Circular Flow + AS/AD Flashcards
What does the circular flow of income look like in a closed economy?
Households ‘consume’ into firms.
Firms ‘income’ to households.
What’s an assumption when households spend all of their money?
Income = expednditure
What’re some examples of withdrawals from the circular flow of income?
- Savings
- Taxes
- Imports
What’re some examples of injections from the circular flow of income?
- Investment
- Government expenditure
- Export
When is there equilibrium in national income?
G + I + X = S + T + M
What’s the aggregate demand formula?
C + I + G + (X - M)
Label the business cycle.
- Y axis is - Output
- X axis - Time
- Trend Growth
- Actual Growth
What’s the definition of AD?
Total demand for goods and services produced within the economy over a period of time.
What does each letter of the AD formula stand for?
C - Consumption
I - Investment
G - Government Expenditure
X - Exports
M - Imports
Draw a graph for AD
Y Axis - Price Level
X Axis - Output
Demand line - AD
Draw a graph for AS
Y axis - Price level
X axis - Output
- Supply line (curved upwards) - AS
What’s the definition of AS?
Aggregate supply refers to the total supply of final goods and services produced by companies that they plan to sell at a certain price within a specific time.
Why does AD shift to the left?
If any C I G X M decreases.
Why does AD shift to the right?
If any C I G X M increases.
Why might AS shift to the left?
- Productivity decrease
- Raw material cost increases (oil)
- Rise in labour costs
