How the Macroeconomy works

National income measures the monetary value of the flow of output of goods and services produced in an economy over a period of time. Real income is nominal income adjusted for inflation whereas nominal income is the monetary amount on someone's pay-check. Income=output=expenditure.

Injections into the circular flow are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output. Withdrawals are increases in savings, taxes or imports so reducing the circular flow of income and leading to a multiplied contraction of production (output).

Aggregate demand is the total expenditure for goods and services within a particular market.

The determinants of AD

• Consumption
• Investment
• government spending
• imports
• exports

The accelerator effect happens when an increase in national income (GDP) results in a proportionately larger rise in capital investment spending.

The determinants of savings include: the level of income, income distribution, consumption motivations, wealth, habit, population, objective and institutional factors, subjective motivation for saving and rate of interest. 

Econocic activity- Is the production, distribution and consumption of goods and services at all levels within a society. 

The link between economic activity and employment is when real output increases, firms generally have to employ more workers to produce the additional goods and services that the output increase involves.

The multiplier effect isthe increase of final income arising from greater spending. The size of the multiplier is dependant on the households descision to save or spend money.

Multiplier= Change in national income/ intial change in government spending

SRAS- aggreagate supply when the level of capitl is fixed, though the utilisation of existing factors of production can be altered so as to charge the level of real output. 

Factors causing a rightward shift of th SRAS curve:

• a fall of businesses' cost of production
• a fall in unit labour costs
• a reduction in indirect tasks 
• an increase in subsidies granted to firms by government
• technical progress which improves the quantity and productivity of capital goods

Technical progress- new and better ways of doing things.

Chnages in costs like money wage rates, raw material prices, business taxation and productivity will shift the short-run AS curve.

Technology, productivity, attitudes, enterprise, factor mobility and economic incentives will all cause a shift in the LRAS. 

The position of the vertical long-run aggregate supply curve represents the normal capacity level of output of the economy. 

So anything that wil increase the capacity like advancements in technology or better economic incentives will cause the LRAS curve to shift outwards. Anything that causes the capacity to decrease will shift the curve inwards.