How The Macroeconomy Works Flashcards
Consumption
Total planned spending by households on consumer goods and services produced within the economy
Saving
Income which is not spent
Withdrawal
A leakage of spending power out of the circular flow of income into savings, taxation or imports
Investment
Total planned spending by firms on capital goods produced within the economy
Injection
Spending entering the circular flow of income as a result of investment, government spending and exports
What are the components aggregate demand
consumption, investment, government spending, net exports
How is Aggregate Demand calculated?
Consumer Spending + Investment + Government Spending+ (Exports-Imports)
What factors affect consumption?
Interest rates Income level Expected future income Wealth Consumer confidence The availability of credit Distribution of income Expectations of future inflation
How do interest rates affect consumption?
Interest rates reward savers for sacrificing current consumption and therefore the higher the interest rate the higher reward, the more reduced consumption is. The opposite happens if interest rates fall.
How does income level affect consumption?
As income levels rise, absolute consumption rises but as it makes up a smaller part of income consumption decreases as people are saving more. The opposite happens if income levels fall.
How does expected future income affect consumption?
People plan their savings on the basis of a long-term view of their expected lifetime or permanent income over their expected lifetime.
How does wealth affect consumption?
If a wealth asset increases in price it causes increased consumption as they feel as if they have more money due to positive equity (wealth effect), the create a ‘feel-good’ factor that increases consumption as well as the fact that banks allow increased borrowing as they have more leverage. The opposite happens if wealth prices drop.
Aggregate Demand
The total planned spending on real output produced within the economy
Aggregate Supply
The level of real national output that producers are prepared to supply at different average price levels
Economic Shock
An unexpected event hitting the economy. Economic shocks can be demand-side or supply-side shocks (and sometimes both) and unfavourable or favourable.
