macro AD & AS Flashcards
what is the equation for aggregate demand
AD = C+I+G+(X-M)
In the aggregate demand curve what does the wealth effect describe and how does it effect graph movement
as the price level decreases the purchasing power of income now increases as people are richer therefor more likely to spend money on goods and services
what does it mean if the aggregate demand curve is downwards sloping?
means that aggregate demand is changing purely for reasons to do with the price level changing
In the aggregate demand curve what does the trade effect have on the graph/slope
as the price level decreases exports become more competitive and imports. This will therefore increase net exports, causing the slope to go downwards
in the aggregate demand curve what does the interest effect have on the graph/slope
as price level decreases interest rates can be kept lower in the economy, this in turn will increase more consumption, investment, and reduces the value of exchange rate boosting net exports. Changes to the price level purely will cause the slope to face downwards
when does the AD graph contract
when price level increases as a result of (wealth, trade or interest effects) which only effect the y-axis
when does an extension in AD curve occur
when the price level decreases (which will then increase AD equation factors)
when does the AD curve slope downwards movement
occurs purely based on changes in factors effecting price level , this will therefor increase of decrease real GDP
what happens when withdrawals are equal to injections
national income is =
what happens when withdrawals exceeds injections
national income is lower
what happens when injections exceed leakages
national income will increase
what is aggregate demand
total demand for a country’s goods and services at a given price level in a given period of time
what is the equation for aggregate demand
AD = C + I + G + (X-M)
what is disposable income
income minus taxes
what are two influences of consumption (simple statements)
.disposable income
.rate of interest
what is GDP
-gross domestic product
-total level of economic activity carried out in an economy during a given period
how is GDP measured
-average of total income
-total expenditure
-total output
what does total income show
the ways in which households earn income (balance between rewards to, labour, capital, land..)
what does total national expenditure show
how resources are being used, what proportion is used in consumption and what in investment
what does national output show
the total value of final goods and services produced by a country’s economy
what does consumption function mean
the relationship between consumer expenditure and diposable income
what is the relationship between income and consumption
income is one of the main factors that determine consumption
increase in disposable income will result in increase in consumption
define investment
spending on capital goods by firms
what is the rate of interest
cost for borrowing and reward for lending
what are 5 factors that will effect net exports
.increase or decrease in income abroad
.increase or decrease in income at home
.exchange rate
.relative prices
.security
what are the 4 types of government spending
current spending
capital spending
welfare spending
debt interest
what is current government spending
spending on maintenance of key public services and public sector wages
what is capital spending
spending infrastructure projects
what are two determinates of net exports
real disposable income earned abroad
real disposable income earned at home
how does increase in real disposable income abroad effect Uk exports
if income for folks abroad increase the marginal propensity to import goods from the UK (our exports) will increase
how does decrease in real disposable income abroad effect UK exports
Refer to key vocabulary to describe spending
if there is a resession abroad the marginal propensity for them to import UK goods will decrease
what are the 6 determinates of investment
(IBCSCC)
interest rates
business confidence
corporation tax
spare capacity
competition level
capital price
what are the three withdrawals into the circular flow
savings
taxes
imports
what are the three injections in the circular flow
exports
investment
government spending
what will happen if injections exceed withdrawals
circular flow will expand (and so national income will rise)
what happens if leakages exceed injections
.circular flow will shrink (so national income will fall)
what do owners of firms receive and what is it a payment for (as they are apart of a household)
they receive profit for enterprise
what actually is MPC how is it calculated
.represents the amount of each extra pound that the consumer spends when given an extra pound in income
.it is change in consumption/change in income
will MPC for people of low income/ poorer countries be higher or lower
higher MPC’s
how is MPS calculated
change in savengs/change in income
what does MPS represent
amount of each extra pound that the consumer saves when given an extra pound in income
how is MPT calculated
change in tax paid/change in income
what does MPT represent
the amount of each extra pound earned that is spent paying taxes
how is MPM calculated and what does it show
.change in imports purchased/change in income
.for every extra £1 of income MPM is the proportion of that £1 spent on imported goods
what will change in price do to AD curve (briefly)
cause a movement along the curve
what is a demand-side shock
anything (positive or negative) that causes AD to change
example of negative demand-side shocks
-rise in interest rates
-rise in taxation
-fall in real GDP (have a knock on effect on confidence)
what is the relationship between average price level and aggregate demand
inverse
6 factors effecting consumption on AD graph
WIAFUJ
-wealth levels
-income levels
-animal spirits (consumer
confidence)
-future inflation expectations
-unemployment levels
-job security
what are the two different types of investment and explain them
-physical capital (machinery ect…)
-human capital (spending on skills of workers, training programmes ect…)
5 factors that may effect levels of investment
-interest rates
-future growth and demand
-profitability
-government policies (corporate tax, subsidies)
-efficiency of financial system
what are the two
what is the shape of the AD curve
downward sloping
what are 4 determinants of consumer spending
-interest rates
-consumer confidence for the future
-wealth effect
-inflation expectations
-income
what is the term used to explain why firms will be overoptimistic and invest excessively in good times
animal spirits
what in general is fiscal policy
involves changing government spending and taxation according to economic conditions
expansionary fiscal policy can increase, consumption, investment and government purchases, how?
