Equilibrium in the Economy Flashcards
What is macroeconomics?
About the economy as a whole
What are the characteristics of macroeconomics?
The total level of spending, production, national output and the general price level of prices
What are the major issues in macroeconomics?
Economic growth, unemployment, inflation, balance of payments and exchange rates, sector accounts and financial stability
What are the governments macroeconomic objectives?
High and stable economic growth, low inflation, low levels of unemployment and a favorable balance of trade
What are the policy instruments?
Fiscal and monetary policy
What is fiscal policy?
Involves changing the level of government spending and taxation rates to influence the economy
What is monetary policy?
Involves controlling the money supply and changing the interest rates to influence the economy
What are examples of government policy changes?
Cut income tax, increase government spending, make borrowing easier and cheaper for people and firms and reduce unemployment benefits
When is there an equilibrium in macroeconomics?
When aggregate demand = aggregate supply
What are the economic agents?
Households and firms
What is an injection (J)?
Money that flows to firms without being recycled through households
What are the injections in the circular flow of income?
Investment (I), government spending (G) and exports (X)
What is the formula for injection?
J = I + G + X
What are withdrawals (W)?
Money not recycled from households to firms
What are the withdrawals in the circular flow of income?
Savings (S), tax (T) and imports (M)
What is the formula for withdrawals?
W = S + T + M
What are withdrawals dependent on?
National income
Are withdrawals upward or downward sloping?
Upward sloping, if income is higher, people save more, import more and will have to pay more taxes
Do withdrawals usually start negative or positive?
Negative, people don’t have income but still have to buy food, so they use their savings
What happens if injections exceed withdrawals?
National income will rise
What happens if income falls?
We will have a lower national income
What happens if withdrawals exceed injections?
National income will fall
What happens if you’re on the left hand side of your equilibrium?
Injections are higher and income increases
What happens if you’re on the right hand side of your equilibrium?
Withdrawals are higher and national income will fall
