How the macroeconomy works?

Define national income

• The flow of new output produced by the economy in a particular period using stock of physical/capital

What is national capital stock

• Stock of capital goods that has accumulated over time

National wealth?

• The stock of all the goods that exist that have value in the economy

What happens if replacement investment does not occur?

• Capital stock shrinks

• Negative growth occurs

• PPF shifts inwards

What is net investment?

• Investment needed to enlarge the capital stock

Define consumption

• Total planned spending on consumer goods and services

What is national expenditure

• Spending on goods and services

• A measurement of economic output

What does the circular flow model show?

• How money, goods and resources move around in the economy

• Highlighting the interdependence between different economic agents

Define leakage/withdrawal and give examples

• Any withdrawal of expenditure from the circular flow of income, decreasing overall economic activity

• Savings

• Taxes

• Imports

Define injection and give examples

• Expenditure in the circular flow of income, boosting economic activity

• Exports

• Government spending

• Investment

Macroeconomic equilibrium

Leakages=injections

What is a closed economy?

• Economy with no international trade

Define reflationary policies

• Polices that increase AD

• With the intention of increasing output and employment

Define AS

• Level of real national output that producers are willing to supply at different average price levels

Define AD

• Total planned spending on real output

What is an economic shock?

• An unexpected event hitting the economy

• Can be demand side- shock that effects aggregate demand

• Supply side-shock that effects aggregate supply

What does saving instigate?

• Can lead to deficient aggregate demand

• Meaning there is too little demand to buy the output the economy is capable of producing

• National income falls

What refutes the idea that savings lower national income

• If savings are lent to other consumers via banks for the purpose of consumption

• Savings end up as consumption

• National income remains in equilibrium

What do free market economists say about deficient aggregate demand

• They believe its a self correcting phenomenon

• And interest rates fall rather than output

Why is the simple circular flow model unrealistic?

• Forsakes international trade and domestic government

Explain the effect of leakages>injection

• Net withdrawal of demand out of the circular flow of income causes national income to fall

Explain the effect of injections> leakages

• Net injection of demand into the circular flow of income causes national income to rise

What are the components of AD?

• Consumption

• Investment

• Government spending

• Net exports

• AD= C + I + G + (X-M)

What factors effect consumption?

• Interest rates

• Level of income

• Expected future income

• Wealth- Stock of personal wealth(assets)

• Consumer confidence

• Availability of credit

• Distribution of income

• Expectations of future income

What is the life cycle theory of consumption?

• Explains consumption and savings in terms of how people expect their incomes to change over the future

How does availability of credit effect consumption?

• Refers to the ease with which individuals can obtain loans

• If credit is available easily and cheaply consumption increases

How does a distribution of income effect consumption?

• Rich people save a higher proportion of their income as they earn more

• Therefore a redistribution of income reduces savings and increases consumption

Define realised personal savings

• The actual amount of income that individuals save after meeting their consumption and tax obligations

How do you calculate personal saving ratio and what does it show

• Used as an indicator of how people spend their money

• Realised personal saving/disposable income

2 types of investment

• Investment in fixed capital- factories, roads

• Inventory investment - raw materials

What is saving

• income not spent on consumption

Factors influencing investment

• expected sales revenue

• expected costs of production

• Future profit

• Prices of capital and labour

• Nature of technical progress

• Impact of government policies- increased gov spending promotes investment but higer taxation reduces investment

What is the accelerator effect

• Changes in investment can be directly linked to changes in the rate of GDP growth

• If the rate of GDP growth increases so does investment

• In order to keep up with growing demand

• Vice versa

Define economic activity

• Production and consumption of goods and services in the economy together with the employment of labour and inputs that produce outputs

What is the expansionary effect

• When AD increases so does real output

What is the contractionary effect

• AD decreases so does real output

Define multiplier effect

• Process by which any changes in the components of aggregate demand will lead to an even greater change in national output

• Because an increase in spending will create income for someone else facilitating further consumption

Multiplier equation

K= 1 / 1-MPC

• Where K is the multiplier

What is MPC -

• The marginal propensity to consume is the fraction of an increase in disposable income that people plan to spend

• If MPC is 1 that means 100% of that increase in income is to being spent

Another equation to calculate the multiplier

• Change in national income/initial change in government spending

Define nominal national income

• Total value of goods and services produced in an economy measured at current market prices

• Reflects changes in output and price

Define real national income

• Total value of goods and services adjusted for inflation

• Reflects actual change in output without effects in price

Define SRAS

• Aggregate supply when the level of capital is fixed but other factors of production can be altered

What does the slope of the SRAS indicate

• In the short run the cost of producing extra units of of output increases as firms produce more output

Define the inflationary effect

• A sustained increase in general price level

What does the notation of Yfe mean and tell you

• Full employment level

• Any increase in demand beyond this point only causes price to rise and inflation

Factors that cause a rightward shift of SRAS

• Fall in production costs

• Increase in labour productivity

• Reduction in tax

• Increase in subsidies

• Technical progress

Define LRAS

• Aggregate supply when the economy is producing at its productive potential

• If more factors of production become available

  LRAS shifts to the right

What is the normal capacity level of output

• Where the LRAS is located

• Maximum sustainable level of output an economy can produce when all factors of production are employed

Why is LRAS vertical

• Independent of price level

• Does not matter whether prices increase or decrease the economy can only produce as much as its productive resources allow

What determines the position of the LRAS

• Technical progress

• Productivity of labour

• Quantities of factors of production

• Personal enterprise

How can long run economic growth be depicted by diagrams

• Outward movement of the ppf

• Rightward shift of the LRAS

Define long run economic growth

• Is the sustained increase in the productive capacity of an economy over time

Explain the Keynesian aggregate supply curve

• In the horizontal proportion the economy is operating below full capacity

• At this point output can increase without changes in price level. Firms can produce more by employing idle resources

• Once economy approaches full capacity curve slopes upwards

• As demand rises and resources are already fully employed- price level starts to increase

• Curve becomes vertical when it reaches normal capacity level of output