How the Macroeconomy Works

• What is national income?

  Total value of goods and services produced
• How is national income measured?

  By GDP, GNP, and GNI
• What does real GDP account for?

  Inflation adjustments in GDP value
• If the economy grew by 4% and inflation was 2%, what is real economic growth?

  2%
• What is nominal GDP?

  GDP value without inflation adjustments
• What is aggregate demand?

  Total demand in the economy
• Why can nominal GDP be misleading?

  It may appear higher than actual value
• What does Gross National Product (GNP) include?

  GDP plus income from overseas assets
• How does GNP differ from GDP?

  GNP includes overseas production by citizens
• What is Gross National Income (GNI)?

  Sum of value added by all producers
• What does aggregate demand measure?

  Spending on goods and services
• What does GNI include besides value added?

  Product taxes minus subsidies and income receipts
• What is the circular flow of income?

  • Interaction between firms and households
  • Households supply factors of production
  • Firms provide goods and services
  • Income circulates through spending

  
• Who contributes to aggregate demand?

  Consumers, firms, government, overseas entities
• What do households supply to firms?

  Factors of production like labor and capital
• What do households receive in return for supplying factors of production?

  Wages and dividends
• What happens when the price level falls from P1 to P2?

  Demand expands from Y1 to Y2
• What do firms supply to households?

  Goods and services
• What occurs when the price level rises from P2 to P1?

  Demand contracts from Y2 to Y1
• What happens to income when households spend on goods and services?

  It circulates around the economy

  
• What is a withdrawal from the circular flow of income?

  Money removed from the economy

  
• What causes movements along the demand curve?

  Changes in the price level
• What are injections into the circular flow of income?

  Money entering the economy

  
• Why does the AD curve slope downwards?

  Higher prices reduce real incomes
• How does high inflation affect imports?

  Foreign goods seem relatively cheaper
• What does full employment income represent?

  Total output with minimized unemployment
• What is the relationship between income, output, and expenditure in the circular flow?

  Income = output = expenditure
• What is the effect of high inflation on interest rates?

  Interest rates generally increase
• What is the effect of net injections into the economy?

  Expansion of national output
• What happens if there are net withdrawals from the economy?

  Contraction of production occurs
• How does higher interest affect consumer behavior?

  Discourages spending, encourages saving
• What is aggregate demand?

  Total demand in the economy
• What is the traditional savings rate in the UK?

  Traditionally low savings rate
• How does Japan's savings rate affect investment?

  High savings rate leads to high investment
• What shifts the AD curve?

  • Changes in consumption (C)
  • Changes in investment (I)
  • Changes in government spending (G)
  • Changes in net exports (X-M)

  
• What does aggregate demand measure?

  Spending on goods and services
• What is the equilibrium state in the circular flow of income?

  Withdrawals equal injections

  
• What components make up aggregate demand?

  C + I + G + (X-M)
• What is the relationship between savings and investment in an economy?

  Amount of savings equals amount of investment
• What does consumer spending represent in aggregate demand?

  The largest component of AD