Macro Economic Concepts: Leakages, Injections, and the Multiplier Effect

These flashcards cover key economic concepts regarding leakages, injections, and mechanisms affecting GDP gaps and the multiplier effect.

Leakage

Income generated in production that is diverted out of the circular flow (e.g. saving, imports, taxes).

Injection

An addition of spending in the circular flow (e.g. investment spending, government spending, exports).

Multiplier

The multiple by which an initial change in spending will alter total expenditure after all spending cycles.

Recessionary GDP Gap

The difference between equilibrium GDP and full-employment GDP, indicating unused production capacity as the economy is underproducing.

Inflationary GDP Gap

The difference between equilibrium GDP and full-employment GDP, where the economy is producing above full-employment GDP, subject to inflationary pressure.

Demand-Pull Inflation

Prices rise due to excessive aggregate demand pushing too far to the right in the economy.

MPC (Marginal Propensity to Consume)

The proportion of additional income that a household consumes rather than saves, influencing the size of the multiplier.

Keynesian Adjustment Process

A process where producers cut output and employment when aggregate demand exceeds the current price level, leading to further declines in consumption and AD.

Auto-adjustment principle in classical economics

The belief that the economy will naturally return to full employment through mechanisms such as flexible interest rates, without government intervention.

Abrupt changes in spending behavior

Changes in consumer and business expectations that can lead to economic booms and busts.