Macroeconomics Flashcards

Flashcards about Macroeconomics based on lecture notes.

What is National Income?

The total value of the goods and services a country produces in one year.

What are the ways national income can be measured?

Gross Domestic Product (GDP), Gross National Product (GNP), and Gross National Income (GNI).

What is Real GDP?

The value of GDP adjusted for inflation.

What is Nominal GDP?

The value of GDP without being adjusted for inflation.

What is the difference between GDP and GNP?

GDP is within a country’s borders, whilst GNP includes products produced by citizens of a country, whether inside the border or not.

What are examples of withdrawals/leakages from the circular flow of income?

Saving, taxes, and imports.

What are examples of injections into the circular flow of income?

Government spending, investment, and exports.

When does the economy reach a state of equilibrium in the circular flow?

When the rate of withdrawals equals the rate of injections.

What happens if there are net injections into the economy?

There will be an expansion of national output.

What is the formula for Aggregate Demand (AD)?

Consumption + Investment + Government Spending + (eXports – iMports)

What is the wealth effect on the aggregate demand curve?

Higher prices lead to a fall in the value of real incomes, so goods and services become less affordable in real terms.

What is the interest rate effect on the aggregate demand curve?

High inflation means interest rates will be higher, discouraging spending and encouraging saving.

What causes shifts in the aggregate demand curve?

Changes in the components of AD (C, I, G, or X-M).

How do interest rates affect consumption?

A cut in interest rates will reduce the cost of borrowing, increasing disposable income.

What determines consumer confidence?

Expectations of the future state of the economy, job security, and promotions.

How do consumers react if they anticipate higher than target rates of inflation?

Bring forward consumption to protect themselves from lower purchasing power in the future.

What two choices do individuals have with their income?

Individuals have two choices with their income — either to spend it or to save it

How do interest rates affect investment?

A cut in interest rates will reduce the cost of borrowing for firms

What determine business confidence?

The level of future demand in the economy and thus expected profitability

What does the accelerator effect suggest?

The level of investment in an economy is related to the change in GDP.

How do exchange rates affect net exports?

A weak exchange rate makes exports cheaper and imports dearer. A strong exchange rate makes exports dearer and imports cheaper

What is the relationship between the marginal propensity to save and the marginal propensity to consume?

A consumer’s marginal propensity to save plus the marginal propensity to consume is equal to 1

If consumers spend 0.6 of every £1 they earn, they save 0.4. What is the multiplier?

Consumers spend 0.6 of every £1 they earn, they save 0.4. Therefore, the multiplier will be: 1/(1-0.6) = 1/0.4 = 2.5.

Why is the SRAS curve upward sloping?

At a higher price level, producers are willing to supply more because they can earn more profits.

What factors shift the SRAS curve?

Raw material/commodity prices, business taxes, wages, and prices of imported commodities/raw materials due to exchange rate changes.

Where is the classical LRAS curve fixed?

Vertical at the full employment level of output.

What is an example of how Labour Productivity can cause a shift in the LRAS curve?

Improvements in education and adult training.

What is an example of Infrastructure Improvements that can cause a shift in the LRAS curve?

Transport - infrastructure includes new roads, airports, ports, runways, train lines, rail electrification