Notesale: Turn your study into money

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Review the MULTIPLIER

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This is to avoid recession or other economical issues
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‘Real’ economic growth is actual growth in all production output
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○ Actual growth trend is increasing, but fluctuates
○ The ‘Business Cycle’ or ‘Trade cycle’ is a depiction of the periodic
fluctuations of national Output around it’s long term trend
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Review the MULTIPLIER
Question - Aggregate
Demand and the National
Economy (7A)

< don’t really get it
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◦

Inflation is calculated every month giving percentage increase in prices
over last 12 months by comparing the cost of a Basket of goods

◦

Inflation

UK publishes 2 types:
◦

The Consumer Prices Index (CPI)

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Retail Prices Index (RPI) – includes mortgage interest costs &
council tax

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Inflation instability causes problems with future decision making

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Most developed countries have a ‘target rate’ for inflation – the UK’s is
2% - the Bank of England adjusts interest rates to keep inflation on
target
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The second peak was the
influence of panic from previous decade
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Question - Aggregate
Demand and the National
Economy (7A)

Answers

Balance of Payments

Is a recoded transactions of a country to the rest of the world
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- Debit Payments includes a nations purchases of imports and investment
that is makes abroad (interest, dividends or wages abroad)
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For
example, sales of exports, inward investment and dividends
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Balance of Payments Exchange rates

Note that for an economy to buy goods from another country it needs to buy
its currency and this also goes for when a country buys in this economy
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If a countries export is popular the country will have its
currency to rise in prices
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For example,
government can increase investment or reduce taxation
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Money and income are
two different things Money is what the
economy has as a whole
income is measure by
period of time
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The income will be £2 trillion income
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This can
be paid as dividends, salaries and interest
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This stays in the circular flow therefore is not
counted as an injection or withdrawals
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Question - Aggregate
Demand and the National
Economy (7A)

Answers

Withdrawals (W)

Incomes of household and firms that are not passed around the inner flow
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There are the money that does not circulate flow of income as it is
taken off it
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- Net Import Expenditure
- Net Savings
- Net Taxes

Transfer of Payments

Money transferred from one person or group to another (e
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firm paying tax
to the government) without production taking place
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Injections (J)=Id+Gd+Xd

Note! Consumer
expenditure is not
measured here as its part
of the inner flow of
income

- Export expenditure
- Government Spending
- Investment Expenditure

Relationships between J
and W
These are some indirect
connection but it is not
necessarily as straight
forward
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The intersection gives the
equilibrium output, Y
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○

○

We can measure 3 ways by dropping in at any point around the flow:
1) Measuring all expenditure on goods and services produced
(‘Aggregate demand’)
2) Measuring amount of all production from firms/factories in the
economy (‘Aggregate supply’)
3) Measuring all incomes in the economy (‘National Income’)
At equilibrium National Income (NI):
Aggregate Demand (AD) = Aggregate Supply (AS)

Review the MULTIPLIER

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If
injection exceeds withdrawals the level of expenditure will rise (show as P)
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- The rise in AD will result in the following:
- Economic growth
- Reduction in unemployment
- Inflation will tend to rise
- Imports and exports deteriorates - the higher the demand the higher
their will be imports and if inflation is high this makes exports less
competitive
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Question - Aggregate
Demand and the National
Economy (7A)

Answers

Consumptions Influences

○

○

○

Disposable income & Expected future income
! Over long term, as income rises - we tend to spend it!
! Short-run Household consumption smoothing (e
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seasonal
changes)
! Long-run smoothing (e
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students loans against higher future
earnings)
The financial system
! Enables smoothing of consumption via loans, overdrafts etc
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e
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Wealth! [‘Assets’ = things I have versus ‘Liabilities’ = things I owe)
! Physical wealth (houses, cars, land, property, furniture, appliances
etc
...
)

Marginal Propensity to
Consume (mpc)

The proportion of rise in income, change in income that goes in the
change in consumption
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Consumer confidence - job security, if an individual is not secured to
their job it will likely save and is it is safe it will likely consume
Expectation of future prices - if prices are expected to rise (cars to
increase cost) there will be a tendency for them to buy not before it
happens
Distribution of income - Poorer household will tend to spend more (%)
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Taste and Attitude
Age of durables - replacement of existing items
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The influences of Investments are the following:
- Increase in consumer demand
- Expectation - this is about firms expectation of the future health of the
market, if they believe that it will continue to grow it will invest more now
to achieve higher yield
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This means that firm will
spend more on technologies that can do this
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On the other hand if rates are low
this will encourage investment as firms will keep more of what they earn
...
g
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Question - Aggregate
Demand and the National
Economy (7A)

Answers

Government Spending
(G)

- Current and capital spending - expenditure that will provide long-term
-

Relationship of National
Income (NI) with
Government spending

- Governments ultimately finance expenditure from taxation, the higher
National Income, the higher tax revenue
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Government can ‘smooth’ i
...
save or
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Expenditure on Imports
Influenced by

Expenditure on a
country’s export is
influenced by

benefits like investing in new education services or infrastructure
development like road networks etc
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borrow to finance expenditure
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When a nation’s GDP is measure the Import (M) must be deducted as the
production of this good is not domestically produced
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Answers

Equilibrium Level of NI
Understand this!

There should be an equilibrium of J and W and if this is not the case we will
experience disequilibrium
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- If the national income was at Y1 injection would exceed withdrawals by
the amount of a - b
...

- However, this will also increase taxes and imports resulting in
withdrawals to also rise
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Question - Aggregate
Demand and the National
Economy (7A)

Answers

Keynesian Diagram

- The Keynesian diagram - Income and expenditure approach:
- The 45° line: Y = Cd + W
- By definition, income must equal expenditure – which is consumption

Aggregate Expenditure
line - E = Cd + J
This means Income - C

d

plus withdrawals
...
e
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- Any Y = X line in a graph will therefore always be a 45° line (where
x=y)

- The expenditure curves:
- We can now plot the expenditure curves Cd (i
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pure domestic
consumption) and E = Cd + J (consumption plus injections – i
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investment, government spending and exports
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The rest will be tax and buying
imports (Withdrawals)

(This diagram is for
Keynesian Diagram ^)
Note: E is the vertical
axis

Marginal propensity to
consume domestically
produced goods (mpcd)

The proportion of a rise in national income that will be spent in goods and
serves within the country
...
75

Review the MULTIPLIER
Question - Aggregate
Demand and the National
Economy (7A)

< don’t really get it
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k = multiplier

For example, if injection rose by £10 billion and national income to rise by
£30 billion the multiplier will be 3
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Question - Aggregate
Demand and the National
Economy (7A)

Answers

Withdrawals and
Injections

A rise in J1 to J2 will result in a change in Y and J
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Marginal Propensity to
withdraw
Learn this!

This is the proportion of the rise on national income that is withdrawn
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This will
result in more money recalculating with an outcome of higher national
income
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25 the multiplier will be 4
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The multiplier formula
mpw+mpcd = 1
mpw = 1 - mpcd
Learn this!

k=1/mpw or

k = 1/(1- mpcd) < learn this!

The alternative formula it using mpcd where proportion of income is spend
on domestic goods and services
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mpw = 1 - mpcd
mpw = 1 - 0
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25 this means that 25% is withdrawn and 75% is
consumed to recirculate

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