Unit 10 - How The Macroeconomy Works Flashcards
Closed economy
An economy with no international trade
Saving
Income which is not spent
Withdrawal
A leakage of spending power out of the circular flow of income into savings, taxation or imports
Investment
Total planned spending by firms on capital goods produced within the economy
Injection
Spending entering the circular flow of income as a result of investment, government spending and exports
Equilibrium national income
The level of income at which withdrawals from the circular flow of income equals injections into the flow; also the level of output at which aggregate demand equals aggregate supply
Full employment income
The level of income when the economy is producing possibility frontier with no spare capacity
Open economy
An economy open to international trade
Aggregate demand
Total planned on real output in the economy at different price levels
Reflationary policies
Policies that increase aggregate demand with the intention of increasing real output and employment
Aggregate supply
The level of real national output that producers are prepared to supply at different average price levels
Long-run aggregate supply
The real output that can be supplied when the economy is on its production possibility frontier. This is when all the available factors of production are employed and producing at their ‘normal capacity’ level of output
Economic shock
An unexpected event hitting the economy. Economic shocks can be demand-side or supply-side shocks (and sometimes both) and unfavourable or favourable
Rate of interest
The reward for lending savings to somebody else (e.g. a bank) and the cost of borrowing
Life cycle theory of consumption
A theory that explains consumption and saving in terms of how people expect their incomes to change over the whole of their life cycles
Availability of credit
Funds available for households and firms to borrow
Credit crunch
Occurs when there is a lack of funds available in the credit market, making it difficult for borrowers to obtain financing, and leads to a rise in the cost of borrowing
Distribution of income
The spread of different incomes among individuals and different incomes among individuals and different income groups in the economy
Accelerator
A change in the level of investment in new capital goods induced by a change in national income or output. The size of the accelerator depends on the economy’s capital-output ratio
Multiplier
The relationship between a change in aggregate demand and the resulting generally larger change in national income
Normal capacity level of output
The level of output at which the full production potential of the economy is being used
