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Economics MACRO > How the Macroeconomy Works > Flashcards

How the Macroeconomy Works Flashcards

1
Q

what is the definition for national income ?

A

the total number of goods and services a country produces every year

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2
Q

what is GNP ?

A

GDP + income earned overseas

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3
Q

what is GNI ?

A

sum of value added by all the producers

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4
Q

what is a withdrawal in the circular flow of income ?

A

money moving out of the economy

leakages of money out of the economy

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5
Q

what is an injection in the circular flow of income ?

A

money moving in the economy

new income in the economy

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6
Q

what are the main economic withdrawals in the circular flow of income ?

A

savings, by households

taxes, by government

imports

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7
Q

what are the main economic injections in the circular flow of income ?

A

investment

government spending

exports

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8
Q

what causes an equilibrium in the economy ?

A

withdrawals = injections

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9
Q

what is aggregate demand ?

A

total demand for all goods and services in the economy at a given time and price

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10
Q

why is the demand and aggregate demand curve downward sloping ?

A

as prices increases, the value of incomes fall, so goods and services become less affordable ?

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11
Q

what are the components of AD ?

A

C + I + G + (X-M)

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12
Q

what causes a shift in AD ?

A

change to the components of AD

consumption
investment
government spending
exports
imports

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13
Q

what is AS (SRAS) ?

A

total supply of goods and services produced in the economy

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14
Q

why is the supply and aggregate supply curve upward sloping ?

A

higher prices, higher profits for firms, so they will supply more

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15
Q

what causes a shift in AS ?

A

changes in cost of production (FOP)

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16
Q

what is the economic short run definition ?

A

Price is variable, everything else is controlled

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17
Q

what is the economic long run definition ?

A

everything is variable including price

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18
Q

why is LRAS completely vertical ?

A

supply is responsive to a change in price

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19
Q

where is there an excess in supply ?

A

above the market equilibrium

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20
Q

where is there an excess in demand ?

A

below the market equilibrium

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21
Q

what influences consumer spending ?

A

interest rates
consumer confidence
influences on investment
business expectations
demand for exports

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22
Q

how does AD influence the level of economic activity ?

A

employment
confidence
events
tax, interest rates

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23
Q

what is the multiplier effect ?

A

when initial investment leads to greater investment which leads to economic growth

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24
Q

what are the stages of the multiplier effect ?

A

new demand in the economy
⬇
leading to a new injection of income in the economy
⬇
leading to economic growth
⬇
leading to more jobs, higher incomes, and greater spending

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25
Q

finish off the sentence,

“one persons spending …

A

… is another persons income.”

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26
Q

what are the axis on a basic MACRO supply and demand curve ?

A

price level Y
real GDP X

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27
Q

what is the main factor influencing/ causing shifts in SRAS ?

A

cost of production

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28
Q

what is the main factor influencing? causing shifts in LRAS ?

A

quality and quantity of production

29
Q

why is the LRAS curve fixed vertically ?

A
  • output is fixed (at each level)
  • FOP are fully employed in the economy
  • shifting AD only changes price, not output
30
Q

what factors influence LRAS ?

A
  • technology advancements (^qual, quan)
  • productivity (^quan)
  • education and training (^qual)
  • government regulation (^quan)
  • demographic/ migration (^quan)
  • competition policy/ efficiency (^qual, quan)
31
Q

what is the circular flow of income used to illustrate ?

A

the flow of money, resources, and goods in an economy

32
Q

what is the financial sector in the circular flow of income made up of ?

A

investment

savings

33
Q

what is the foreign sector in the circular flow of income made up of ?

A

exports

imports

34
Q

if (injections > withdrawals) how will it affect the economy ?

A

economic growth
increase in national income

35
Q

if (injections < withdrawals) how will it affect the economy ?

A

economic decline
decrease in national income

36
Q

if there is an increase in interest rates how will it effect the circular flow of income ?

A

more and more households will save because the reward of saving is greater

saving is a withdrawal

this will decrease the relative size or the circular flow of income because, investment will fall due to a decrease in consumption

37
Q

what does the determinant of savings depend on ?

A

an individuals/ or households decision to save money rather than consume it immediately

38
Q

when savings decrease what tends to happen to consumption ?

A

consumption usually increases

39
Q

when savings increase what tends to happen to consumption ?

