How the macroeconomy works Flashcards
What are the determinants of consumption?
- Level of disposable income
- Interest rates and availability of credit
- Consumer confidence
- Asset prices/wealth
- Household indebtedness
Determinants of saving
- Age of population
- Consumer confidence
- Levels of TAX
Determinants of investment
- Business confidence
- Interest rates
- Corporation TAX
- Spare capacity
Types of government spending
- Welfare spending
- Current spending
- Debt interest payments
What is meant by the term “current spending”
Current spending is the spending on maintaining public services
what occurs when TAX revenue> Government spending
A budget surphlus
What occurs when government spending> TAX revenue?
A budget deficit
What is meant by the term “National debt”?
The national debt is the total amount of money in that a countries government has borrowed
Factors affecting net exports
- Real disposable income earned at home/abroad
- Strength of exchange rates
- protectionism at home/abroad
- Inflation levels
How does the strength of the exchange rate impact NET EXPORTS
When the pound is stronger, exports decrease as they will become less competitive and imports will increase as they get cheaper
What is meant by the term “Protectionism”
Protectionism is when a country restricts international trade to protect its domestically grown products through tariffs/quotas
What is meant by the term “Quota”
A qouta is a trade restriction that limits the quantity of and import that can enter the country in a given time period
How do home inflation levels affect net exports?
High inflation levels at home make exports less competitive to foreign countries due to the increase in price
High inflation also makes imports more competitive as they could be seen as cheaper than the locally sourced products
What is meant by the term “Multiplier effect”
The multiplier effect occurs when an initial increase in spending stimulates further rounds of spending in the circular flow, resulting in a larger overall increase in national income
What is meant by the term accelerator effect
The accelerator effect occurs when there is an increase in national income that leads to a proportionally larger increase in investment as firms anticipate demand to rise
How do we calculate the multiplier?
1
1-MPC
What does MPC stand for?
Marginal propensity to consume
What does Margainal propensity to consume mean?
The proportion of an increased income spent on consumption
What does “National income mean”?
The national income of an economy refers to the total income of an economy earned by all workers and businesses over a period of time
What are the 3 ways to calculate national income?
- The expenditure method
- The income method
- The output method
What does the expenditure method consist of?
The expenditure method consists of adding together all spending over a given period of time
AD=C+I+G+(X-M)
What does the income method consist of?
Adding up all incomes earned in a given time period-
Wages of all workers
Rent from those who are paid
interest earned by investors
profit earned by firms
Give 3 variables that are considered in the income method?
Wages of all workers
Profits of firms
Interest of investors
Rent of those who rent out their properties
What is the output method when calculating national income?
Totalling the value of all output produced in each sector of the economy in a given time
