Definitions Flashcards
What is meant by an ‘output gap’?
A measure of the difference between actual and potential growth
What are the two tools of the fiscal policy?
Government spending
Taxation
What are the three tools of the monetary policy?
Interest rates
Government easing
Credit controls
What is the multiplier effect?
-identified by Keynes
Where and initial increase in spending leads to a greater increase in output
The multiplier
The number of times a rise in national incomes exceeds the rise in injections that cause it
Productivity
Is output per unit of input
Standard of living
A measure of welfare of people living in an economy
Circular flow of income
A model of the economy which shows the movement of goods and services between households and firms
Supply side policies
Measures by the government to increase productive capacity of the economy
Examples of supply side policies
Reduction in corporation tax - can produce more cheaper more supply
Improved education
Improved training
Cut benefits - incentive
Reduce income tax - incentive
Infrastructure - reduce industries costs improves access to market
what is an economy?
a system which attempts to resolve the basic economic problem of scarce resources in a world of infinite wants
what is an economic system
a mechanism for deciding what is to be produced, how production is to take place and who is to receive the benefit of that production
define economic growth
the rate of change of output (GDP)
define inflation
the increase in average prices in an economy
define aggregate demand
the total of all demands or expenditures in the economy at any given price
define average propensity to consume
the proportion of a total income spent.
C/Y
define average propensity to save
the proportion of a total income which is saved
S/Y
define consumption
total expenditure by households on goods and services over a period of time
define marginal propensity to consume
the proportion of a change in income which is spent
AC/AY
define marginal propensity to save
the proportion of a change in income which is saved
AS/AY
define the wealth effect
the change in consumption following a change in wealth
define gross investment
the addition to capital stock, both to replace the existing capital stock which has been used up and the creation of additional capital
define investment
the addition to the capital stock of the economy
define net investment
gross investment minus depreciation
define retained profit
profit kept back by a firm for its own use which is not distributed to shareholders or used to pay taxation
define net exports or the net trade balance
exports minus imports
marginal propensity to import (MPI)
increase in imports divided by the increase in income that caused them (AM/AY)
marginal propensity to save (MPS)
increase in saving divided by the increase in income that caused it (AS/AY)
marginal propensity to tax (MPT)
increase in tax revenues divided by the increase in income that caused them (AT/AY)
marginal propensity to withdraw (MPW)
increase in withdrawals from the circular flow (S+T+M) divided by increase in income that caused them (AW/AY)
same as the sum of the marginal propensity to save, tax and import
multiplier or national income multiplier ir keynesian multiplier of real multiplier
the figure used to multiply a change in an injection into the circular flow
such as investment, to find the final change in income
multiplier effect or process
an increase in investment or other injection will lead to an even greater increase in income (assuming the injection is not determined by income)
