Economics Key terms Flashcards
Learn key terms required for understanding and application in the course
What are the 3 Injections?
Government spending (G), Exports (X), Investment(I)
What are the three withdrawals?
Taxation (T), Imports (M), Savings (S)
Factors of Production
Capital, Enterprise, Land, and Labour
Aggregate Demand (definition)
Total spending on goods and services in an economy over a period of time.
AD Formula
AD = C + I + G + (X-M)
AD = Consumption + Investment + Government Spending + (Exports - Imports)
What are the axes on AD and AS diagrams?
GDP (x) and Price level (y)
Explain the real balance effect
If the price level (inflation) rises, AD falls as a result of people’s real income falling because they don’t get pay rises in line with inflation.
Explain the Interest rate effect
If the price level rises, BoE will raise interest rates to keep inflation under control, thereby reducing AD as investment and consumption reduces.
Explain the International Effect
If the Pound is higher than other currencies, then our exports are less competitive.
Exports are a component of AD, therefore ceteris paribus, AD will reduce
Explain MPC (Marginal Propensity to consume)
The proportion of extra income earnt (salary increase) that is spent and consumed in goods and services.
Explain MEC (Marginal Efficiency of Capital)
Compare expected ROI (return on investment) of investing in your capital to expand your business, to the current interest rate in order to assess whether you are going to save it in a bank or invest it
Real Disposable Income
The amount of money left over in a household after paying bills and buying necessities, adjusted for the inflation rate.
Accelerator Effect
An increase in GDP leads to a proportionally larger change in investment (due to factors such as animal spirits)
Two factors affecting consumption
amount of disposable income, inflation rate, taxation and fiscal policy
Two factors affecting Investment
Business confidence, interest rates, taxation
