preliminaries and the Keynesian cross Flashcards
what are the factors of production?
all resourceses used in the production of goods and services. they are labour, capital , land and enterprise
what is the circular flow of income and spending?
there are two actors: firms and households. households provide the labour to the firms in exchanged for goods and services. firms pay the households with labour which they then use to spend on the goods.
what is the aggregate output?
the total value of all goods and services produced by firms.
how can you calculate the aggregate output?
by adding up total income or total expenditure. this is due to one persons expenditure being anothers income
what are the three withdrawels from the circular flow?
1) people save - as people save part of their income, this is not spent on consuming goods
2) governments levy taxes - income is reduced by taxation so less is spent on consumption
3) people buy foreign goods- income is spent on foreign goods therefore demand for domestic decreases
what are the three injections into the circular flow?
1) firms invest - money is spent in the domestic economy and this is usually financed from savings
2) government spending - governments spend the money from taxation into the economy with public consumption or investment
3) exports - foreign individuals may spend their income on our goods providing increase to our economy
if investment is understood to include inventory changes then what does this mean for the injections and leakages and why?
it will mean that the injections will be equal to the leakages. this is due to the fact that if demand falls short of supply then the firms will be forced to demand their own goods and add them to their inventory stock. if supply falls short of demand then the demand will just be left unsatisfied or they will provide the preexisting stock. that means that investment will always be high enough or low enough to force injections to be equal to withdrawels
what is money
anything that the sellers generally accept as payment for goods and services
what is the quantity equation for the quantity theory of money?
M x V = P x Y
what factor is constant in the quantity theory of money?
the velocity of money is constant
how does the quantity equation explain inflation?
as the velocity of money is constant then if the money supply increases faster then the real incomes grows then the price level must increase causing inflation
what is the aggregate supply curve?
it indicates how much output firms are willing to produce at various price levels
what is the government budget?
it is primarily a planning instrument. in hindsight it breaks down government receipts and expenditures and shows how deficits are being financed.
what is the balance of payments?
it is a record of a countrys trade in goods, services and financial assets with other countries
what is the central bank?
a government agency primarily responsible for supplying the economy with the right amount of money
what are the two purposes of the balance of payments?
it adds detail to the general notion of imports and exports but also traces how any given imbalance between exports and imports are being financed
what is the formula for government debt?
government spending - government taxation = government debt owed to private sector + government debt owed to the public sector
what are the three parts of the balance of payments?
there is the capital account,, the current account and the official reserve account
what does the balance of payments equal?
the balance of payments always equal 0
what is the current account?
the current account records the goods, services and transfers into and out of the country. it measures the net demand for domestic currency which results from the net sales of domestically produced goods and services to the world, plus cross border income flows and transfer payments.
what can the currenrt account be approximated too?
the net exports - the net imports
