Macroeconomics Model Flashcards
Define Aggregate demand
Aggregate demand (AD) refers to the total demand for all goods and services produced by a country for a given price level (GPL), where components are C, I, G and (X-M). It shows the amount of domestically produced goods and services which households, firms, governments and foreigners are willing to buy at each general price level.
What causes a movement along the AD curve?
A change in price levels
- Wealth effect, when GPL increases
- Foreign sector effect
What is the formula for non-price determinants of AD?
AD = C + I + G + (X-M)
Define consumption expenditure.
Consumption expenditure is the amount that households spend out of their disposable income on consumer goods and services to satisfy current wants.
What are the two types of consumption consumption expenditure made up of?
Induced consumption: consumption expenditure that varies directly with income, the higher the income the higher the consumption
Autonomous consumption: consumption expenditure that does not vary with income. When income rises, consumption does not change
Define Investment expenditure.
Investment is the expenditure on new capital assets
eg. New fixed capital assets or the increase in stocks and inventories
Define government expenditure.
Government expenditure refers to spending by governments on goods and services for current consumption or for expanding the productive capacity of its economy.
Define net exports
Net exports is equal to export revenue minus import expenditure
Where export revenue is the income received by selling domestically produced goods and services to foreigners and import expenditure is the spending by residents on goods and services that are produced in other countries.
Define aggregate supply.
Aggregate supply refers to the total output of goods and services produced by an economy for a given general price level.
Explain what is SRAS
In the SRAS range, real national output is much lower than its full employment income level (Yf). For the SRAS, there is a high level of unemployment or an
the abundance of spare capacity
This spare capacity allows the production of output to be increased without incurring higher additional unit costs. In other words, real
national output can increase without a rise in the general price level.
What are the determinants that cause a shift in the SRAS curve?
- Changes in prices of factor inputs (cost of production)
- Changes in the expected future prices
Explain what is LRAS
LRAS is when the economy has reached full employment, physical output can no longer increase as resources have been used to their maximum capacity. This also
means that the economy is producing on its PPC. If AD were to rise, only the general price level would increase with no change in real national output.
What are the determinants that cause a shift in the LRAS curve?
- Changes in quantity of resources
- Changes in quality of resources
- Impact of improvement in technology
What is the multiplier effect?
The multiplier effect is a numerical coefficient for which a change in autonomous spending ie C,IG,(X-M) is multiplied to show the final change in equilibrium level of real national income.