-increase in consumption by increasing disposable income due to tax cuts
-increase investment by cutting business taxes
-increase gov purchases because government spending rises
how does expansionary fiscal policy effect the AD curve
shifts AD curve right as AD has increased
how does contractionary fiscal policy effect the AD curve
shifts the AD curve leftwards as AD has fallen
what 3 aspects of AD are decreased by contractionary fiscal policy
consumption
investment
government spending
how is government spending impacted during an economic boom
there is more spending and higher incomes
this means government receives more tax
and pay less benefits
Therefore have more to spend
what is spare capacity
how much spare
4 factors that influence net trade
-protectionism
-exchange rates (WIDEC SPICE)
-relative income (domestic and abroad)
-inflation rates
-spare capacity
what three factors can cause SRAS to shift
-Business costs (labour and raw material costs)
-exchange rates (may lead to higher import prices)
-government increasing taxes (increase cost of production)
what will cause a movement in the SRAS
a change in the average price level
what are the 3 differences between LRAS and SRAS
-in the short run at least one of the FOP are fixed
-in the long run all FOP are variable
-in the long run the economy is operating at full employment
what is a supply side shock
anything (positive or negative) that causes SRAS to change
what will a rise in global oil prices result in terms of SRAS
will cause shift left as imported costs of production rise
In terms of SRAS a bad harvest, technological improvement or a new mineral discovery are all regarded as…?
a supply-side shock
what is SRAS, what is the shape of the SRAS curve and why
-curve shows the total quantity firms will produce at each price level
-SRAS is upwards sloping
-as it shows how suppliers will react to a higher price level for final outputs of goods and services holding inputs constant
what shape is Keynesian LRAS
curves upwards
in detail describe the different points along the Keynesian LRAS at:
-bottom/low quantities of output
-moving closer towards the curve/as output rises
-moving towards Yfull
-At low quantities of output
.lots of spare capacity
.increases in output use up this spare capacity and they are not inflationary
.unemployed workers are hired and unused factors of production are used
-As output rises
.supply starts becoming a limiting factor
.there could be labour shortages, capital shortages or a shortage in raw materials this is inflationary but not impossible to increase output
-at Yfull all FOP are being used this is full output
labelled axis on LRAS graphs?
y=price level
x=real national output
what can shift the classical LRAS curve
an increase in the amount or quality of each FOP
factors effecting classical LRAS model
technology
infrastructure
enterprise
cultural attitudes
factor mobility
economic incentives
what are price level rises known as
inflation
define multiplier effect
number used to multiply a change in injection or leakage that leads to a greater final change in real national income
what happens to the multiplier in the economy if the MPW increases
it is reduced
the multiplier effect would be greater in an economy with no imports? true or false
true
what type of economy have the largest multiplier and why
-larger in closed or at least less open economies
-because injections into the circular flow stayed in the economy
the UK economy grew in the decade after 2008, but why might the trend of weak consumer expenditure have persisted
UK government has taken many steps to increase tax-free allowance of annual income since 2010. Why might tax giveaways make more economic sense when directed at the poorest
.many economists argue that people who earn less have higher MPC’s
.if the government is to give a take break of 100million, they will find this multiplies into higher GDP if granted to those on lower income
.(most likely because the richest would use the same tax break to accumulate more wealth not inject it back into the economy)
inflation expectations effect consumer spending, what are inflation expectations?
.if prices are going to rise in future people spend more now and save less
.this raises consumer spending as savings represent forgone consumption
name three leakages from circular flow
-save
-tax
-import
evaluate impact of increased inflation on consumption
“Assuming all other factors affecting consumption remain constant (ceteris paribus), an increase in inflation would…”
describe three reasons why consumer expenditure in an economy might be relatively low (3 points 6 marks)
1) interest rates are a factor effecting consumer expenditure. If interest rates are high people are more willing to save their income that they would have spent, this decreases consumer expenditure
2) consumer expenditure is also impacted by taxation. If the government increase taxation on income, consumers will have less disposable income they are willing to spend and therefore consumer spending will decrease
Define multiplier
Process by which any changes in compounds of AD will lead to an even greater change in RGDP
Multiplier equation
1/1-MPC
3 factors effecting a he value of the multiplier
Factors effecting MPC
Culture of saving
Taxation
What is the accelerator effect
Changes in investment can be directly linked to changes in the rate of HDP growth
What are the 3 phases of the economic cycle
Boom
Recession
Recovery
5 What happens during recovery of economic cycle
Rising consumer confidence
Higher houseing prices
Rising business confidence
Higher investment
Loose policy
What is the boom bit of economy cycle
Growth is faster than trend
High profits
High consumer and business confidence
High import demand
Rising tax revenue
What happens during rescission bit of business cycle
Declining AD
high unemployment
Falls in confidence and investment
Fall in housing
What is a negative output gap
When actual out is less than potential output
What is negative output gap also known as
Deflationary gap
How would a negative output gap occur
Using labour unsustainably
overusing capital
taking people out of natural rate ic unemployment
Is + output possible in LRAS
Yes but not sustainable
