Macroeconomic models Flashcards
What is wealth?
The sum or stock, of all your assets added up
What is income?
measure of the flow of money a person or economy receives each year
What are the factors of production?
The things that are needed to produce something. They spell out CELL; Capital, Enterprise, Land and Labour
What can be deduced from the circular flow of income model?
Income=expenditure=output
What is national income?
The income earns by everyone altogether in a country
What is national income?
The income earns by everyone altogether in a country
Why does national income=national expenditure=national output?
The total spending from households across the economy must come from the total income they earn. Households spend on the total output on goods and services produced by firms in the economy
What is real GDP?
Real gross domestic product .A statistic that measures the value of an economy national output, adjusted for inflation.
What are the three types of leakages/withdrawals?
Savings, imports, taxes
What are taxes?
Money paid to the government by consumers, firms and workers
What are savings?
Disposable income that is not spent by households.
What are imports?
Spending on foreign goods and services.
What is a leakage/withdrawal?
When money leaks out of the circular flow
What is factor income?
Money paid by firms to households in return for factors of production
What are the three types of injections to the circular flow of income?
Government spending, Investment and exports
What is investment?
Banks use our savings to invest back into our firms, injecting money into the circular flow
What is government spending?
When the government injects money into the economy by spending on schools, teachers, hospitals, doctors etc.
How does the circular flow of income work?
Firms buy factors of production, like labour and land, from households. In return, they pay households factor incomes, like wages and rent. Households then spend their factor incomes on firms in exchange for the goods and services.
Disposable income
income minus taxes
Multiplier effect
When an initial increase in an injection leads to a much bigger, overall effect on the economy
Multiplier ratio
Total change in real GDP/Initial injection or 1/1-MPC
Accelerator effect
When real GDP increases, which signals to firms that consumers are demanding more goods, so firms increase their investment, to produce more goods
Benefits
The money given by the government to people who need financial help.
interest rate when saving
The return on your savings
Interest rate when borrowing
The percentage of your borrowing which you pay to the bank
short run
when at least one factor of production is fixed
aggregate supply
Total amount produced in an economy
Contraction in AS
A decrease in the price level leads to a decrease in real GDP
long run
all factors of production are variable
spare capacity
When the economy is producing below its maximum potential output (horizontal part of Keynesian LRAS)
Bottle neck
When the economy is nearly producing at its maximum potential output (bendy part of Keynesian LRAS
Full employment
When the economy is producing at its maximum potential output (vertical part of Keynesian LRAS)
why would
SRAS shift
The SRAS will shift if there is a change in the cost of production in an economy
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
Downward multiplier effect
Where an initial increase in withdrawals leads to a larger decrease in aggregate demand
Positive wealth effect
When an increase in wealth makes consumers feel more confident and therefore increase their consumption, increasing aggregate demand.
Factors of production
Capital, enterprise, land, labour
High animal spirits
Investor confidence is high
Wealth effect
When changes in consumers wealth affect their confidence and spending
Savings ratio
What percentage of disposable income consumers will save
Savings ratio formula
Total savings/post tax income
Marginal propensity to consume
A measure of the increase in consumer spending due to an increase in income
