How The Macroeconomy Works

Question 1

consumption

Answer 1

spending by households on goods and services

Question 2

investment

Answer 2

spending by businesses on additions to the capital stock

Question 3

nominal national income

Answer 3

nation income unadjusted for changes in prices

Question 4

real national income

Answer 4

removes the effect of price changes from the value of national income

Question 5

Uses of real national income

Answer 5

• measure of how successful the economy is
• how well of the population is
• allows gov to estimate how much can be collected in taxation

Question 6

circular flow of income

Answer 6

a model of the economy where income and spending flow between household and firms

Question 7

injections

Answer 7

• gov spending
• exports
• investment

Question 8

withdrawals

Answer 8

• taxation
• imports
• savings

Question 9

when does national income increase

Answer 9

injections > withdrawals

Question 10

when does national income decrease

Answer 10

withdrawals > injections

Question 11

Aggregate demand

Answer 11

the total spending goods and services in an economy over a given period of time

Question 12

equation of AD

Answer 12

consumption + investment + government spending + net exports (x-m)

Question 13

Why is AD downward sloping?

Answer 13

• at lower price levels, the value of any assets increases in real terms, may lead to wealth effect (consumption increases)
• at lower price levels, increase exports because more price competitive

Question 14

wealth effect?

Answer 14

increases in the value of household’s assets cause people to feel wealthier and encourages spending

Question 15

wealth

Answer 15

the value of the assets held by households

Question 16

Factors affecting consumption

Answer 16

1) Income
2) Interest rates
3) consumer confidence
4) wealth effects
5) taxes
6) unemploymetn

Question 17

Link between consumption and investmnet

Answer 17

• consumption should increase profits for firms

- boost to business confidence, investment less risky

Question 18

Accelerator theory

Answer 18

when there is an increase in national income GDP, there tends to be a proportionately greater increase in capital investment spending

Question 19

if growth in national income increase?

Answer 19

firms will need a larger productive capacity in order to produce a higher level of output to meet the higher level of spending in the economy

Question 20

industry where demand is growing rapidly?

Answer 20

• firms expand productive capacity
• deplete current stock of finished goods
• if its expected increase in demand will be sustained, firms may invest in more machines and factories
• may also invest in new technology, increase supply capacity
• causes accelerator effect

Question 21

The multiplier effect

Answer 21

when an initial change in injections / withdrawals to the circular flow of income leads to a greater final change in real GDP

Question 22

What is the the multiplier given by?

Answer 22

1/ (MP to save + MP to import + MP to tax)

Question 23

why is multiplier effect given by this?

Answer 23

• due to injections of new demand for goods and services into the circular flow of income
• leads to further cycles of spending
• leads to bigger, cumulative effect on total levels of national output and employment

Question 24

what happens if the economy is operating at or near full capacity

Answer 24

the multiplier effect can cause inflation

Question 25

size of multiplier

Answer 25

1/ 1 - MPC

Question 26

MPC

Answer 26

the proportion of any additional income that is spent and passed on around the circular flow of income

Question 27

A rise in the prices level causes output to fall because

Answer 27

• domestic consumption reduced, things more expenisve
• demand for exports reduced
• imports rises if abroad is cheaper

Question 28

Aggregate supply

Answer 28

the total output produced in an economy at a given price level over a given period of time

Question 29

Shifts in short run AS

Answer 29

1) wage rates rise - left
2) changes in cost of raw materials, more expensive - left
3) productivity, rises - right
4) exchange rate, fall - left

Question 30

Shifts in LRAS

Answer 30

increase in either quantity or quality of factors of production

Question 31

Keynesian AS curve

Answer 31

• at low level of real GDP, easy for firm to find workers and utilise idle machinery and capacity
• as you get closer to maximum GDP, difficult to find more workers and spare capacity as upward pressure on wages and prices ( FOP become scarce)
• eventually becomes perfectly inelastic as you reach full employment

Question 32

what are supply side policies for?

Answer 32

intended to increase long run trend rate of economic growth

Question 33

economic shocks

Answer 33

sudden, unexpected events that affect the macroeconomy

Question 34

demand side shocks

Answer 34

• unexpected changes in the level of aggregate demand

- affect the level of national income

Question 35

supply side shocks

Answer 35

unexpected changes in the price or availability of factors of production