Macro Book 2 Flashcards
Aggregate Demand/Supply, Macro Equilibrium
What makes up aggregate demand
Consumption + Investment + Government Spending + (Exports - Imports)
What is the “wealth effect”
Consumers will spend more as wealth rises
What is consumption
The act of using disposable income for the purchase of consumer goods/services
What can sustained increases of consumption lead to?
Demand-pull inflation
What is the correlation between income and spending
Positive (as income rises, consumers buy more)
Who is responsible for setting interest rates
The Bank of England via the Monetary Policy Committee, which meets eight times a year
What are interest rates often described as?
The reward for saving and the cost of borrowing
The more confident consumers are…?
The more they are willing to spend their income and to take on debt
What is the proportion of an increase in income that is spent
The marginal propensity to consume (MPC)
If someone with an APC of 0.75 was earning £260,000, how much would they spend?
£195,000
How would you find someone’s MPS if you already had their MPC
1 - Marginal Propensity to Consume = Marginal Propensity to Save
What is the multiplier effect
An increase in aggregate demand resulting in a futher increase in aggregate demand
How could you work out the size of the consumption multiplier
1/Marginal Propensity to Save
What does investment mean
The total planned expenditure by firms on real output produced in the economy
What is the accelerator theory based on
It is based on an assumption that firms wish to keep a stable ratio between their output and their stock of fixed capital
