Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

macroeconomics > how the macroeconomy works > Flashcards

how the macroeconomy works Flashcards

1
Q

what are the injections into the circular flow of income?

A
  • exports
  • government spending
  • investment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what are the withdrawals to the circular flow of income?

A
  • imports
  • taxes
  • savings
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

what does it mean for the economy to be in equilibrium?

A

the injections equal the withdrawals

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what is the difference between nominal and real income?

A
  • nominal income is the total amount of money a person earns in a given period of time
  • real income is the nominal income adjusted for inflation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what is a positive output gap?

A

when actual output is greater than potential output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

why does a positive output gap occur?

A

occurs when the economy is growing faster than the trend, it is trying to operate above its potential

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what are the problems with a positive output gap?

A
  • leads to a shortage of raw materials and labour
  • leading to a rise in production and labour costs
  • therefore high inflation rates
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what is a negative output gap?

A

when actual output is less than potential output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

why does a negative output gap occur?

A

occurs when the economy is growing below the trend, there is likely to be spare capacity in the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

how does a positive output gap influence monetary policy?

A

a positive output gap is likely to persuade the MPC to raise interest rates to slow down the economy and reduce inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

how does a negative output gap influence monetary policy?

A

a negative output gap is likely to persuade the MPC to lower interest rates to speed up the economy and increase inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what are the four main causes of unemployment?

A
  • cyclical
  • structural
  • seasonal
  • frictional
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what is cyclical unemployment?

A
  • this is when the unemployment rate rises during an economic downturn and falls during a recovery
  • it is caused by fluctuations in the business cycle
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

why does employment increase in the recovery period of the economic cycle?

A

when the economy is in a boom period, consumers are spending and firms need more workers to increase production, because labour is a derived demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

what is structural unemployment?

A
  • this is caused by changes in the economy, like the decline of certain industries or the rise of automation
  • it occurs when there is a mismatch between the skills of workers and the needs of employers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what is frictional unemployment?

A

short-term unemployment caused by people transitioning between jobs, moving to a new location, or re-entering the workforce after a break

17
Q

what is seasonal unemployment?

A

arises due to fluctuations in the demand for labour throughout the year e.g. agriculture, tourism

18
Q

what is the formula for calculating real income?

A

real income = (nominal income / price index) x 100

19
Q

what is the relationship between income, output and expenditure in the circular flow of income model?

A

income = output = expenditure

20
Q

what is aggregate demand?

A

the total demand for all goods/services in an economy at any given average price level

21
Q

what are the components of aggregate demand?

A
  • consumption
  • investment
  • government spending
  • net exports (exports - imports)
22
Q

explain how interest rates affect aggregate demand

A
  • an increase in interest rates
  • means that the cost of borrowing is reduced
  • this encourages more spending and investment in the economy
  • consumption and investment are both components of AD
  • therefore, an increase in consumption and investment increases AD
23
Q

what are the determinants of consumption?

A
  • income tax/disposable income
  • consumer confidence
  • interest rates
  • employment rates
  • wealth effects
24
Q

what is investment?

A

spending by firms on factors of production to produce goods and services

25
Q

what are the determinants of investment?

A
  • interest rates
  • business confidence
  • performance of the economy
  • foreign demand for exports
  • access to credit
  • government regulation
26
Q

what does the acronym SPICED stand for?

A

strong pound, imports cheaper, exports dearer

27
Q

what causes a shift in the AD curve?

A

changes in one of the AD components i.e. consumption, investment, government spending and net exports

28
Q

what is the multiplier effect?

A

the concept that an injection into the circular flow of income leads to a disproportionate increase in economic growth

29
Q

why is the AD curve downward sloping?

A
  • lower prices in an economy increase global competitiveness, so exports increase and imports decrease
  • therefore, net exports are lower at higher prices, so AD decreases
  • at higher price levels, interest rates are likely to be raised by the MPC
  • therefore, the cost of borrowing increases and at higher prices, domestic consumption is lower as households can afford fewer goods and services, so AD decreases
30
Q

explain how interest rates affect consumption

A
  • higher interest rates increase the cost of borrowing, and increase the benefit of saving
  • therefore, people borrow less and save more, so consumption falls
  • higher interest rates increase the cost of mortgages (higher mortgage interest repayments), reducing the amount of money consumers have to spend on goods and services, decreasing consumption
31
Q

explain how consumer confidence affects consumption

A

if consumers are confident, both in terms of job security and future income prospects, they will tend to spend more and also make large purchases which they can pay for in the future

32
Q

explain how house prices (the wealth effect) affects consumption

A
  • if house prices increase, consumers could go to their mortgage provider and request more mortgage equity release (i.e. take out a loan based on the increased wealth)
  • this adds to the consumer’s disposable income, so consumption therefore increases
  • if house prices increase, consumers feel more confident and ‘wealthier’, and therefore save less and spend more, increasing consumption
33
Q

explain how interest rates affect investment

A
  • to invest in capital stock, firms have to borrow money to finance the investments
  • higher interest rates increase the cost of borrowing, and hence makes investment less attractive for firms
  • so with higher interest rates, investment falls
34
Q

what is aggregate supply?

A

the total amount of goods and services produced in an economy at a given price over a period of time

macroeconomics (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions