Unit 7: Macroeconomics and National Income

The total value of all final goods and services produced within a country's borders in a given period.

A measure of the income earned by all factors of production within a country's borders in a given period.

The final purchases of machinery, equipment, and tools by businesses, as well as proprietors' income and corporate profits.

The income earned by businesses from selling final goods and services to households and firms.

Money paid to owners of land, buildings, and other physical capital used in production.

The income earned by the owners of capital for providing machines, tools, and equipment.

The profit that business owners earn from selling their products or services.

The income earned by government through taxes on production and imports.

The total amount of spending in an economy, including consumption, investment, government spending, and net exports.

A situation where aggregate demand equals aggregate supply, leading to a stable level of national income.

The pattern of income flowing through an economy, involving spending, production, and income generation.

Spending by households on goods and services.

Spending on new capital goods, such as machinery and buildings, by businesses.

Spending by the government on goods and services, such as education and healthcare.

The difference between a country's exports and imports.

The relationship between changes in injections or withdrawals and the resulting change in national income. It explains how small changes in spending can have a larger impact on the overall economy.

The proportion of a rise in national income that is spent on domestically produced goods and services. This is the slope of the consumption (Cd) function.

The proportion of a rise in national income that is withdrawn from the circular flow, like through savings or taxes.

The sum of MPCd and MPW always equals 1, meaning that every extra dollar of income is either spent domestically or withdrawn from the circular flow.

This occurs when planned expenditure (E) exceeds national income (Y), leading to excess demand. Firms respond by increasing production and employing more factors of production, pushing income towards equilibrium.

This occurs when planned expenditure (E) is less than national income (Y), leading to insufficient demand. Firms respond by reducing production and employment, pushing income towards equilibrium.

The proportion of an income increase that is saved rather than spent.

The proportion of an income increase that is paid in taxes.

Changes in taxes or savings impact household spending decisions and the overall economic activity.

The ratio of the change in national income to the change in injections (spending)

A situation where the equilibrium level of national income (where aggregate demand equals aggregate supply) is below the full-employment level.

The maximum level of national income that an economy can achieve at full employment, meaning all available resources are being utilized.

The amount by which aggregate expenditure (spending) falls short of the level needed to achieve full employment.

The level of national income where aggregate demand equals aggregate supply. It is the point where the economy is in equilibrium.

An increase in spending in the economy, such as increased investment, government spending, or exports.

A decrease in spending in the economy, such as increased savings, taxes, or imports.

The multiplier is the ratio of the change in national income to the change in injections (or withdrawals). It indicates how much national income will change for every unit change in injections (or withdrawals).

The size of the multiplier is determined by the marginal propensity to withdraw (MPW). The larger the MPW, the smaller the multiplier.

The MPW is the fraction of each additional dollar of income that is withdrawn from the circular flow of income. It is the sum of the marginal propensity to save (MPS), the marginal propensity to tax (MPT), and the marginal propensity to import (MPM).

The income and expenditure approach to calculating the multiplier emphasizes the relationship between aggregate expenditure and national income. A change in aggregate expenditure (due to changes in injections or withdrawals) will lead to a magnified change in national income.

The withdrawals and injections approach utilizes the concept of withdrawals (leakages) and injections (inputs) to explain the multiplier effect. It emphasizes how changes in injections (investment, government spending, exports) or withdrawals (saving, taxes, imports) affect national income.

The multiplier formula 𝒌 = 𝟏/𝒎𝒑𝒘 shows the inverse relationship between the multiplier and the MPW. A higher MPW means a lower multiplier, and a lower MPW means a higher multiplier.

The multiplier formula 𝒌 = 𝟏/(𝟏 − 𝒎𝒑𝒄𝒅) shows the inverse relationship between the multiplier and the marginal propensity to consume domestically (MPCD). A higher MPCD means a higher multiplier, and a lower MPCD means a lower multiplier.

The multiplier effect can be used to explain how changes in government spending, investment, or net exports can lead to larger changes in national income.

Represents the amount by which injections (investment, government spending, and exports) fall short of withdrawals (savings, taxes, and imports) at the full-employment level of income.

The cure for demand-deficient unemployment is to close the recessionary gap by increasing aggregate expenditure. This can be achieved through expansionary fiscal policy (increasing government spending or lowering taxes) or expansionary monetary policy (lowering interest rates or increasing the money supply).

The excess of national expenditure over income (and injections over withdrawals) at the full-employment level of national income. This happens when Ye is greater than YF, causing demand-pull inflation.

The maximum sustainable level of output in an economy, where all resources are fully employed. It is a ceiling to output and cannot be exceeded sustainably.

To eliminate inflation caused by an inflationary gap, policies need to either raise withdrawals (like taxes) or lower injections (like government spending). This will reduce aggregate demand and bring it back to the full-employment level.