Macroeconomics- How The Macroeconomy Works

Question 1

What is national income?

Answer 1

The total level of output in an economy and is the main measure of GDP.
It means the same as national output, national product and national expenditure.
A simple or closed economy is where there is no foreign trade, injections or withdrawals

Question 2

What is income, expenditure and output?

Answer 2

Income- value of income paid by firms to households in return for factors of production (value of labour)

Expenditure- value of spending on goods and services by households

Output- value of goods and services from firms to households

Question 3

What is SPICED?

Answer 3

Strong pound imports cheap exports dear

Question 4

What is the multiplier effect?

Answer 4

An injection into the circular flow of income leads to a proportionally greater increase in national income

Question 5

What are economic shocks?

Answer 5

An unexpected event that has a large impact on the demand and/or supply in an economy

Question 6

What is aggregate demand?

Answer 6

The total planned spending on goods and services produced within an economy by households, firms, governments and overseas

AD= Consumption + government spending + investment + exports - imports.
(CGI Xmen)

Question 7

What is consumption and investment

Answer 7

Consumption- total planned spending on UK goods and services (~65% of AD)

Investment- total planned spending by firms

Question 8

What are the types of government spending?

Answer 8

Transfer payments- e.g. benefits and pensions

Capital spending- e.g. building schools

Current spending- day to day upkeep of government supplied services

Question 9

What determines consumption?

Answer 9

Taxation
Expectations and confidence
Interest rates
Inflation expectations
Population/age
Availability of credit
Employment
Brexit

Question 10

What are savings?

Answer 10

Income minus consumption
The proportion of income that is not spent and is a withdrawal from the circular flow of income

Question 11

What are the determinations of savings?

Answer 11

Age
Income
Interest rates
Availability of savings schemes
Financial institutions
Future expectations and confidence
Cultural reasons

Question 12

What are the determinants of investment?

Answer 12

Technological change
Cost of capital goods
Expectations/confidence
Rate of interest
Profits
Gov. policy
Subsidies

Question 13

What is the accelerator effect?

Answer 13

Firms decide how much to invest based on national income
If national income is high then investment will increase and national income will increase even more

Question 14

What are the determinants of government spending?

Answer 14

Government policies and objectives
The country’s economy
The budget
Changing priorities
Taxation

Question 15

What are the determinants of exports minus imports?

Answer 15

Price
Exchange rate
The world in relation to the UK
Relative inflation
Non price factors like environmental targets

Question 16

What is marginal propensity to consume and marginal propensity to save?

Answer 16

Marginal propensity to consume- How much people plan to spend on goods and services with each extra pound

Marginal propensity to save- How much people plan to save with each extra pound

MPC + MPS = 1

Question 17

What is the Aggregate supply curve?

Answer 17

The sum of all industry supply curves in the economy.
It shows how much output firms wish to supply at each price level.

Question 18

What is the short run AS curve?

Answer 18

An upward sloping curve

Shows the period when money wage rates and prices of all other factors are fixed

Considers the relationship between output/GDP and the price level

Question 19

What factors shift the SRAS curve?

Answer 19

Wage rates
Price of raw materials
Taxation
Rate of interest
Exchange rates

Question 20

Long Run Aggregate Supply curve

Answer 20

In the long run there is a limit to how much firms can increase supply as they run into capacity constraints

LRAS is not affected by price and the classical theory is that the curve is a vertical straight line

The LRAS curve shows an economy’s productive potential and shows the same as the PPD curve

Question 21

What can cause shifts in LRAS?

Answer 21

Education and training
Investment
Technology
Specialisation
Work practices
Regulations
Mobility of labour

Question 22

Keynesian LRAS curve

Answer 22

Keynes believed that AS was the same in the long run and short run

The AS curve is horizontal when there is spare capacity in the economy, like in a recession

Keynes believed that in a recession AD can be increased without increasing inflation which is why the AS curve is horizontal

Classical economists believed that in a recession the economy would heal itself. Wages according to classical economists are variable in the long run and would reduce to make labour cheaper and so the economy would be brought back up to maximum capacity.

Keynes did not believe that wages were variable in the long run. Because workers do not like to take pay cuts and so it takes too long for wages to reduce and the economy to self correct.