Section 9: Aggregate Supply and Aggregate Demand Flashcards
What is the circular flow of income?
A model of the economy that shows how money, goods and services flow between different
sectors of an economy, including households, firms, the government and the foreign trade
sector.
What are injections?
Types of expenditure that add to and increase the circular flow of income in an economy. They are Investment (I), Government spending (G) and Exports (X)
What are withdrawals (leakages)?
The part of household income that is not spent on goods and services produced by the
economy. It is income that is not passed on around the circular flow of income. Withdrawals
are saving (S), taxation (T) and imports (M).
What is aggregate demand?
Total planned spending on goods and services produced in the domestic economy.
AD= C + I + G + (X-M)
What factors cause SRAS to shift?
Changes in costs of production: wage rates, taxes, exchange rates and efficiency levels
What factors cause LRAS to shift?
Changes in factors of production: Improvement in education, better infrastructure, health care improvement will all shift to the right
Describe the SRAS curve
Sloping up, price level on y-axis (P), Real GDP on x-axis (Y)
Describe the LRAS curve
Straight vertical line, price level on y-axis (P), Real GDP on x-axis (Y) (classical)
What factors cause the AD curve to shift?
A change in consumption (C), investment (I), government spending (G) or net exports (X-M), e.g, changes in income tax, changes in interest rate, exchange rate changes.
Why does a rise in price level cause GDP to fall?
Domestic consumption reduced, demand for exports reduced, demand for imports increases n
What does the Keynesian LRAS suggest about the relation between general price level and RGDP.
It suggests that the price level is fixed until recourses are fully employed.
In Keynesian theory, what happens to GPL for an increase in output when there is spare capacity.
GPL left unaffected - output changes are not inflationary.
In Keynesian theory, what happens to GPL for an increase in output when resources are fully employed.
GPL will go up, the increase in output will be inflationary.
What is the multiplier effect?
The extent to which a change in injections or withdrawals affects national income.
What is the marginal propensity to consume (MPC) and how is it calculated?
A measure of how a change in income affects consumption.
What is the marginal propensity to save (MPS) and how is it calculated?
MPS is the proportion of extra income that’s saved.
How do you calculate the multiplier?
What is the relation between MPS and MPC.
MPS+MPC=1
