introduction and the goods market Flashcards
what is the equation of Aggregate Demand
AD= C+I+G+X-IM
domestic consumption
Cd=C-IM
circular flow model description
-households receive/firms give away: goods/services, real wages (labour households), real interest rates
-firms receive/households give away: labour, capital, domestic consumption
-intermediaries: governments (give firms G, take T from households), banks (take savings from households, give firms I), abroad (take IM from households, give firms X)
withdrawals/injections into economy
-withdrawals: savings, investment, taxes
-injections: government spending, Investment, exports
methods of measuring output in the economy
-income method: sum of total incomes paid to households (salaries, rent)
-product method: total value of all goods/services produced in an economy
-expenditure method: add up all the expenditure necessary to purchase an economy’s production (Y=C+I+G+X-IM)
critiques of the methods to sum up national income
-RFK speech: counts- air pollution, sin tax advertising, arms spending. does not count poetry
-general critiques: includes heating costs: will be higher in hotter countries
alternative methods to measure GDP
-Human development index (HDI): life expectancy at birth, access to education, GNI/capita. no inequality/poverty/human security
-OECD better life index: tool to create your own better life index based on independent factor
composition of GDP
-consumption: g/s purchased by consumers
-investment: sum of residential/nonresidential investment
-government spending: purchase of g/s by local/federal/state governments- excluding transfers
-exports: purchases of UK g/s by foreigners
-imports: purchase of foreign goods by UK consumer, firms and government
closed economy and new AD equation
-closed economy: X=IM=0
-Z=C+I+G
endogenous and exogenous variables
-endogenous: variables that depend on others in model
-exogenous: not taken within model but are a given
the consumption function (equation, explanation and explanation of graph)
-is an endogenous variable (depends on others within the model)
-C=C0+C1(Y-T)
-C0 is autonomous consumption (consumption which occurs with no disposable income) this is the y-intercept), c1 is the mpc (slope), Y-T is disposable income
-graph: C and Yd on axis (y, x), start above zero (C0), slope is C1
autonomous terms added to aggregate demand and why and the new graph
-assume investment is autonomous along with government spending and taxes. All have a small straight line above the letter. do not vary with income
-graph: c remains same, I and G are horizontal lines as they are autonomous, AD starts higher than C due to having more autonomous variables but the slope is c1
new equation of aggregate demand following the introduction of the consumption function and process of finding equation for equilibrium output
-z=C0+C1(Y-T)+I+G
-set Z=Y
-Y=C0+C1Y-C1T+I+G
-Y-C1Y=C0-C1T+I+G
-Y(1-C1)=C0-C1T+I+G
-Y=1/(1-C1)[C0-C1T+I+G)
description of the Keynesian Cross curve
description:
-Z (AD) on y-axis, Y (output) on x-axis
-45 degree line labelled Z=Y
-AD curve with slope c1 starting above origin labelled ZZ- this is actual demand
-where curves meet is the equilibrium output and demand (e)
description of how the economy adjusts to a rise in an autonomous variable (focusing on MPC)
-the intercept will increase but the slope will stay the same
1) increase in G, increase in incomes
2)however not all of this income will be spent in the economy- depends on MPC
3)the new spending will increase further as incomes rise
4) process will eventually end- during each multiplier round a proportion of income will be spent/withdrawn
description of multiplier relating to the Keynesian Cross
-G rise to G’ (G prime)
-the new AD curve will shift upwards parallel to ZZ
-e is at Y1 and Z1 at point A initially
-as G rises AD will shift up to point B and Z2
-suppliers will react and produce more at point C (Z2 and Y2)
-there is still excess demand in the economy (at point C), as supplier decide to produce more, they will hire more people, increasing incomes in the economy and thus spending and AD rises
–this process will continue as suppliers adjust, eventually reach the new equilibrium E2
description and graph of negative feedback loop
-graph: normal Keynesian cross, but output is at Y2 which is above e
-producing at Y2
-there is excess supply in the economy (difference between Z=Y and ZZ)
-in response, producers will supply less, they will hire fewer workers/fire workers
-demand will fall and producers will continue readjusting
additionally suppliers are building up inventory
same graph as multiplier but reversed and reaching original equilibrium and no new curve
description and graph of positive feedback loop
-graph: normal Keynesian cross graph but output is at Y2 which is lower than equilibrium output
-producing at Y2
-there is excess demand within the economy
-producers will respond to this by hiring more workers
-demand will rise and suppliers will continue to readjust to reach e
-same graph as multiplier but reaching original equilibrium and no new curve
-they are not building up inventories
positive feedback loops and full employment. Graph and description
-full employment: all resources in the economy are employed
-graph: Keynesian cross curve but new curve at ZZ high above original ZZ
1)there is excess supply (deflationary gap)- prices fall
2)however, prices adjust faster than wages leading to a spiral and deflation
