Macro : Aggregate Demand and Aggregate Supply Flashcards
The Multiplier Effect
when an initial injection into the circular causes a bigger final increase in real national income
The Accelerator Effect
when an increase in (GDP) results in a larger rise in capital investment spending
A reduction in income tax will cause an increase in consumers’
disposable income. AD will shift
To the right
If a government changes its fiscal policy and decides to
increase its spending above any increase in its revenue. AD will shift
To the right
A weak currency will make exports cheaper and imports more
expensive. This will lead to a rise in net exports. AD will shift
To the right
A rise in interest rates will lead to a reduction in consumer
spending because people will choose to save more.
Higher interest rates also lead to a reduction in investment
because borrowing the money to invest becomes more
expensive. AD will shift
To the left
A strong currency will make exports more expensive and
imports cheaper, so there will be a fall in net exports. AD will shift
To the left
Formula for calculating the Multiplier from the MPC
1
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1 - MPC
Formula for calculating the Multiplier from the MPW
1
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MPW
SRAS is shifted by
Changes in Costs of Production
LRAS is shifted by
Changes in Factors of Production
A rise in wages above any increase in productivity
− If wages make up a large proportion of a firm’s total costs
then this could lead to a significant rise in prices AS will shit
To the left
A rise in the cost of imported raw materials. AS will shit
To the left
A rise in indirect taxes
− If the government raises indirect taxes, this will increase costs. AS will shit
To the left
Conflicts Between Economic Objectives
Inflation and Unemployment
Economic Growth and Inflation
Inflation and Equilibrium in the Balance of Payments
Economic Growth and Environmental Protection
Economic Growth and a Reduction in Wealth Inequality
