Definitions: 1. Aggregate Demand and Aggregate Supply: Paper 2: OCR A-level Economics Revision and Macroeconomics

Circular Flow of Income

A model of the economy which shows the flow of goods and services, the factors of production and money around the economy.

Injections

Spending power entering the circular flow of income resulting from investment, government spending and exports.

Leakages

Spending power leaving the circular flow of income resulting from savings, taxation and imports.

Macroeconomic Equilibrium

Where the rate of withdrawals equals the rate of injections.

Monetary Flows

The flow of money, for example from taxes or for consumption.

Physical Flows

The flow of a good or service.

Aggregate Demand (AD)

The total level of demand in an economy at any given price level at a moment in time.

Consumption

Consumer spending on goods and services.

Exports

Goods and services sold to foreign countries that provide an inflow of money.

Imports

Goods and services bought from foreign countries that lead to an outflow of money.

Investment

Spending by businesses on capital goods, which leads to the creation of real goods.

Government Expenditure

Spending by the government for the provision of goods and services.

Net Exports

Exports minus imports.

Aggregate Supply (AS)

The total amount of output in the economy at any given price level at a moment in time.

Long Run

When all factors of production are variable.

Long Run Aggregate Supply

The total output an economy can produce when operating at full output.

Short Run

When at least one factor of production is fixed.

Short Run Aggregate Supply (SRAS)

Aggregate supply when at least one factor of production is fixed.

Accelerator Theory

A change in consumption will cause a larger percentage change in investment; high consumption leads to high investment.

Average Propensity to Consume

The percentage of income spent on goods and services, expressed by: Total consumption/Total income

Average Propensity to Save

The percentage of income that is saved, expressed by: Total savings/Total income

Marginal Propensity to Consume (MPC)

The proportion of an increase in income spent on consumption, expressed by: Change in consumption/Change in income

Marginal Propensity to Save (MPS)

The proportion of an increase in income that is saved, expressed by: Change in money saved/Change in income

Marginal Propensity to Withdraw (MPW)

The proportion of an increase in income that is withdrawn from the circular flow.

Negative Output Gap

When GDP is lower than predicted; the economy is producing below full output.

Output Gap

The difference between the long term trend rate of growth and actual growth.

Positive Output Gap

When GDP is higher than predicted; the economy is producing above full output.