Yr1 How the Macroeconomy Works: The Circular Flow of Income, Aggregate Demand/Aggregate Supply Analysis, and Related Concepts Flashcards
PART 1
THE CIRCULAR FLOW OF INCOME
What are the 4 parts of the economy?
- Households
- Government
- Firms
- International sector
What are the 4 factors of production and their rewards?
- Capital > interest
- Enterprise > profit
- Labour > wages
- Land > rent
What parts of an economy are involved in a closed economy? (3 ish)
- Households
- Firms
- Minimal / some government
What parts of an economy are involved in an open economy? (4)
- Households
- Firms
- Government
- International countries
What are the 3 measurement methods when measuring the quality of an economy? + what letters represent them
- Income approach (Y)
- Output approach (O)
- Expenditure approach (E)
What is the equation for the 3 measurement methods when measuring the quality of an economy?
Income approach A = expenditure A = output A
Y=E=O
> would represent a well functioning economy but not actually possible
In circular flow diagram
- What flows generally between firms and households? (2)
- What flows from firms to households? (1)
- What flows from households to firms? (1)
- What are the injections into an economy? (3)
- What are the withdrawals from an economy? (3)
- Factors of production and goods + services
- Wages
- Consumer spending
- Government spending, investment, exports
- Taxation, savings, imports
PART 2
AGGREGATE DEMAND AND AGGREGATE SUPPLY ANALYSIS
What is the definition of aggregate demand?
The total spending on goods and services produced in the whole economy
What are the 3 reasons for why the aggregate demand curve is downwards sloping?
- Exports
- Consumer stock of wealth
- Consumer expectations of price
What are the key determinants of consumer spending linked to the aggregate demand curve? (4)
- Level of disposable income
- The marginal propensity to consume
- Government policies
- Interest rate changes
What goes on the x and y axis of an AD curve?
X > real output
Y > price level
Label of aggregate demand
AD
Relationship between price level and real output on the AD curve? + why
Inverse
Because when prices are high, consumers buy less so less goods and services are produced
Definition of aggregate supply + overall what are the shifts due to
The total output of an economy (at a given price level and at a given time)
- shifts due to changes in economies productive capacities (quantity or quality of FofP)
PART 3
THE DETERMINANTS OF AGGREGATE DEMAND
What is the formula of aggregate demand? + what do each of the letters of components mean
AD = C + I + G + (X - M)
C = consumer spending
I = investment
G = gov spending
X-M = difference between spending on imports + receipts from exports (Balance of Payments)
For a well performing economy, what equation should be balanced which links to aggregate demand and the circular flow of income?
I + G + X = S + T + M
What causes a shift in the AD curve? (4)
- Consumer spending
- Investment
- Government spending
- Exports + imports
PART 4
AGGREGATE DEMAND AND THE LEVEL OF ECONOMIC ACTIVITY
What is the definition of the multiplier effect?
The relationship between change in aggregate demand and the resulting usually larger change in national income
What is the key thing about a diagram showing the multiplier effect?
2 changes in AD so there should be 3 AD lines, each gaining a higher equilibrium point which is shifting to the right
What is the definition of the accelerator effect?
DOUBLE CHECK DEFINITION
A change in the level of investment in new capital goods is induced by a change in the rate of forth of national income or AD
Economic activity and the multiplier process (meaning and calculation)
NEED TO RESEARCH
PART 5
DETERMINANTS OF SHORT-RUN AGGREGATE SUPPLY
On the SRAS graph..
- X and y axis labels
- How to label price level
- How to label real output
- Downwards or upwards sloping
- What shift if there is an increase in SRAS
- What shift if there is a decr in SRAS
- X > real GDP (output)
Y > price level - P1, p2, p3
- Y1, y2, y3
- Upwards
- Moves rightways and downwards
- Moves leftwards and upwards
What causes shifts in the SRAS curve? (3)
- Employment costs
- Costs of other inputs
- Impact of gov
Why is the SRAS curve the shape it is?
Assumes one factor of production remains fixed in the short term
PART 6
DETERMINANTS OF LONG-RUN AGGREGATE SUPPLY
On the LRAS graph
- X and y axis
- Downwards or upwards sloping
- Increase in LRAS
- Decrease in LRAS
- X > real output (GDP)
Y > price level - Straight line vertical
- Line right wards shift
- Line shifts leftwards
What causes shifts in the LRAS curve? (4) + one extra for a decrease in LRAS
- Productivity of labour and capital
- Labour market participation
- Innovation and enterprise
- Capital investment (technology)
Extra - natural disasters
Why is the SRAS curve the shape it is?
As it takes into account that no unemployment of resources and all resources are maximised and utilised
The economy will correct itself
Describe what the KEYNESIAN MODEL of aggregate supply and looks like and reasons for changes? (3 key parts and stages)
- Begins flat short term (horizontal)
- Economy begins to heat > steeper gradient
- Long term vertical due to FULL EMPLOYMENT LEVEL
What is meant by the full employment level in economics?
The maximum available resources are being utilised
