How the macroeconomy works: the circular flow of income Flashcards
What is a recession?
A phase of negative economic growth for at least 2 consecutive quarters
What is flow?
Measured over a specified period of time
What is stock?
A quantity measured at a particular point in time
What are injections?
Money that originates outside the circular flow and so will increase national income/output/expenditure
What are withdrawals?
Any money not passed on in the circular flow and has the effect of reducing national income/output/expenditure
What is investment?
Spending by firms on buildings, machinery and improving the skills of the labour force
What is saving?
A withdrawal from the circular flow
How is saving affected when income rises?
Savings will rise
What is income induced?
Will increase as income increases and decreases as income decreases
How is AD affected when there is more saving? Why?
AD will fall because there is a fall in consumer spending
What is disequilibrium?
When injections and leakages are not equal
What is the multiplier effect?
Where an increase or decrease in spending leads to a larger proportionate change in national income
Explain how the multiplier effect works? (4)
Business invests in new machinery
Provides income for workers
Workers spend their income in the economy
Creates further employment (more demand)
Why doesn’t the multiplier effect carry on forever?
At each stage money is withdrawn through taxes, savings or spent on imports
What is net government spending?
The difference between government spending and taxation
