Macro 2/6 1st year Flashcards
define aggregate demand
total demand of an economy goods and services at any given price level over a given period of time
what are the four AD components
Consumption (66% uk gdp)- total spending by consumers on domestic goods and services
Investment (18% uk gdp)- spending that increases the size of a nations capital stock
Gov spending (20% uk gdp)- spending by gov to inject economic activity into the economy
Net exports (-4% uk gdp)- net trade
what is the driving force behind performance of the uk economy
consumption and consumer confidence
how do households make purchases
they use disposable income
what is disposable income
the amount of income in any period that remains after deduction of taxes
what is the process of acquiring disposable income
supply of labour -> earns gross pay -> direct taxes -> take home pay
what is disposable income used to consume
Goods (physical.. durable and non durable)
Services (intangible.. financial transport educational and health)
what is propensity to consume
the proportion of disposable income which is used to buy goods and services
what is average propensity to consume (APC)
the proportion of TOTAL income that is consumed
what is the equation for APC
consumption/income
what is marginal propensity to consume (MPC)
the proportion of a CHANGE in income that is consumed
what is the equation for MPC
change in consumption/change in income
what is the consumption function
a model devised by Maynard Keynes to illustrate the relationship between consumption and disposable income
what are some features of the consumption function model
- positive relationship between consumption and disposable income
- doesn’t start at the origin because consumption occurs even if disposable income =0
what is autonomous consumption
some consumption that occurs even when disposable income =0 due to daily necessities
what is discretionary consumption
money spent by consumers on goods and services that aren’t necessities and depend on the amount of disposable income
how do you find the marginal propensity to consume from a consumption function model
find the gradient from any part of the slope t a given income and consumption
what are some determinants of consumption
- level of disposable income
- level of savings
- interest rates
- inflation rate
- inflation expectations
- stock of wealth
what is the relationship between savings and consumption
inverse relationship, as savings increase, consumption decreases
define savings
disposable income that is not spent on the consumption of goods and services
what is the avrg propensity to save equation
savings/income
what is marginal propensity to save equation
1-MPC
define wealth
a physical or financial asset that’s a stock of value and can be used to generate income
how does increased wealth lead to increased consumption
wealth increases confidence which in turn increases consumption
how does an increase in interest rates affect consumption
people will save more so consumption will go down
how does a decrease in interest rates affect consumption
people will decrease saving and increase consumption
what goes on the X and Y axis for an aggregate demand curve
X axis = real output
Y axis = price level
why is the AD curve downwards sloping
decrease in price level = increase in real output
what causes a movement along the ad curve
change in price level
what is the trade affect and how does it affect real output
decrease in domestic prices = increase in demand for exports increasing net exports and AD
what is an AD curve shift
a change in real output at every given price level due to any other relevant factor apart from changes in price
what are 6 factors of an AD shift
confidence, exchange rates, interest rates, population changes, wealth changes, tax changes
how do inflation rates affect consumption
inflation is the rate at which prices change within an economy and affects overall confidence of consumers so may decrease consumption long term
how do demographics affect consumption
demographics are population dynamics, showing the larger the population and the faster the growth rate, the greater demand for goods and services
define investment
spending on capital goods by firms and government
define capital goods
goods used in the production of goods and services
what is infrastructure
roads + rail networks
what is human capital
human skill and services
what is the importance of investment
economic growth and competitiveness
how would decreasing consumer goods on a PPF with capital goods on the X axis and consumer goods on the Y axis have an affect on real output
increasing capital good production will in the short run decrease the ability to produce consumer goods, but in the long run, will increase capacity to produce consumer goods, therefore shifting the PPF outwards due to low costs and innovation.
what is government spending influenced by
politics, economic performance, country finances, demographics and lifestyles
define the multiplier effect
the process by which any expenditure generates a trail of subsequent expenditure so that the resultant change in national income will exceed the amount initially expended
what effect does the multiplier effect have on an AD shift
shift is extended further than the original shift
what is the equation for the multiplier effect
1/1-MPC
define aggregate supply
total amount of goods and services the whole economy can supply at every given price level
what model of AS include SRAS and LRAS
classical model
define SRAS
total supply of goods and services at any given price level over a given period of time at a given wage rate
define varying output
when production can exceed productive capacity for short periods of time
why does increasing output in the short run cause prices to increase
it is difficult and costly to engage other factors, and working labour more intensely means increasing wages hence why price levels must increase
how does cost increase and decrease cause inwards and outwards shifts in SRAS
costs up = inward shift
costs down = outwards shift
what are 4 causes of shifts in AS
changes in wage rates, indirect taxes/subsides, exchange rates, raw materials price
what is supply side shock
a sudden, unexpected and significant change in the cost of a factor of production
what are 4 features of LRAS
cannot exceed capacity for long periods of time, capacity does not depend on price or costs, perfectly inelastic, vertical
what is full employment
the level of output where all available factors of production are engaged in the production process
what are inactive resources
resources are capable but not willing e.g. unused factories
what causes a LRAS shift
a change in the productive potential of an economy due to a change in quantity or quality of a factor of production
what is a negative output gap and what does this mean for employment rates
when factors are working below full level of output (equilibrium is left of LRAS). means more unemployment
what is a positive output gap and what does this mean for employment rates
when factors are working above full level of output (equilibrium is right of LRAS). means lower unemployment
what is a no output gap and what does this mean for the economies capacity
when factors are at the full employment level of output and the economy is at full capacity (equilibrium is on the LRAS)
what is the relationship between real output and unemployment
as real output increases, unemployment decreases, so an inverse relationship
what are the four main macro economic goals
growth, stable prices and inflation (between 2%-1%), low unemployment, X-M
