Lesson 3 - The Circular Flow Of Income Flashcards
What is actual growth?
- What is happening now?
- short run
- demand side
What is trend growth?
- average over time
- supply side
- long run growth
Draw and name the 4 parts of the economic cycle and the 2 types of output gaps
- Boom, recession, slump, recovery
- positive and negative output gap
Describe a boom
- hot economy (AD is greater than supply)
- low unemployment
- can lead to inflation
- high imports
- hard for businesses to hire, leading to the wage prices spiral
Describe a recession (downturn)
- unemployment is rising
- economy is slowing down
- investment is falling
Define a recession
2 consecutive quarters of negative growth
Describe a recovery
- unemployment is falling - firms start to hire again
- confidence is rising (leads to a rise in AD)
Describe a slump
- high unemployment
- low confidence, low AD (economic growth)
Describe the link between GDP, national output, expenditure and income
GDP = expenditure = income = national output
Describe the circular flow of income
Households to firms
- hire of factors
- payments for goods/services
Firms to households
- payment for factors
- goods/services
What are the injections in an open economy?
- government spending
- exports
- investments
What are the leakages in an open economy?
- imports
- taxes
- savings
What are the 2 assumptions made in the circular flow of income?
- that households spend all of the income they receive
- demand and supply are in equilibrium
What is a closed economy?
- no imports/exports
- no relationships with other economies
What is the equation for macroeconomic equilibrium in the circular flow of income?
Taxes + savings + imports = exports + gov spending + investment
(T + S + M = X + G + I)
What is the Keynesian approach towards a recession?
- if we are moving towards a recession, we need to stimulate AD by increasing gov spending and lowering taxes
- the injections will have a multiplied effect, so the national income will increase further
What is government spending?
A direct injection with multiplied effects
What are the issues with the Keynesian approach?
- if demand increases but LRAS doesn’t, then we experience supply constraints
- rise in costs is reflected by a rise in prices, leading to inflation (demand pull)
- leads to the economic problem - unlimited wants, scarce resources
Give an example of when the Keynesian approach was used and explain
Furlough scheme:
- providing grants to firms to help them pay workers wages
- prevented high unemployment and saved the UK from a deep recession
What is the new classical approach?
- allowing the free market to clear the economy (reach equilibrium)
