Macroeconomics lecture 2

dexazuxo's version from 2017-05-20 10:09


Question Answer
What is Aggregate demand failure? incomes fall, demands wall therefore unemployment rates higher.
Describe the stages in a business cycleTrough: High unemployment, low demand in relation to economies capacity to produce. (a lot of unused capacity) unwilling to make new investments
Recovery: Consumer spending begins to rise, replace rundown equipment, rise of employment and income.
Peak: top of cycle, when Y>Y*, utilising capacity at high degree, labour and essential raw material shortages.
Recession: downturn in economic activity. Fall in real GDP, demand, production, employment and profits = fall in real GDP for 2 quarters in succession.
Boom: the period at or near the top of an abnormally strong recover.
Slump: the period at or near the bottom of an abnormally deep recession.
What is excess capacity?no constraint from producing, more output by capital stock/labour shortages.
What is short run?explaining why national output can deviate from it potential level. How to keep -/+ GDP gaps as small as possible, keep actual and potential gap as close as possible.
What is long run?The period it takes economy to return to level of potential GDP once its been disturned by an exogenous shock.
What is aggregate spending?total desired spending on domestically produced goods and services. This doesn't’t have to equal to actual spending, may not plan to invest in stock accumulation but may do so unintentionally.
1) Autonomous/exogenous spending – Components of aggregate spending that don’t depend on current domestic incomes. Can and does change, but not systematically in response to changes in income
2) Induced/endogenous spending – components of aggregate spending that DO change in response to changes in income, high income = more household spend
3) Investment – national output not used for current consumption or by governments and motivated by firms desire to increase capital stock.
What is the 45 degree line? This line shows where AE = Real GDP
What is the aggregate spending function?Relates to the level of desired real spending to the level of real GDP
What is equilibrium GDP?This is the level at which purchasers wish to buy exactly the amount of national output that is being produced. ABOVE: Output more than desired expenditure. output will soon reduce
BELOW: desired expenditure exceeds national output and output will soon be increased.
What happens when there is persistent unemployment?Where there is period of persistent unemployment, the government seeks to stimulate the economy by injecting new spending. If there is a larger than expected effect, demand may rise too much with GDP reached with still expanding demand. If the government overestimates the effects, the recession would persist longer than necessary.
What happens if there is a high marginal propensity to spend?= steeper AE function and the larger the multiplier
What was the big idea (keynesian revolution)Classical theories insisted that economies self correct over time and that government involvement does more harm than good.This was because consumer spending falls. BUT the big ideas solution was to get the government to use their own spending and money supply to increase demand. Government spending in an economy leads to more spending (thus the multiplier effect). Initial spending causes more spending, therefore government spending is needed for more growth.
- this is now a tool more managing the economy.
- economies can get stuck with GDP below potential for a long time (aggregate demand failure)