Learning Sequence 4 Macro Flashcards
Two types of aggregate supply
SRAS - short run AS
LRAS - long run AS
Classical SRAS
At least one factor of production is fixed.
Movement happens by change in general price level, either extension or contraction.
If increase in price, increase in supply. Vice versa
What causes shifts in SRAS curve
Cost of production increases, left shift.
Prices of raw materials - if increase, left shift, as higher production costs vice versa
Taxes and subsidies - increase in taxes, reduces profit margins, left shift. Increase in subsidy, less production cost, right shift
Wage rates - increase wages, left shift as more cost of production vice versa
Supply shocks - if positive, increased productivity, right shift. If negatuve, increase costs, left shift
Exchange rates - SIPS (stronger pound, imports cheaper, production costs fall, shift right) vice versa
Which graph line in straight and curved for movement and shift
Curve for movement causing extension of contraction. Straight line for shifts
Classical LRAS
Graph is vertical.
In the long run all factors of production are variable. There is full economic employment and output doesn’t depend on price level
Labour productivity is maximised and there is a maximum use of resources
Factors affecting LRAS classical
increase in capacity to produce, right shift, vice versa
Increased production cost - decrease in supply, left shift
Increased tech - increased supply, right shift
Changes in education - improve education, improved skills, right shift
Demographic changes and migration - growth in Labour, right shift
Keynesian LRAS
They argue that economy could be below max full capacity, like how it is for classical.
They think that when resources aren’t utilised the line will be straight then when resources are fully utilised, upwards curve
They don’t think there is max full employment and they suggest that it can’t be at full economic level
Circular flow of income
Shows how money moves thru an economy.
Main economic agents
- households (receive wages, rent, provide factors of production)
- firms (produce goods and services and pay wages to households)
- gov (collects taxes and provides public goods)
- foreign sector (exports and imports)
Wealth v income
Wealth is the stock of assets owned by a person
Income is the flow of money received by an individual or household such as wages or interest
Injection v withdrawals and examples
Injection is an addition of income into the flow, withdrawal is a leakage of income out of the flow
Injections increase economy, withdrawals decrease it.
Injections:
-investment
-gov spending
- exports
Withdrawals:
- savings
- taxes
- imports
Equilibrium of real national output
Total output is equal to total demand
Multipler effect
When an injection into the flow, causes a final bigger real National income.
Multiplier process
When one round of spending happens, it leads to many other rounds of spending.
Effect of multipler effect on MPC
MPC is the size of added extra income that is spent on consumption.
If MPC is high , this means it boosts the overall demand in economy, this amplifies the multiplier effect, more income for others, leads to a chain reaction.
MPT and MPM
To tax, to import
