Macro- Aggregate Demand and Aggregate Supply Flashcards
Circular Flow of Income
Model of the economy that shows the flow of goods and services, the factors of production and money around the economy
Injections
Spending Power entering the circular flow of income resulting from:
-Investment
-Export Revenue
-Government Spending
Leakages
Spending power leaving the circular flow of income resulting from:
-Savings
-Imports
-Taxes
Macroeconomic Equilibrium
AD=AS
Aggregate Demand (AD)
Is the total demand, or the total spending in an economy over a given period of time.
AD Components
AD= C+I+G+(X-M)
Consumption
Consumer Spending on goods and services.
Investment
Spending by business on capital goods which leads to creation of real goods
Government Spending
Spending by the government for the provision of goods and services.
Exports
Goods and services sold to foreign countries that provide an inflow of money.
Imports
Goods and services bought from foreign countries that lead to an outflow of money.
Net Exports
Exports-Imports
Exchange Rates
Is the price of a currency in terms of another currency.
Appreciation
If the value of the currency rises against that of another currency.
Depreciation
If the value of a currency falls on relation to the value of another currency.
Aggregate Supply (AS)
Total supply of all goods and services produced within an economy at a given overall price at a given time.
Short Run Aggregate Supply (SRAS)
Aggregate Supply when at least one factor of production is fixed. Affected by cost of production raw materials, wage costs and oil prices.
Short Run
When at least one factor of production is fixed.
Long Run aggregate supply (LRAS)
Is determined by all factors of production- size of the work force, size of capital, levels of education, labour productivity and economic growth.
Long Run
When all factors of production are variable.
Multiplier
An increase in AD (initial injection) leads to an even bigger increase in national income.
Positive Multiplier
Increase AD
Injections>Leakages
Negative Multiplier
Reduce in AD
Injections<Leakages
Accelerator Theory
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.
Output Gap
The difference between the actual and potential output of the economy
Negative Output Gap
When GDP is lower than predicted: the economy is producing below full output.
Positive Output Gap
When GDP is higher than predicted; the economy is producing above full output.
Marginal Propensity To Consume (MPC)
Proportion of each additional pound of household income that is used to consume.
Marginal Propensity to Save (MPS)
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
Marginal Propensity to Withdraw (MPW)
The proportion of an increase in income that is withdrawn from the circular flow of income.
Taxes+Savings+Imports
MPT+ MPS + MTM
Calculating Size of Multiplier
1/1-MPC
OR (depends on the question)
1/MPS+MPT+MPM
Average propensity to consume (APC)
The percentage of income spent on goods and services rather than saved.
Average Propensity to Save (APS)
The percentage of income that is saved.
