Macro- Aggregate Demand and Aggregate Supply

Question 1

Circular Flow of Income

Answer 1

Model of the economy that shows the flow of goods and services, the factors of production and money around the economy

Question 2

Injections

Answer 2

Spending Power entering the circular flow of income resulting from:
-Investment
-Export Revenue
-Government Spending

Question 3

Leakages

Answer 3

Spending power leaving the circular flow of income resulting from:
-Savings
-Imports
-Taxes

Question 4

Macroeconomic Equilibrium

Answer 4

AD=AS

Question 5

Aggregate Demand (AD)

Answer 5

Is the total demand, or the total spending in an economy over a given period of time.

Question 6

AD Components

Answer 6

AD= C+I+G+(X-M)

Question 7

Consumption

Answer 7

Consumer Spending on goods and services.

Question 8

Investment

Answer 8

Spending by business on capital goods which leads to creation of real goods

Question 9

Government Spending

Answer 9

Spending by the government for the provision of goods and services.

Question 10

Exports

Answer 10

Goods and services sold to foreign countries that provide an inflow of money.

Question 11

Imports

Answer 11

Goods and services bought from foreign countries that lead to an outflow of money.

Question 12

Net Exports

Answer 12

Exports-Imports

Question 13

Exchange Rates

Answer 13

Is the price of a currency in terms of another currency.

Question 14

Appreciation

Answer 14

If the value of the currency rises against that of another currency.

Question 15

Depreciation

Answer 15

If the value of a currency falls on relation to the value of another currency.

Question 16

Aggregate Supply (AS)

Answer 16

Total supply of all goods and services produced within an economy at a given overall price at a given time.

Question 17

Short Run Aggregate Supply (SRAS)

Answer 17

Aggregate Supply when at least one factor of production is fixed. Affected by cost of production raw materials, wage costs and oil prices.

Question 18

Short Run

Answer 18

When at least one factor of production is fixed.

Question 19

Long Run aggregate supply (LRAS)

Answer 19

Is determined by all factors of production- size of the work force, size of capital, levels of education, labour productivity and economic growth.

Question 20

Long Run

Answer 20

When all factors of production are variable.

Question 21

Multiplier

Answer 21

An increase in AD (initial injection) leads to an even bigger increase in national income.

Question 22

Positive Multiplier

Answer 22

Increase AD
Injections>Leakages

Question 23

Negative Multiplier

Answer 23

Reduce in AD
Injections<Leakages

Question 24

Accelerator Theory

Answer 24

The Level of Investment depends on the rate of change of GDP. So an increase in the rate of economic growth will cause a larger change in I.

During Economic Boom (rise in Real GDP) - Investment will increase dramatically with many more capital goods being purchased to expand capacity.

If Real GDP is constant- only investment that may take place for firms is replacement investment (replace worn out capital goods).

During Recession- Net investment may be negative with some capital goods not being replaced due to lack of funds/ or firms need to reduce capacity.

Question 25

Output Gap

Answer 25

The difference between the actual and potential output of the economy

Question 26

Negative Output Gap

Answer 26

When GDP is lower than predicted: the economy is producing below full output.

Question 27

Positive Output Gap

Answer 27

When GDP is higher than predicted; the economy is producing above full output.

Question 28

Marginal Propensity To Consume (MPC)

Answer 28

Proportion of each additional pound of household income that is used to consume.

Question 29

Marginal Propensity to Save (MPS)

Answer 29

Proportion of each additional pound of household income that is used for saving.

A consumers marginal propensity to save plus marginal propensity to consume MPC+MPS= 1

Question 30

Marginal Propensity to Withdraw (MPW)

Answer 30

The proportion of an increase in income that is withdrawn from the circular flow of income.

Taxes+Savings+Imports
MPT+ MPS + MTM

Question 31

Calculating Size of Multiplier

Answer 31

1/1-MPC

OR (depends on the question)

1/MPS+MPT+MPM

Question 32

Average propensity to consume (APC)

Answer 32

The percentage of income spent on goods and services rather than saved.

Question 33

Average Propensity to Save (APS)

Answer 33

The percentage of income that is saved.