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Economics > Theme 2 > Flashcards

Theme 2 Flashcards

1
Q

The circular flow of income diagram

A

Income

Households Firms

  • ^Goods services = output-

———————————>
Expenditure

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2
Q

Physical Flow of income on Circular flow of Income diagram

A

Straight arrows Goods and services and land labour and capital, Real things.

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3
Q

Monetary Flow of income, shown by outer arrows

A

The money that pays for the physical things

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4
Q

Injections into the Circular flow of income

A

Exports
Investment
Government spending

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5
Q

Withdrawals From the circular flow of income

A

Imports
Savings
Taxes

Can be made by households or firms.

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6
Q

Injections = Withdraws

A

Equilibrium

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7
Q

Injections > Withdrawls

A

Expenditure is greater than Output

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8
Q

Injections < Withdrawals

A

Output is greater than Expenditure

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9
Q

The Multiplier Effect

A

When an injection is made into the circular flow of income, The actual change is greater than the initial injection

Money of initial investment leaks out of the circular flow through withdraws, the money that does not leak out keeps going through the flow until it is all gone, the less money which leaks out, the bigger the multiplier

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10
Q

Wealth

A

Total value of assets owned by individuals or firms in an economy.

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11
Q

Aggregate Demand

A

The total demand/spending in an economy over a given period of time:

Consumption(C) + Investment (I) + Government spending (G) + (Exports (X) - Imports (M))

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12
Q

Factors which impact consumption (Does not include firms only households.)

A 
Income 
Interest Rates
Consumer Confidence 
Taxes 
Wealth Effects 
Unemployment
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13
Q

How much does consumption make up of total aggregate demand in the U.K.

A

65%

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14
Q

Investment

A

Firms spending money on assets used to produce goods and services

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15
Q

Factors which affect investment

A 
Risk
Government incentive and regulation
Interest rates and access to credit
Technical advances 
Business confidence
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16
Q

Government spending

A

Government spending is the money spending by the government on public goods and services e.g education, health care and defence.

17
Q

Government Deficits and Surpluses

A

Budget outlines a government planned spending and revenue for the next year

If Government Spending > Revenue = Budget Deficit
If Government Spending < Revenue = Budget Surplus

18
Q

An Export from one country….

A

Is always and import to another

19
Q

Factors which affect imports and exports

A

Exchange rate -> SPICED
State of world economy -> Recession or boom
Degree of protectionism -> Amount of tariffs and quotas
Non-price factors -> Factors which include the quality of goods etc.

20
Q

Aggregate demand curve

A

Real National output along the x- axis
Price level on the y- axis

AD curve which illustrates the change in prices, basic demand and supply graph.

21
Q

Outward shift in the demand curve

A

Increase in aggregate demand and therefore output.

22
Q

Causes of an increase in aggregate demand curve.

A

Reduction in income tax
Increase in government spending
Fiscal policy changes^

Reduction or increase in interest rates
Monetary changes^

Strength of the exchange rate
SPICED^

23
Q

Multiplier Impacts on aggregate demand

A

Leads to an overall larger increase in Aggregate demand, the size of this extra increase depends on the amount of leakages in the circular flow.

24
Q

What does the average propensity to consume show + Formula

A

The proportion of national income which is spent

Formula = APC = Consumption/Total income

25
Q

What does the average propensity to save show + Formula

A

The proportion of total national income saved

Formula: MPS = Change in saving/Change in income

26
Q

Formula for calculating the multiplier from the MPC

A

1/1-MPC

27
Q

Aggregate supply

A

The total output produced in an economy at a given price level over a given period of time.

28
Q

Short run aggregate supply curve

A

Slope up from the left to right, shows the increase in the price level, there’s an increase in the amount of output firms are willing to supply.

In a short run aggregate supply curve: Steep upwards if inelastic
Less steep if elastic

29
Q

Long run aggregate supply curve

A

Assumes an economy will move towards an equilibrium where all resources are being used to full capacity.

Vertical curve, an increase in price will not result in an increase in output because the economy is already running at full productive potential (Full capacity.)

30
Q

Factors which will cause shifts in the short run aggregate demand curve.

A

Reduction in costs of production - Right shift.
Wage rates
Tax laws on firms
Exchange rates
Efficiency levels
Supply side shocks e.g Natural Disasters or War.

31
Q

Factors which cause the long run aggregate supply curve to shift

A

Verticals right shift if increase vice versa for decrease

Things which affect the capacity of an economy.
New technology/ Production improvements 
Improving education
Demographic changes - Skilled workers moving to the country in question.
Healthcare improvements
New resources
Increase in competition 
Promotion of enterprise
Factor mobility
32
Q

Impact of banks on long rung aggregate supply curve

A

Stronger banking system, better stimulus of economic growth (more money for investments.)

33
Q

Keynesian Long run aggregate supply curve

A

L shaped
Low levels of output, aggregate supply is completely elastic, meaning there is spare capacity in the economy.

As the slope rises it shows the economy is experiencing problems with supply.

When the curve is vertical, the economy is at full capacity.

34
Q

Macroeconomic Equilibrium

A

Aggregate supply = Aggregate demand.

35
Q

Can aggregate demand increase output in the short run

A

Yes

36
Q

Impacts of an increase in aggregate demand

A

Increase in output
Increase in derived demand
Reduction in unemployment
Rise in prices due to demand pull inflation

37
Q

Decrease in aggregate demand impacts.

A

Decrease in output
Decrease in derived demand
Increase in unemployment
Decrease in inflation.

38
Q

Impacts of an increase in aggregate supply.

A 
Increase in the capacity of the economy 
Increase in output
Decrease in unemployment
Decrease in inflation
Improve the balance of payments
39
Q

Impacts of a decrease in aggregate supply

A

Decrease economy output
Increase in unemployment
Negatively impact the balance of payments
Increase inflation

Economics (19 decks)

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