1.7 How the Macroeconomy Works

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  • Created by: Sam19
  • Created on: 01-03-17 18:47
What is aggregate demand?
The total planned spending on real output produced within the economy.
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Equation for aggregate demand
AD=C+G+I+(X-M)
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Consumption
The total planned spending by households on consumer goods and services produced within the economy.
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Government spending
The total planned spending by governments on goods and services produced within the economy.
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Investment
The total planned spending by firms on capital goods produced within the economy.
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Exports
Domestically produced goods or services sold to residents of other countries.
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Imports
Goods or services produced in other countries and sold to residents of this country.
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What are the factors affecting consumer spending?
Disposable income, Employment and Job security, Household wealth, Confidence, Interest rates, Distribution of income, Expectations and Availability of credit.
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What are the factors affecting consumer confidence?
Economic growth, Household debt, Unemployment and House Prices.
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MPC
Marginal propensity to consume.
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MPS
Marginal propensity to spend.
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What to MPS & MPC refer to ?
How much extra spending and saving will occur if consumers are given additional amounts of income.
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What is savings ration?
The percentage of disposable income saved rather than spent.
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What does a high savings ratio do to AD?
Lower consumption and therefore AD.
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Why is it important to save?
Business survival, provides a cushion during a recession, Funding investment- banks need deposits for lending and buffers for consumers e.g.: reduce debt.
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Lifecycle theory of consumption
A theory that explains saving in terms of how people expect their incomes to change over the whole of their lifecycle.
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What are the Investment types?
Physical capital: E.G: buildings, machinery, stock and raw materials. Or Human capital E.G: investment in training and skills.
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What are the types of Physical capital?
Investment in fixed capital and Inventory investment in stocks of raw materials, finished goods and semi-finished goods.
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Equation for Net investment
Gross/ replacement investment - capital depreciation.
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Factors determining investment
Expenditure, Actual & expected demand, Exoended profits and taxes, interest rates, confidence, Government polices & activities and technological progresses.
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Accelerator effect
Where given change in demand for consumer goods and services will cause a bigger percentage change in demand for capital goods.
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Government expenditure
Government will often seek to use their discretionary spending on capita projects and they also have required spending.
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Public sector businesses
Are owned and operated by the Government.
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Private sector businesses
Are privately owned and operated businesses.
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What is currently being spent on providing public services?
Salaries for NHS staff, Drug used in healthcare, Road maintenance and Army logistics supplies.
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What capital spending is currently being used to make new public infrastructure?
Equipment for NHS, Flood defence schemes, Motorways.
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Equation for net exports
Exports - Imports
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Factors affecting exports
Relative price of exports in world markets, exchange rates- stronger currency = exports more expensive, Non price demand factors E.G: Branding.
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What is the net trade balance?
The measure of exported goods and services minus the value of imported goods
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What does a trade surplus mean?
Exports > Imports
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What does a trade deficit mean?
Imports > Exports
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What is it called if Exports = Imports?
Net trade balance
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What is aggregate supply?
It is the quantity of goods and services that producers are willing and able to supply at a given price level.
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What is Short run AS?
The relationship between planned national output and the general price level.
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What causes a shift in AS?
Cost of resources, Business taxes, subsidies and regulations and supply shocks E.G: Tsunami.
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What external factors affect AS?
World oil & gas prices, energy costs, mineral and metal prices, food stock prices and import tariffs and quotas.
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Who is affected by falling oil prices?
Cheaper fuel for motorists and businesses, possible fallen exploration, renewable energy less economically viable and will bring down inflation.
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What is Long run AS?
In the long run, the ability of an economy to produce goods and services to meet demand is based on the state of production technology and the availability/ quality of factor inputs.
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What does an outward shift of LRAS show?
Increase in productive potential.
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What can shift a LRAS curve?
change in labour supply, Change in stocks of capital inputs, changes in efficiency, Advance in technology, Changes in land and enterprise and factor mobility
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What is an economic shock?
An unexpected event hitting the economy. These shocks can be demand-side or supply-side and unfavourable or favourable.
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Other cards in this set

Card 2

Front

Equation for aggregate demand

Back

AD=C+G+I+(X-M)

Card 3

Front

Consumption

Back

Preview of the front of card 3

Card 4

Front

Government spending

Back

Preview of the front of card 4

Card 5

Front

Investment

Back

Preview of the front of card 5
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