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
An initial increase in aggregate demand may cause firms to?
Need more capital to produce additional output
What are the possible “phases” of an economic cycle (e.g. Growth)
Boom
Recession
Slump
Recovery
What are net exports
The value of imports subtracted by the value of exports
Which good/service is produced in one country and sold to another
Exports!
What is different about the Keynesian LRAS curve and why?
Keynesians believe that once full employment is reached, the LRAS curve will become vertical as if all resources are being employed, it is not possible to raise output further. At low levels of output and employment, there would be spare capacity in the economy
What does the classical LRAS curve look like?
It is perfectly price inelastic so it is fully vertical
What does a country’s gross investment include
Replacement investment
Net investment
When is a country in recession
When there are two quarters of negative economic growth
