Government, Unemployment and the Macroeconomy Topic 11

Flashcards on Government, Unemployment and the Macroeconomy

Aggregate Demand

Total demand for goods and services in an economy at a given time.

Aggregate Demand Model

A macroeconomic model that explains how output/income changes.

Y = C + I + G + (X – M)

GDP = Consumption + Investment + Government Spending + (Exports - Imports)

Autonomous consumption

The fixed amount we spend even with no income.

Induced Consumption

Consumption that is dependent on income.

Disposable Income

Income after taxes

Multiplier Process

The increase in spending that leads to a larger increase in economic output.

Multiplier Process Element

One person's spending is another person's income.

Multiplier Effect

The total change in output can be greater than the initial change in aggregate demand.

Multiplier

The relative change in output caused by an initial change in aggregate demand.

1/(1-MPC)

Marginal Propensity to Save (MPS)

PARADOX of THRIFT

The more that is saved, the SMALLER the Multiplier will be as new expenditure is taken out of the economy and can’t circulate

KG

The government expenditure multiplier

KI

The aggregate investment multiplier

Automatic Stabilizers

Government can automatically affect AD (and the business cycle) without any explicit interventions.

Automatic stabilizers

Offset economic expansions or contractions automatically without explicit government actions.

Fiscal multiplier

The total (direct + indirect) change in output caused by an initial change in government spending

Marginal propensity to import (m)

The fraction of each additional unit of household income that is spent on imports.

Unemployment

Defined as being without paid work, where a person was available for and actively seeking work

Frictional Unemployment

Moving between jobs. Natural and needs no intervention

Structural Unemployment

Job market skills changed and old skills not wanted. Need to retrain old skills to new demands

Cyclical Unemployment

Unemployment related to the position in the business cycle

Discouraged workers

no longer looking for jobs. Need to be retained. They are not counted in the unemployment statistics so often ‘hidden’