Topic 2: How the Macroeconomy works, circular flow of incomr, AD - AS analysis Flashcards
national income
total value of goods and services a country produces. ( output of one uear)
circular flow of income represents
the spending and income circulating around the economy
withdrawals of income
- savings
-taxes - imports
injections of income
- investment
- goverment spending
- expirts
firms supply what in the circular flow of income
- goods and services
- wages, rents and dividends
households supply what in the circular flow of income
-factors of production
- consumer spending
an injection in the circular flow of income is
money entering the economy
a withdrawal in the circular flow of income is
money leaving the economy
aggeregate demand is
the total demand in the economy
what causes movements along the demand curve
changes in price level
why the AD curve is downsloping
-wealth effect (C)
-trade effect (X-M)
-interest effect (C,I, X-M)
what shifts the ad curve
changes in its components
C,I,G or X-M
rise in economic growth occurs when
-higher confidence levels of consumers or firms
-if monertary policy committee lowers interest rates
-lower taxes
-increase in government spending (boosts ad)
-depreciation in a currency so m is more expensive and x is cheaper
wealth effect
when price levels fall purchasing power increases making consumers feel wealthier boosting consumer spending so more goods and services are produced
trade effect
As prices fall, foreign buyers find domestic goods more affordable, leading to an increase in exports. Additionally, domestic consumers are likely to reduce their purchases of relatively more expensive imported goods, substituting them with cheaper local alternatives. This increase in exports and reduction in imports raise net exports (exports minus imports), thus boosting aggregate demand. On the other hand, if the domestic price level rises, exports become less competitive, imports become more attractive, and net exports fall, which lowers aggregate demand.
interest effect
When the price level falls, people need less money to buy goods and services. This reduces the demand for money, leading to a fall in interest rates. Lower interest rates encourage investment and consumption, both components of aggregate demand. On the other hand, when the price level rises, the demand for money increases, pushing up interest rates and discouraging investment and consumption.
aggregate supply
the quantity of real GDP which is supplied at different price levels in the economy
why is the AS curve upward sloping
at a higher price level producers are willing to supply more because they can earn more profits
