How macroeconomy works Flashcards
Circular flow of income
shows the flow of money between households and firms with injections and leakages in and out of the economy
Three injections are …
Investment
Government spending
Exports
Three leakages are ….
Savings
Taxes
Imports
Aggregate Demand
total planned spending of consumers, investors, government and foreigners into domestic economy
Ad/GDP=
C + I + G + (X-M)
Causes of shifts in ad
Fiscal policy
Monetary policy
Expectations
Incomes of foreigners
External shocks
Multiplier effect
any change in component of AD leads to greater final change in real GDP
Multiplier =
1
————-
1-mpc
Evaluate multiplier effect
works best when there is a large negative output gap so spare capacity can be used
Accelerator effect
any change in real GDP leads to increase in investment
supply side focus
Marginal Propensity to Consume (MPC)
proportion of change in income used for consumption
MPS
proportion of change in income saved
Equation with MPC and MPS
MPC + MPS = 1
Evaluate MPC and multiplier
depends on MPM (import)
if higher there are leakages leading to a smaller multiplier
Short run aggregate Supply
costs of production
causes of shifts in sras
raw materials
wage rates
technology
tax
petrol
Long run aggregate supply
shows change of country’s potential output
Causes of shifts in LRAS
Size of labour force (immigration)
Labour skills (training and apprenticeships)
Capital stock (new technology)
Technological change—increases productivity
SUPPLY SIDE POLICIES—increase competition and reduce barriers to entry
Research and development-innovation and invention
