Diagrams Flashcards
Circular flow model
Firms buy factors of production, like labour and land, from households. In return, they pay households factor incomes, like wages and rent. Households then spend their factor incomes on firms in exchange for the goods and services!
exchange rate diagram to model currency market
cyclical unemployment.
The AD should start on the vertical part of the LRAS (at full employment). A reduction in demand for goods and services will reduce AD so the AD curve will shift left, output and price level will fall. Demand deficient (or cyclical) unemployment is shown as the gap between Y1 and YFE.
real wage unemployment.
Real wage unemployment is shown when the wage is above the equilibrium, meaning that there is high supply of labour but low demand for it. This creates excess supply of labour, also known as unemployment.
the business cycle
The horizontal axis needs to be labelled with ‘Time’ and the vertical axis with ‘Real GDP’. The highest points show ‘Boom’ and the lowest points show ‘Recession’. The upward sloping part shows ‘Recovery’ and the downward sloping part shows ‘Slump’.
Draw on the diagram to show the likely impact of expansionary monetary policy.
Expansionary monetary policy involves decreasing the base interest rate. This should discourage saving and encourage borrowing, which will decrease the marginal propensity to save and increase the marginal propensity to consume. More consumption and investment will increase AD and shift it out.
The diagram below shows the aggregate supply and demand curves for the UK economy. The economy is currently operating at the equilibrium PLe, Ye.
Draw on the diagram to show the likely impact of a reduction in the interest rate on investment by firms.
Reducing the base interest rate will make it cheaper for firms to borrow. This should encourage investment. Investment is a component of AD and so AD will increase and shift out. Also, the increase in investment will increase the quantity and productivity of the factors of production such as capital. This will shift the LRAS out as shown below.
draw the impact of a government subsidy for university education.
A government subsidy will reduce the cost of production for university education. This will shift the supply curve to the right as shown on the diagram below.
