Macro 1.1 Flashcards
What is the circular flow of income
Firms buy factors of production from households
Households spend factor incomes on goods and services produced by firms
What is real GDP
A measure of all goods and services produced by an economy in a given year
3 Leakages
Savings
Imports
Tax
3 injections
Government spending
Investment
eXports
Components of AD
C + G + I + (X-M)
Contraction in AD = ________ in price level
Increase
What is Multiplier effect
When an initial increase in injections leads to a larger increase in AD
Multiplier ration =
1/ 1 - MPW
MPS + MPT + MPM
High MPC =
More likely to spend
Interest rates =
Return on saving /slash/ cost of borrowing
High interest rates -
Decrease in AD
High return on saving // high cost of borrowing
Low interest rates
Increase AD
Low return on saving // low of cost of borrowing
Components of consumption
Consumer confidence
Wealth effect
Savings ratio =
Total saving / Disposable income x 100
Difference between Short and long run aggregate supply
Short run – At least one factor of production is fixed
Long run – All factors of production are variable
