Theme 2 Flashcards by Jack Moss

The circular flow of income diagram

Income

Households Firms

^Goods services = output-

———————————>
Expenditure

How well did you know this?

Not at all

Perfectly

Physical Flow of income on Circular flow of Income diagram

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

How well did you know this?

Not at all

Perfectly

Monetary Flow of income, shown by outer arrows

The money that pays for the physical things

How well did you know this?

Not at all

Perfectly

Injections into the Circular flow of income

Exports
Investment
Government spending

How well did you know this?

Not at all

Perfectly

Withdrawals From the circular flow of income

Imports
Savings
Taxes

Can be made by households or firms.

How well did you know this?

Not at all

Perfectly

Injections = Withdraws

Equilibrium

How well did you know this?

Not at all

Perfectly

Injections > Withdrawls

Expenditure is greater than Output

How well did you know this?

Not at all

Perfectly

Injections < Withdrawals

Output is greater than Expenditure

How well did you know this?

Not at all

Perfectly

The Multiplier Effect

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

How well did you know this?

Not at all

Perfectly

Wealth

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

How well did you know this?

Not at all

Perfectly

Aggregate Demand

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

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

How well did you know this?

Not at all

Perfectly

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

Income 
Interest Rates
Consumer Confidence 
Taxes 
Wealth Effects 
Unemployment

How well did you know this?

Not at all

Perfectly

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

65%

How well did you know this?

Not at all

Perfectly

Investment

Firms spending money on assets used to produce goods and services

How well did you know this?

Not at all

Perfectly

Factors which affect investment

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

How well did you know this?

Not at all

Perfectly

Government spending

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

Government Deficits and Surpluses

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

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

An Export from one country….

Is always and import to another

Factors which affect imports and exports

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.

Aggregate demand curve

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.

Outward shift in the demand curve

Increase in aggregate demand and therefore output.

Causes of an increase in aggregate demand curve.

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^

Multiplier Impacts on aggregate demand

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.

What does the average propensity to consume show + Formula

The proportion of national income which is spent

Formula = APC = Consumption/Total income

What does the average propensity to save show + Formula

The proportion of total national income saved Formula: MPS = Change in saving/Change in income

Formula for calculating the multiplier from the MPC

1/1-MPC

Aggregate supply

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

Short run aggregate supply curve

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

Long run aggregate supply curve

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.)

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

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.

Factors which cause the long run aggregate supply curve to shift

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 ```

Impact of banks on long rung aggregate supply curve

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

Keynesian Long run aggregate supply curve

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.

Macroeconomic Equilibrium

Aggregate supply = Aggregate demand.

Can aggregate demand increase output in the short run

Yes

Impacts of an increase in aggregate demand

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

Decrease in aggregate demand impacts.

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

Impacts of an increase in aggregate supply.

``` Increase in the capacity of the economy Increase in output Decrease in unemployment Decrease in inflation Improve the balance of payments ```

Impacts of a decrease in aggregate supply

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