A

consumption usually decreases

40
Q

when the economy is booming what tends to happen to consumption ?

A

it increases

41
Q

when the economy is slumping what tends to happen to consumption ?

A

it decreases

42
Q

where is there an equilibrium at the national income level ?

A

injections = withdrawals

43
Q

what are net exports ?

A

the difference (profit) between the revenue grained from selling goods and the expenditure from goods abroad

44
Q

what relationship does AD and AS/ SRAS show ?

A

the relationship between average price level and real GDP (total output)

45
Q

if disposable income increases what happens to consumption ?

A

increases

46
Q

if disposable income decreases what happens to consumption ?

A

decreases

47
Q

what factors cause a change in the level of consumption ?

A

interest rates (spend or save)

consumer confidence (strong or weak economy)

change in wealth/ income

48
Q

what factors cause a change in the level of consumption ?

A

interest rates (cheap or expensive to loan/ borrow)

business confidence

government intervention (subsidies, increase inv indirect tax, decrease inv)

demand for exports

49
Q

what factors influence government spending ?

A

economic cycle (G will spend more in recession to stimulate inflation)

political decisions

50
Q

what factors impact the level of exports ?

A

level of income abroad

domestic inflation rate

value of the pound (price of imports for foreigners are less expensive if the pound is weak)

51
Q

what factors effect the level of imports ?

A

level of income domestically

value of pound (price of imports for us will be less expensive if the pound is strong)

52
Q

where does the short run macroeconomic equilibrium occur ?

A

where aggregate demand (AD) intersects with short-run aggregate supply (SRAS)

53
Q

what do the free-market economists believe about capacity in the long run ?

A

In the long-run, the economy will return to this normal capacity level of output

54
Q

where does the long-run macroeconomic equilibrium occur ?

A

the intersection of long-run aggregate supply (LRAS), short-run aggregate supply (SRAS) & aggregate demand (AD)

55
Q

what is an economic shock ?

A

an unpredictable event that has macroeconomic consequences

56
Q

what is a demand-side shock ?

A

typically involves a sudden change in the levels of private spending, as seen in shifts in consumer spending or business investment

57
Q

what is a supply-side shock ?

A

When production across an economy is made more difficult

58
Q

in detail, what are the step by step consequences of an injection into the economy ?

A

1) the AD curve will shift to the right
2) This increases the overall level of real output
3) When real output increases, firms typically need to hire additional workers to meet the higher demand for goods/services
4) The increased employment is linked to an increase in economic growth

59
Q

in detail, what are the step by step consequences of a withdrawal into the economy ?

A

1) the AD curve will shift to the left
2)This decreases the overall level of real output
3) When real output decreases, firms typically reduce their workforce to align with reduced demand for goods/services
4) The decreased employment is linked to a decrease in economic growth

60
Q

what is the multiplier effect ?

A

states that any injection in the economy leads to a greater impact on the economy than the value of the initial injection

61
Q

what effect does the marginal propensity to consume (MPC) have on the multiplier effect ?

A

The higher the leakages, the smaller the marginal propensity to consume (MPC)
The higher the marginal propensity to consume, the lower the leakages and the greater the multiplier will be

62
Q

what is the definition of MPC ?

A

the proportion of additional income that is spent on consumption

63
Q

what is the formula for MPC ?

A

change in consumption
/ change in income

64
Q

what is the formula for working out the value of the multiplier ?

A

1/ (1-MPC)

65
Q

the greater the MPC the … ?

A

the higher the multiplier

66
Q

the smaller the MPC the … ?

A

the lower the multiplier

67
Q

what is the accelerator ?

A

that changes in the level of investment from firms (into capital goods such as machinery, factories, etc) to meet the changes in the overall level of economic activity

  • As economy expands, firms invest more into capital goods
  • As economy contracts, firms invest less into capital goods
68
Q

how does the multiplier and the accelerator effect work together ?

A

1) As the demand for goods and services increase, AD increases

2) As a result, firms invest more (or make an accelerated investment) into capital goods to meet demand for products in the hope of making
a profit

3) This leads to a further increase in AD

4) This increase in AD is then multiplied, making growth in national income more rapid

5) Which leads to an even more accelerated investment into capital goods by firms

69
Q

The multiplier process is based on the idea that …

A

one persons spending is another persons income

Economics MACRO (5 decks)

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