Macro Models Flashcards
the definition of: Income
Income is the flow of money received by a person or economy each year.
the definition of: Wealth
Wealth is the sum, or stock, of a person or economy’s assets.
what is the definition of assets
Items that you own.
What is the Circular Flow Equation
National income = national expenditure = national output
What is meant by factor incomes
Money paid by firms to households in return for factors of production.
What is the definition of real gdp
Real GDP stands for Real Gross Domestic Product. Real GDP measures the value of an economy’s national output, adjusted for inflation
What are the three types of withdrawals in the circular flow of income model
Savings
Imports
Taxes
What are savings within the Circular Flow of Income
Disposable income that is not spent by households. Savings are a leakage.
What are imports within the Circular Flow of Income?
Spending on foreign goods and services. Imports are a leakage.
What are injections within the Circular Flow of Income?
when money is injected into the circular flow.
What are the different types of injections into the circular flow of income?
Government spending
Investment
Exports
What is investment within the Circular Flow of Income?
When Banks use our savings to invest back into our firms, injecting money into the circular flow.
What is the share of each component of Aggregate Demand?
Consumption = 60%
Investment = 14%
Government Spending = 25%
Exports minus Imports = 1%
Net investment
Net investment = Gross investment - Depreciation
the definition of: Multiplier Effect
The multiplier effect is when an initial increase in an injection leads to a much bigger, overall effect on the economy.
the definition of: Disposable Income
Income minus taxes.
What is national income equal to
National Expenditure = National Output
Outline the processes in the circular flow model
Firms buy factors of production, like labour and land, from households. In return, they pay households factor incomes, like wages and rent
What are Exports within the Circular Flow of Income?
When firms export goods abroad, foreign consumers pay us, so money is injected into our economy.
What is meant by net investment
GrossInvestment−Depreciation
What is meant by aggregate demand
The total demand for all goods and services within an economy
definition of: Multiplier Ratio
The multiplier ratio shows the increase in GDP following an initial injection into the economy.
What are the three ways of calculating the multiplier ratio
= 1/(1-MPC)
= 1/MPW
= 1/(MPS + MPT + MPM)
Marginal Propensity to Save
The proportion of additional income that is saved.
Marginal Propensity to Import
The proportion of additional income that is used on imports
Marginal Propensity to Tax
The proportion of additional income that is taxed.
Marginal Propensity to Consume
The proportion of additional income that is spent on consumption
Marginal Propensity to Withdraw
The proportion of additional income that is withdrawn from the economy (saved, taxed or spent on imports)
MPW formula (2)
MPW = MPS + MPT + MPM
MPW = 1 - MPC
the definition of: Interest Rate (Saving)
The percentage of your savings paid to you by the bank.
Interest Rate (Borrowing)
The percentage of the amount you borrow that you need to pay to the bank.
What happens to saving borrowing and consumption when interest rates increase?
Saving Borrowing Consumption
Increase Decrease Decrease
What is meant by the Downward Multiplier Effect
The downward multiplier effect is where an initial increase in withdrawals leads to a larger decrease in aggregate demand.
What is meant by animal spirits
refer to investor confidence, when animal spirits are high investor confidence is high.
What is meant by the wealth effect
When changes in consumers’ wealth affect their confidence and spending.
What is the Savings Ratio
The savings ratio gives the percentage of a consumer’s disposable income that is saved.
What is the formula for the savings ratio
Savings ratio = (Total Savings/Disposable Income) x 100
What are the components of AD
CIGX-M
definition of: Aggregate Supply
Total amount produced in an economy.
Within the context of Keynesian LRAS what is spare capacity?
When the economy is producing below its maximum potential output
Within the context of Keynesian LRAS what is a bottleneck?
When the economy is nearly producing at its maximum potential output
bendy part of Keynesian LRAS).
Within the context of Keynesian LRAS what is full employment?
When the economy is producing at its maximum potential output
What causes the SRAS curve to shift?
if there is a change in the cost of production in an economy.
Explain the wealth effect in Europe
The wealth effect in Europe is approximately 0%.
describes the downward multiplier effect?
An initial increase in withdrawals leads to a larger decrease in aggregate demand.
summary of the multiplier effect
An initial injection promotes further rounds of spending causing aggregate demand to increase by more than the initial injection
How do we workout multiplier ratio with change in real gdp and initial injection
Change in real gdp / initial injection
What is the share of each component of Aggregate Demand?
Consumption = 60%
Investment = 14%
Government Spending = 25%
Exports minus Imports = 1%
What are the three types of aggregate supply curve?
SRAS, neoclassical LRAS and Keynesian LRAS
What is true for the horizontal start part of the keynesian lras
Lots of available resources which is why real gdp increase without affecting price level
What is true at the point where keyensia lras is perfectelly vertical
economy is at full employment
As the keynesian lras begins to slope upwards this is known as a bottleneck what causes this bottleneck
output is increasing and so resources begin to run out.
Why does the short run aggregate supply curve slope upwards?
Increasing output increases costs in the short run and so price level increases
What is the short run?
A period where at least one factor of production is fixed
Oil, gas, coal, wheat, steel and corn, are all examples of
Commodities.
What are benefits?
Payments made to unemployed or low income workers shown as an increase in consumption in the AD formula
Important characteristics of Neoclassical LRAS
The LRAS curve is vertical, reflecting the idea that in the long run, the economy’s output is determined by its productive capacity
economy operates at full employment output
When do we shift sras
when costs change
when do we shift lras
whenever the productivity or quantity of factors of production changes
What was the dot com bubble
What % is VAT in the uk
20%
what effect would and increased VAT have on sras and lras
sras would shift left, lras would remain the same
What does the exchange rate of a currency tell us
An exchange rate tells us the price of one currency in terms of another.
What are the y and x axis labelled as for a exchange rate diagram
Y: Exchange rate
X: Quantity of currency
What is the supply of a currency is determined by
Tourism abroad and imports
The demand of a currency is determined by
domestic tourism and exports
An appreciation of the exchange rate will occur if
Demand for pounds shifts right and/or supply of pounds shifts left
A depreciation of the exchange rate will occur if
Demand for pounds decreases and/or supply of pounds increases
what is speculation in the context of currencies
Speculation is when investors predict changes in an exchange rate to make a profit .
As the price of imported goods increases, the rate of inflation in the UK
increases
As the pound depreciates what happens to the demand for uk exports
Exports become cheaper for foreigners meaning the demand for exports from the uk increases
What are the axis labelled for a labour market diagram
Y: Wage
X: Quantity of labour
What is excess supply known as in the labour market?
excess supply is known as unemployment
Who supplies labour
Workers
In a labour market, wages increase so that they are now at the equilibrium.
What happens to the demand and supply of labour
Supply of labour increases, whilst demand drops
explain why the labour demand curve is downward sloping
?
A decrease in wage increases the number of workers that firms want to employ
