How the Macroeconomy Works

Question 1

What is the circular flow of income?

Answer 1

A model which explains what determines the equilibrium level of national income.

Question 2

Describe the circular flow of income.

Answer 2

Households provide firms with labour (factors of production), firms then provide payment (wages, salaries etc.) to households.

Firms provide households with goods & services, households then provide firms with payment for them.

Question 3

Define injection.

Answer 3

Spending on domestic output which comes from outside the simple circular flow of income. (e.g. investment, government spending and exports)

Question 4

Define withdrawal (leakage).

Answer 4

Income which is not spent on domestic output. (e.g. savings, taxation & imports)

Question 5

Define consumption.

Answer 5

Spending by domestic households on consumer goods and services.

Question 6

Define macroeconomic equilibrium.

Answer 6

Macroeconomic equilibrium is when the quantity of aggregate demand equals the quantity of aggregate supply with no tendency for change.

Question 7

Define aggregate demand (AD).

Answer 7

The sum of all planned spending on domestic output at a given general price level over a given period of time.

Question 8

What is the formula for aggregate demand?

Answer 8

Aggregate demand = consumption + investment + government spending + (exports - imports)

so…

AD = C + I + G + (X - M)

Question 9

Define aggregate supply (AS).

Answer 9

The sum of all planned domestic production at a given general price level over a given period of time.