flashcards
What is the multiplier effect?
a
When the initial injection into the circular flow causes a larger increase in real GDP
When is the multiplier high?
Project is labour intensive and when equipment is sourced domestically
What is the multiplier coefficient?
Final change in real GDP / Initial change in real GDP
q
What is a negative multiplier effect?
a
When an initial withdrawel or leakage of spending in the circular flow leads to knock on effects as results in a bigger drop in GDP
What is the calculation for simple multiplier
1/1-MPC
What is capital spending?
Government spending on items from which we will benefit in the future e.g infrastructure, education
What is a positive accelerator effect?
When an increase in the rate of demand leads to a rise in planned capital investment by businesses
When is the multiplier high?
Economy has plenty of spare capacity to meet higher AD
MPT and MPI is low
MPC is high
What does QE involve?
Creating money electronically to buy assets (mainly bonds) from financial institutions such as the major insurance companies, pension funds and comercial banks
Order the events of QE
Creates money electronically and puts in on a balance sheet
–>
Purchases government bonds causing a price of bonds to increase
–>
This results in lower yields for bond owners so owners look for assets with larger yields such as stocks
–>
Commercial banks get money from these purchased assets and increases their liquidity.
–>banks lend out and stimulate economy
What is current spending
Government spending on items from which we will benefit in the current financial year
What are transfer payments?
Government payments to individuals in which no service is given in return e.g. benefits
Define a trade off
a
A trade off is a situation where achieving one macroeconomic objective could lead to damagine another macroeconomic objective
What is a an improvement in the current account?
When a deficit gets smaller or a surplus gets larger or we move from deficit to surplus
What is a deterioration in the current account
When a deficit gets larger or a surplus gets smaller or we move from a surplus to a deficit
