Week 2 - Modelling Aggregate Demand, Part I Flashcards
What is Full capacity output
The maximum level of output an economy can achieve at a given period of time by using all inputs at full capacity
What is Potential (trend) output
The level of output the economy can achieve using all inputs at ‘normal’ capacity
What is a Recession
Two consecutive quarters of negative economic growth
What is a Boom
A period of rapid economic growth that involves low unemployment and higher GDP (actual output close to full capacity)
What are the assumptions of the Keynesian Cross Model (x2)
- Prices, Rents, and Wages are all fixed
- Firms always produce what demand requires
What does the Consumption function show
The desired aggregate household consumption at each level of aggregate income
What is the Consumption function
C = A + cY
(Y = income)
(A = autonomous consumption)
(c = MPC)
Explain the relationship between MPC and household income
- A very poor household is likely to immediately spend any extra income they earn. Their
MPC is relatively high (close to 1) - A very wealthy household is likely to spend very little of a small income change. Their
MPC is relatively low (close to 0)
At which point on the Keynesian cross model does the GDP identity hold
At short run equilibrium,
Y = C + I
What is the Paradox of thrift
If a single household consumes less, it’s savings will increase. If all households consume less, savings will not change
What is Fiscal Policy
The government’s policy on spending and taxation, to influence the economy
What is a Budget deficit
When a government’s total spending exceeds its total revenue in a given year
What is a Budget surplus
When a government’s total revenue exceeds its total spending in a given year
What is National debt
The stock of outstanding government debt
What is a Balanced budget
When a government’s total revenues equal it’s total expenditures in a given year
