

What is the equation for AD?

A

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

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26
Q

What are 3 types of leakage that take value away from AD?

A

1) Imports (M)
2) Savings (S)
3) Taxation (T)

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27
Q

What result does (X-M) usually have and why?

A

A negative number as M is usually higher than X

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28
Q

What 2 factors affect investment?

A

1) Interest rates- IR up, I down
2) Uncertainty

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29
Q

What 2 things is the output method also known as?

A

1) Value-added method
2) Production method

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30
Q

In what type of economy 1) are there 2) no leakages or injections in its circular flow?

A

1) Real world economy
2) Closed economy

31
Q

In a circular flow, what 2 things flow from households to firms?

A

1) Consumer expenditure
2) Factors of production

32
Q

In a circular flow, what 2 things flow from firms to households?

A

1) Goods & services
2) Wages, rent & dividends

33
Q

In a circular flow, where do 1) leakages go from and 2) injections go to?

A

1) Households
2) Firms

34
Q

What 5 factors might shift AD to the right?

A

1) Increase in C
2) Increase in I
3) Increase in G
4) Increase in X
5) A decrease in M

35
Q

What 5 factors might shift AD to the left?

A

1) Decrease in C
2) Decrease in I
3) Decrease in G
4) Decrease in X
5) Increase in M

36
Q

What 2 leakages may shift AD to the right?

A

1) Decrease in S
2) Decrease in T

37
Q

What 2 leakages may shift AD to the left?

A

1) Increase in S
2) Increase in T

38
Q

What does the size of how much an increase in RDI (Y) will increase C depend on?

A

Leakages

39
Q

What other 2 things can affect how much a change in RDI changes C/I?

A

1) Expectations
2) Consumer/Business confidence

40
Q

How does consumer/business confidence influence C/I?

A

Confidence=Spending, Unconfident=Save

41
Q

What does business confidence affect?

A

Investment (I)

42
Q

What does consumer confidence affect?

A

Consumption (C)

43
Q

What is Aggregate Supply (AS)?

A

The total value of goods and services produced in an economy

44
Q

What method of measuring national income does AD represent/ equal?

A

The expenditure method/ National expenditure

45
Q

What method of measuring national income does AS represent/ equal?

A

The output method/ National output

46
Q

What does an AS curve look like?

A

Upwards sloping left to right

47
Q

What does a SRAS curve look like?

A

Upwards sloping left to right

48
Q

What does an LRAS curve look like?

A

Vertical- perfectly inelastic curve

49
Q

What is LRAS of an economy dictated by?

A

The capacity of the economy

50
Q

What is the capacity of an economy determined by?

A

The quantity/ quality of the FOP available within the economy- assumed to be fixed

51
Q

What is the point where LRAS meets the x-axis called?

A

Y’FE- (FE smaller than Y)

52
Q

What does Y’FE represent?

A

Full employment level of national output at a sustainable level- where all FOP are being fully utilised

53
Q

How can LRAS also be represented?

A

A PPC diagram

54
Q

What will a change in PL do on an AS curve?

A

Increase= Extend
Decrease= Contract

55
Q

What causes a shift in the AS curve?

A

Change in determinants of AS

56
Q

What determines the position of SRAS?

A

Costs of production in the economy for all firms- higher costs e.g. inflation

57
Q

What are 5 examples of costs of production that effect all firms?

A

1) Wages
2) Raw materials/ commodity prices
3) Oil price
4) Business taxes (VAT)
5) Import prices (SPICED)- exchange rate dependent

58
Q

What is the impact of costs of production to the economy?

A

Shocks- can change quickly

59
Q

Why is LRAS vertical?

A

It represents 1 level of output the economy will always produce at in the long run

60
Q

What 2 factors cause shifts in LRAS?

A

1) Q2CELL- Quantity & quality of FOP (CELL)
2) Productive efficiency

61
Q

What 6 things of Q2CELL & productive efficiency cause a shift right in LRAS?

A

1) ↑ Labour productivity
2) ↑ Investment- Spending on capital goods
3) ↑ Infrastructure- efficiency
4) ↑ Quantity of labour- immigration/ incentives
5) ↑ Competition- firms reduce costs
6) New resource discoveries
INCREASE IN Q&Q OF FOP

62
Q

What 5 things of Q2CELL & productive efficiency cause a shift left in LRAS?

A

1) ↓ Labour productivity
2) Capital depreciation
3) War, conflict, natural disaster- Death/ destroyed infrastructure
4) Health crisis- ↓ productivity
5) Emmigration
DECREASE IN Q&Q OF FOP

63
Q

What do we assume when using AS or AD?

A

Ceterus Paribus

64
Q

What do we assume for AD?

A

The amount of money circulating the economy remains unchanged

65
Q

What do we assume for SRAS?

A

Firms are able to increase their output without increasing costs

66
Q

When is the economy in equilibrium for AS & AD?

A

When AS=AD

67
Q

Why might the LRAS curve be to the right of equilibrium?

A

Lots of FOP unemployed

68
Q

Why might the LRAS curve be to the left of the equilibrium?

A

Economy is over-extended & FOP are being overused (unsustainable)

69
Q

What is the best position for the economy?

A

AD=SRAS=LRAS

70
Q

An increase in what is most beneficial for economic growth?

A

Aggregate supply

71
Q

How do you calculate unemployment?

A

Y’FE-Yn

72
Q

Why are changes in AS more sustainable than AD?

A

↑ AS reduces PL, ↑ AD increases PL

73
Q

What is inflation?

A

A sustained increase in PL

A-Level Economics Year 1 (10 decks)

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