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4.2.2 - circular flow of income + ad/as - Coggle Diagram
4.2.2 - circular flow of income + ad/as
Circular flow of income
Income flows between firms and households
National output = Nat. Income = Nat. expenditure
Injections
Exports, Investment, Government spending
Anything into economy
Withdrawals
Imports, savings, taxes
Anything out of economy
Multiplier effect
a given change in a particular input, such as government spending, causes a larger change in an output, such as gross domestic product.
Size of effect depends on rate at which money leaks from economy - e.g. bigger leakage = quicker money leaves circular flow = smaller multiplier effect
Lots of money spent on imports = small multiplier effect as the injection will quickly leak out of the circular flow
MPC affects size of multiplier - Low MPC = low multiplier as any increase in income will only lead to a small increase in consumption - rest of income is saved
MPC = change in consumption / change in income MPS = change in saving / change in income
Aggregate Demand
Total demand / spending in an economy over a given period of time - AD made of all the components that contribute to spending/ demand in an economy
AD = Consumption + Investment + Government spending + (Exports - Imports)
-Consumption is the total amount of spending by households, not by firms -Consumption ^ = ^ AD therefore a reduction = reduction in AD -Largest component in AD - about 65%
Main factors affection consumption and saving:
Income - as disposable incomes rise, consumption rises - rate at which consumption rises is usually lower than the rate at which income increases because households tend to save more as well
Interest rates - higher rates = less consumption - consumers save more to take advantage of higher rates + less likely to borrow as it's more expensive - also less money if rates on existing loans etc. rise
Consumer confidence - more confident = spend more + save less
Wealth effects - rise in household wealth = rise in consumer spending + less saving
Taxes - direct tax increases = less disposable income = less consumption
Unemployment - save more + spend less
Aggregate supply
LRAS - Vertical curve - an increase in the price level won't cause an increase in output because the economy is running at full capacity so it can't create any more output
Shifts if:
Changes in factors of production - LRAS curve will shift if there is a change that will affect the capacity of the economy
-Improvement of FoP increases the capacity of the economy, shifting LRAS to the right
-Deterioration of the FoP that causes a reduction in an economy's capacity
SRAS = upwards sloping left to right - increase in price level = increase in amount of output firms are willing to supply
Shifts if:
-Change in costs of production - reduction in costs means that at the same price level, more output can be produced so SRAS shifts to the right
-Sudden decrease in aggregate supply / supply side shocks
-Changes in things like wage rates, taxes a firm may pay, exchange rates and efficiency levels