How the Macroeconomy works Flashcards
what is national income
total value of the new ouput of an economy over a period of time
produced by physical and human capital
what is income
a flow in the economy eg wages
what is wealth
stock of assets
an example of how we can use Real national income as an indicator of economic performance
real income rising = improvement of economic performance
real income falling - standard of living is falling
the circular flow of income
used to illustrate flow of money resources and goods in an economy
what are injections
new income in the economy
add money to circular flow of income
eg G, I, X
what are withdrawals
leakages of money from the economy
remove money from circular flow of income eg, S,T,M
what are the determinants of savings
factors that influence an individual decision to save than consume immediately
what are savings
portion of income that is not spent
what are investments
expenditure by firms on capital goods
what is the equilibrium national income level
where withdrawals are equal to injections
or when AD=AS
What is full employment
the level of income at which an economy is operating at full capacity
what is aggregate demand
total demand for goods in the economy at a given price level
formula forAD
C+I+G+(X-M)
factors that shift the AD curve
Consumption
Gov spending
Net exports
Invest,ent
factors that affect consumption
changes in wealth
changes in interest rates
changes in consumer confidence nges in consumer
factors that affectexports
changes in income form abroad
changes in level of inflation
changes in exchange rates
factors that affect imports
changes in exchange rates
changes in domestic income
changes in lvl of inflation
factors that affect investment
changes in business confidence
changes in gov intervention
changes in interest rates
factors that affect gov spending
capital
trade cycle
political decisions
what is aggregate supply
AS is the total supply of goods/services produced within an economy at a specific price level at a given time
factors that affect the SRAS
Changes in the cost of raw materials and energy
changes in exchange rates
changes in tax rates
what is long run aggregate supply
LRAS represents the potential capacity of an economic factor of production
can show economic growth when a rightward shift occurs
factors that affect the LRAS
technological advances
changes in relative productivity
changes in education and skills
change in gov regulations
migration
competition
What is the relationship between short-run and long-run aggregate supply?
SRAS: Influenced by changes in costs of production or productivity.
Refers to the time period where at least one factor of production is fixed.
LRAS; Influenced by changes in the productive capacity, requires changes in quantity and quality of goods shifts the PPF
Long-term economic growth depends on increasing the productive capacity of the economy.
what is an economic shock
an unpredictable event that has macroeconomic consequences
has negative or positive impacts n economic growth, inflation rate, unemployement lvls
what is a demand side shock
sudden changes in levels of private spending seen as shifts in consumer spending or business investment
what is a supply side shock
production becomes more difficult
examples of macroeconmic shock
The financial crisis- banking instability, reduced borrowing, fall in AD increased unemployment
pandemic- reduced consumer spending, price fluctuations,
what is the multiplier
injection that leads to greater impact on the economy than value of initial injection
what can influence the size of the multiplier
Size of withdrawals eg higher the withdrawalW the smaller the MPC
What is the MPC
proportion of additional income that is spent on consumption
how to calculate MPC
Consumption/Income
formula for the multiplier
1/1-MPC
Factors that can impact income and in turn the multiplier
interest rates
consumer confidence
exchange rates
tax rates
what is the accelerator process
the relationship between changes in national income and resulting changes in investment.
If goods and services are increasing firms will invest in capital goods to expand capacity and vice versa
what are commodity prices
market prices of raw materials or primary agricultural products, such as oil, gold, or wheat. Factors like supply and demand, geopolitical events, and market speculation influence these prices.
