Economic models Flashcards
What is aggregate demand?
The total demand in an economy, calculated by C + I + G + (X-M)
What is aggregate supply?
The total supply in the economy
What is a boom?
Peak of the economic cycle with high economic growth
What is a bust?
The period of the lowest growth in an economic cycle aka a recession or trough
What is the circular flow of income?
A model showing the flow of money, factors of production and goods/services in the economy
What is consumption?
The use of goods and services
What is a downturn?
Period of economic growth that is positive but is slowing down aka slowdown
What is the economic cycle?
Fluctuations of economic activity over a period of time
What are exports?
Goods sent to another country in exchange for money
What is government spending?
All government expenditure which may be financed by taxes and/or government borrowing
What are imports?
Goods brought into the economy in exchange for money
What is investment?
The aquisition of goods that aren’t consumed in the current period, but are used in the future to produce other goods and services
What is the National income?
Value of income, output or expenditure over a period of time
What is an overheat?
Demand rises too fast and prices rise-the government wil try and correct this
What is a recession?
2 consecutive quarters of negative growth
What is a recovery?
Where GDP starts to rise again after a recession
What are examples of demand-side shocks to the economy?
- Economic downturn in a trading partner
- Unexpected tax increases
- Financial crisis causing bank lending to fall
- Bigger than expected rise in unemployment
What are examples of supply-side shocks to the economy?
- Steep rise in oil and gas prices or other commodities
- Political turmoil/strikes
- Natural disasters causing a sharp fall in production
- Unexpected breakthroughs in production technology
What are the possible causes of a recession?
- External events
- Tightening of macro policy
- Fall in asset prices or supply of credit
- Drop in business and consumer confidence
What are the short term effects of a recession?
- Business profits fall and capital investment declines
- Rising unemployment
- Decline in tax revenues and more welfare spending resulting in an increase in the budget deficit and a rising national debt
- Deflation due to businesses offering price discounts to off-load excess unsold stocks
What are long term economic effects of a recession?
- Rising structural long-term unemployment and regional decline
- Low rates of investment reducing the size of the capital stock
- Persistant budget deficits and a rising national debt leads to austerity
What are the long term social effects of a recession?
- Falling real wages hits average living standards and reduces demand
- Widening inequality of income and wealth leads to rising poverty
- Social costs such as loss of socials cohesion and threats to democracy
What is the aggragate demand formula?
Household spending on goods and services (C) +
Business investment spending (I) +
Government Consumption (G) +
(Exports of Goods and Services (X)-Imports of Goods and services (M))
What causes aggregate demand to fall?
- Fall in exports
- Cut in government spending
- Higher interest rates
- Decling in household wealth
What causes aggregate demand to rise?
- Depreciation of the exchange rate
- Cuts in direct and indirect taxes
- Increase in house prices
- Expansion of supply of credit + lower interest rates
What are external shocks to aggegate demand?
- A large rise or fall in the value of the exchange rate
- A recession, slowdown or boom in one or more of a nation’s key trading partner countries
- A slump in the housing market
- An event that causes a fall in the supply of credit available to businesses and households
- A large change in commodity prices for a county that is a commodity exporter
What are some factors affecting consumer spending (C)
- Real disposable income
- Employment and job security
- Household wealth
- Expectations and sentiment
- Market interest rates
