How the macroeconomy works

Question 1

aggregate demand

Answer 1

Aggregate demand is the total amount of goods and services demanded in the economy at a given time and price level. Aggregate demand is the sum of consumption expenditure, investment expenditure, government expenditure and net exports. (AD=C+I+G+X-M)

Question 2

consumption

Answer 2

Consumption is spending by households on goods & services. Consumer spending is biggest single component of aggregate demand in the UK.

Question 3

investment

Answer 3

spending by the government and firms on capital

Question 4

government spending

Answer 4

Government spending is spending by the public sector on goods and services such as education, health care and defence.

Question 5

exports

Answer 5

‘Net’ exports refer to the value of a country’s export earnings on the sale of goods and service abroad, minus its expenditure on imported goods and services.

Question 6

imports

Answer 6

Imports are the value of foreign goods and services bought by a country’s households, firms, government agencies, and other organisations in a given period of time.

Question 7

accelerator theory

Answer 7

The accelerator effect states that investment levels are related the rate of change of GDP. Thus an increase in the rate of economic growth will cause a correspondingly larger increase in the level of investment. But, a fall in the rate of economic growth will cause a fall in investment levels.

Question 8

marginal efficiency of capital

Answer 8

The marginal efficiency of capital displays the expected rate of return on investment, at a particular given time. The marginal efficiency of capital is compared to the rate of interest.

Question 9

wealth effect

Answer 9

The wealth effect is a behavioural economic theory suggesting that people spend more as the value of their assets rise. The idea is that consumers feel more financially secure and confident about their wealth when their homes or investment portfolios increase in value. They are made to feel richer, even if their income and fixed costs are the same as before.

Question 10

multiplier effect

Answer 10

the process by which any expenditure generates a trail of subsequent expenditure so that the resultant change in national income will exceed the amount initially expended.
1/1-MPC

Question 11

aggregate supply

Answer 11

the total amount of goods and services the whole economy can supply at every given price level.

Question 12

short run

Answer 12

shifted by changes in costs of production. One fixed factor of production.

Question 13

long run

Answer 13

all factors can be increased/varied. Increase in quality/quantity of factors of production

Question 14

full capacity/ YFE

Answer 14

the full employment level of output, represents max level of output an economy can produce using all factors of production at a sustainable level.

Question 15

autonomous consumption

Answer 15

Autonomous consumption is defined as the expenditures that consumers must make even when they have no disposable income. These expenses cannot be eliminated, regardless of limited personal income, and are deemed autonomous or independent as a result.

Question 16

discretionary consumption

Answer 16

Consumer discretionary refers to those household goods that are consumed more so as to wants than needs. Demand for these goods tends to rise when the economy is strong, while people cut back on discretionary spending when the economy falters.

Question 17

consumption function

Answer 17

The Keynesian consumption function expresses the level of consumer spending depending on three factors.

Yd = disposable income (income after government intervention – e.g. benefits, and taxes)
a = autonomous consumption (consumption when income is zero. e.g. even with no income, you may borrow to be able to buy food)
b = marginal propensity to consume (the % of extra income that is spent). Also known as induced consumption.

Question 18

wealth

Answer 18

a physical of financial asset that is a stock of value and can be used to generate income