Introduction To Macroeconomics Flashcards
Describe the circular flow of income
Money is earned via wages then spent on businesses, who then pay their workers
What are the 3 methods of measuring the size of the economy
Expenditure
Income
Output
Why are none of these methods better than others
National Income = National Output = National Expenditure
Describe the Expenditure method as measuring the size of the economy
Finds the sum of all the money spent on Capital or Consumer goods by economic agents over a given time
Describe the Income Method when measuring the size of the economy
Find the sum of the 4 different types of incomes earned through the production of goods and services
What is the Output Method also known as
The value-added method
Describe the Value-Added method for measuring the size of the economy
Finds the final output of an industry over a given time and subtracting money inputted into the industry
What is AD
Aggregate Demand is the total value of all the goods and services sold in an economy
Describe an AD diagram
A downward sloping line with axis labelled Y(Real GDP) and PL(Price Level)
What are the components of AD
C - Consumption
I - Investment
G - Government expenditure
E - Exports
I - Imports
In a developed economy, what is the largest component of AG
Consumption
What is the equation for AD
C + I + G + (X - M)
Apart from M what are the other 2 leakages
Savings and Taxation
What are the 3 types of injections
Investment
Exports
Government expenditure
What are injections
Things that add value to AD
What are leakages
Things that cause AD to decrease
If the economy is in equilibrium, what are injections equal to
Leakages
What effect would an increase in Government spending have on AD
It would cause the AD curve to move to the right
Why does consumer confidence have an impact on consumption
Is people believe that the economy is likely to grow they will spend more money
Why might high income households spend less money proportionate to income
They can afford to save money
What is consumer confidence
How people feel the economy will change in a period of time
What is aggregate supply
The total value of goods and services produced in an economy
Describe a short run AS curve under the ordinary interpretation
Sloping upwards
Describe a long run AS curve under the ordinary interpretation
Perfectly inelastic. Labelled Yfe meaning Real GDP at full employment
Why is the LRAS curve perfectly inelastic
Since the economy is at max output the total amount of goods and services produced will be unchanged by Price Level (and all other factors)
What assuption is made when drawing an AD curve
the amount of money in the economy is constant
What are the key macroeconomic indicators
Changes in price level, economic growth and changes in employment levels
What could cause the SRAS curve to shift to the right
Decrease in costs for business
What could cause the LRAS curve to shift to the right
increase in quality or quantity of factors of production
Why is it not always good for the economy to be in equilibrium
It does not mean that all of the factors of production are being utilised
When is short run economic growth possible
When the economy is below full employment
What causes long run economic growth
An increase in the quality or quantity of a factor of production
Why does economic growth benefit individuals
Better quality of living
Define inflation
The rate of change of the average price level
What is an index
A way of comparing the value of a variable with a base observation
What is the consumer price index
A measure of the general level of prices in the UK
What is the CPIH
A version of CPI that takes into account the housing costs of owners/occupiers and council tax
What is RPI
The Retail Price index is a measure of the average level of prices in the UK
What is deflation
Negative inflation
What is disinflation
A fall in the rate of inflation
What is hyperinflation
A situation where inflation reaches extreme rates
What is cost push inflation
Inflation caused by an increase in the costs faced by firm
What is demand-pull inflation
Inflation caused by an increase in aggregate demand
What is money stock
The amount of money in the economy
What is the multiplier effect
When an initial change in aggregate demand has a greater final impact on the equilibrium level of national income
What is accelerator theory
The idea that an increase in GDP will often lead to a larger increase in private sector investment
Define fiscal
Relating government spending and Taxation
How do you calculate the size of a multiplier
1/(1 - MPC) or 1/MPW
Prove that 1/(1 - MPC) = 1/MPW
MPC + MPW = 1
What is marginal propensity
The % of income spent on a particular area
How is the marginal propensity to consume calculated
ΔC / ΔY
