Macroeconomics, Part 7- How the Macroeconomy Works Flashcards
Injections definition:
Money going into the economy.
Withdrawals definition:
Money leaving the economy.
What is the macroeconomic consumption function?
AD = C + I + G + (X-M)
Aggregate Demand = Consumer spending + Spending by businesses + government spending + (exports - imports (balance of payments))
Consumer confidence definition:
Illustrates the optimism the general public has on the future.
What will happen if consumer confidence is high?
People will spend more and the economy will grow.
What will happen if consumer confidence is low?
People will save more and the economy will shrink.
In the circular flow of income, how does money get into the economy?
- Government spending (G)
- Bank loans for investment (I)
- Exports (E)
In the circular flow of income, how does money leave the economy?
- Taxation (T)
- Savings (S)
- Imports (M)
Capacity definition:
The maximum level of goods or services produced.
Spare capacity definition:
Resources left over when you’re not working at capacity.
What are the factors affecting consumer spending?
- Interest rates at the bank
- Consumer confidence
- Tax rates
- Stage of the economic cycle
- Inflation expectations
What factors affect exports?
- International competitiveness
- Stage of the economic cycle over seas
- Trade restrictions e.g. tariffs
- Exchange rates
What factors affect government spending?
- Stage of the economic cycle
- level of tax revenue
- Size of the public sector
What factors affect business spending?
- business confidence
- Interest rates
- Stage of the economic cycle
- Level of spare capacity
What factors affect imports?
- International competitiveness
- Foreign government regulations
- Stage of the economic cycle
- Exchange rate
- Trade restrictions e.g. tariffs
Aggregate supply definition:
Total value of all goods and services produced in an economy in a year
What are the factors that cause a rightward shift of the SRAS curve?
- Fall of business’ costs of production
- A fall in the unit labour costs, (lower wage rates or increase in productivity)
- Reduction in indirect taxes such as VAT
- Increase in subsidies
- Technical progress
What are external factors that affect aggregate supply?
- World oil and gas prices
- Energy prices / costs
- Other mineral / metal prices
- Foodstuff prices
- Import tariffs / quotas
What causes shifts in SRAS?
- Input costs (wage costs, labour productivity, raw material and component prices, interest rates, business rents, fuel, energy costs)
- Business taxes, subsidies and imported costs (VAT, environmental charges, subsidies, costs of meeting regulations, costs of imported components (exchange rates))
- Supply shocks (natural disasters, political crisis)
Hot money definition:
The general term for money that is invested. For example putting it on bonds, shares, loans or property
What is the multiplier process?
If the government injects money of that into the economy, some of it will be spent. That money that is spent will be spent by the new owner and so on.
Marginal propensity to consume definition:
The amount of additional earnings that are spent
Marginal propensity to save definition:
The amount of additional earnings that are saved
Multiplier effect definition:
A change in one of the components of AD can lead to a multiplied final change in the equilibrium level of GDP
Multiplier effect formula:
1 / (sum off MPS + tax + imports)
Positive multiplier definition:
Initial increase in an injection leads to a greater final increase in GDP
Negative multiplier definition:
Initial increase in an injection leads to a greater final decrease in GDP (not sure, need to check)
What are the three leakages of the multiplier process?
- Savings
- Tax
- Imports
The higher the rate of leakage, the _____ the multiplier
Lower
When does the multiplier process have the greatest effect?
When AS is highly elastic. When AS is inelastic, it is hard to produce more output so it is hard for the multiplier process to have much effect and it may just cause more inflation
When is there a high multiplier effect?
- Lots of spare capacity
- MPS is low
- MPC is high
When is there a low multiplier effect?
- Economy is close to its limits
- Propensity to import is high
- High inflation causing rising interest rates which then lowers other components of AD
What does the LRAS curve look like and represent?
A vertical supply curve when there is full employment so there can’t be any more supply. It represents the full long run productive capacity of the economy i.e. when we’re producing just about as much as our factors of production will allow.
What are the factors that affect LRAS?
- An increase in the quantity and quality of capital equipment, (machinery, tools e.t.c)
- A more highly skilled workforce
- Innovation and improvements in productive processes
- Geographical/ occupational immobility
- Improved attitudes of entrepreneurship
- Encourage more people to join the labour supply, (immigration, raise the retirement age, lower the school leaving age, lower benefits, lower income taxes)
What is net investment?
Capital accumulation - depreciation
When would the LRAS curve shift to the right?
If capital investment is greater than depreciation
