macrooverviews Flashcards
describe the circular flow of income
entrepeneurs buy factors of production from households, so they can set up and run businesses to produce goods and services
then firms sell the goods and services to the households.
households use the income they earned by selling the factors of production to buy the goods and services that they need and want
why are firms dependent on households
firms rely on households for labour and money (factors of production)
why are households dependent on firms
households are dependent on firm for money and wages, and the goods and services they make
what is aggregate demand
the total planned demand for goods and services in the economy
how is aggregate demand calculated
Consumption + Investement + Government + (Exports - Imports)
C+I+G+(X-M)
how is aggregate demand affected by changed in the price level
when price level decreases, demand expands
when price level increases, demand contracts
what is aggregate supply
the total planned supply for goods and services in the economy
how is aggregate supply affected by changed in the price level ( and why)
as price level increases, supply also increases
1- for a firm to supply more, they must pay their workers overtime which means they need to increase the price level to pay the workers this extra rate
2- it becomes more profitable to produce goods and services
what is macroeconomic equilibrium
the price level where aggregate supply equals aggregate demand
what do we know at macroequilibrium
the GDP
the price level
what does macroeconomic equilibrium represent
-where ad and as meet
what is economic growth
when the GDP of a country rises from one period to another
state 3 benefits of economic growth
government taxes increase so they can increase public spending
living standards increase
employment increases
state 3 disadvantages of economic growth
increased pollution and congestion
it can increase inequality
it can increase inflation which leads to higher prices
what is full employment
when most people who are able to work are in employment
what is unemployment
when someone doesn’t have a job but they’re able to have one
state 3 causes of unemployment
seasonal jobs
economic recession
automation
define the rate of inflation
the rate at which prices increase
define price stability
when inflation rate is around 2% a year
why are stable prices important
it boosts consumer confidence as prices are more predictable
it also boosts business confidence, which makes the economy bigger
define the balance of payments
a record of a country’s financial transactions with the rest of the world
what are the three accounts that make up the balance of payments and what do they record
current account - imports and exports
financial account - foreign direct investement
capital account
why is a trade deficit a problem
it suggests the economy has problems and relies on other contries for assets
why do governments need accurate data
to be able to understand and influence the economy
what are 3 pieces of data the government use
GDP, CPI (consumer prices index), employment and unemployment
define fiscal policy
deliberate use of taxes and spending to influence the economy
define expansionary fiscal policy and when is it used
cuts taxes/increases spending
used when the economy is in a slump
define contractionary fiscal policy and when is it used
increases taxes/cuts spending
used when there is a high inflation rate
how does expansionary fiscal policy affect the economy
lower taxes mean more disposable income, and an increase in aggregate demand, so the economy grows and gets out of a slump
define monetary policy
deliberate use of the country’s interest rate to influence the economy
define expansionary monetary policy and when is it used
cut in the base rate makes borrowing cheaper and saving less attractive
used when the economy is in a slump
define contractionary monetary policy and when is it used
increase in the bank rate which makes borrowing more expensive and saving more attractive - so consumption and investement will reduce and aggregate demand decreases
used when the economy is in a boom with high inflation
define supply side policy
long term policies that allow the economy to grow
describe a supply side policy including its positive effects
government spending on infrastructure like railways to make transporting goods more efficient, growing the economy
why do supply side policies increase aggregate supply
aggregate supply increases as firms invest more to take advantage of a growing economy
