How the macroeconomy works Flashcards
national output
producing goods and services
national income
money paid to households for factors of production like land labour and capital
national expenditure
household spending the money they get from national income on goods and services
Circular flow of income formula
national output=national income=national expenditure
Injections
injections into the circular flow in the form of exports, investment, government spending
Withdrawals
come in the form of imports, savings and taxes
differences in injections and withdrawals
if injections and withdrawals are equal then its equilibrium
if injections are greater than withdrawals this means expenditure is greater output so firms will increase output
if withdrawals are greater than injections this means ouput is greater than expenditure so firms will reduce output
AD demand curve
x axis national output
y axis price level
AD curve slopes downwards the lower the price level the more output demanded
changes in price level from P to p1 causes total AD to fall from Y to Y1
AD curve shifting to the right
due to a rise in consumption, investment and government spending it can cause a shift to the right an outward shift causes more ouput to be produced
AD curve shifting to the left
AD will shift to the left due to a fall in consumption, investment and Government spending
an inward shift means less output is produced
Agreggate supply
the total output produced at a given price level
SRAS
short run aggregate supply, increase in price level causes an increase in output when its inelastic its steep upwards
LRAS
LRAS curve is vertical so an increase in price level wont cause an increase output due to being at full capcity
causes of shifts in SRAS
if theres a change in costs of production as if costs reduce more ouput is produced shifting to the right
it could shift to the left due increase in wage rates or due to supply side shocks like war
causes of shifts in LRAS
Changes in factors of production will causes LRAS to shift
improvements in factors of production shift LRAS to the right like eduction, technology and more
a detioriation in the factors of production causes LRAS shifting to the left
how can banks shift LRAS
firms can borrow money to invest in new machinery which increases productivity potential shifting LRAS and SRAS to the right
Keynesian LRAS
at low levels of output AS is horizontal so output can increase without a rise in price
when the curve slopes upwards its experiencing problems causing an increase in costs
AD equation
AD=consumption + investment+ Government spending + exports - imports
Consumption
total amount spent by households on goods and services
factors affecting consumption
income- as income rises consumption rises
interest rates- high interest rates lower consumption
consumer confidence- if consumer feels more confident they spend more
factors affecting investment
Government incentives- reduction in tax and subsidies affect investment
technological advances- when theres technological advances made investment rises
business confidence- more confident a buisness is to make profits the more likely it is to invest
factors affecting exports
exchange rate - if the currency increases imports become cheaper and exports become more expensive
changes in the state of the economy- the higher the income in the economy the more they will import
degree of protectionism- tariffs and qoutas can increase exports and decrease imports
non price factors- quality of goods improves exports
marginal propensity to consume
MPC- the proportion of extra income spent on Goods and services
Marginal propensity to consume equation
change in consumption/ change in income
accelerator effect
when firms make accelerated investment in capital goods to increase output and create profit
