Macro 6- Short run and Long run growth

• Short run growth When the economy uses spare capacity in order to increase real GDP
• Long run growth There is an increase in the productive capacity of the economy due to an improvement in the quantity and quality of factors of production
• supply side shocks natural disasters technological changes geopolitical events recession
• demand side shocks consumer confidence change in interest rates changes in real disposable income
• The multiplier effect the process by which only change in components of AD will lead to an even greater change in national output
• multiplier formula 1/ 1-mpc or 1/mpw
• marginal propensity to consume the proportion of any increase in household income is spent on consumption rather than saved or withdrawn from the circular flow of income
• Determinants of MPC disposable income age and demographics interest rates
• Accelerator effect Businesses respond to a change in AD to prepare for future growth firms increase productive capacity via investments into FOP as AD gets closer to full capacity
• Short run effects of the accelerator effect Increased investment increased production of jobs Economic growth potential inflationary pressure
• Long run effects of the accelerator effect employment levels economic stability
• What is the process of the multiplier effect?

  • there is new demand in an economy
  • This leads to an injection of more income into the circular flow of income which leads to economic growth
  • This leads to more jobs being created, higher average incomes, more spending, and eventually more income is created