Business cycle: periodic fluctuations in the economic activity experienced over time. It is determined by measuring the growth rate of the gross domestic product.
The Circular Flow Diagram: it is an economic model that shows how goods, services and money move within an economy (between producers and consumers).
Economic Equilibrium: a condition in which economic forces are balanced in the absence of external influences. The main forces are demand and supply.
Effects of leakages from and injections into the spending stream: leakages include savings, imports, and taxes while injections include investment spending, exports and government spending. When leakages exceed injections, total output exceeds total spending and vice versa.
The multiplier effect refers to how an expansion in one economic activity results in an increase in related activities. The multiplier effect arises when injections into the economy result in more increase in the economy’s national income (Woodford, 22).
The product category selected for this assignment is luxury cars. For this product, price and aggregate demand are inversely related. An increase in the price of luxury cars will cause a decrease in aggregate quantity demanded and vice versa. This inverse relationship is because an increase in prices makes consumers feel poorer. As a result, consumers purchase less of the commodity or resort substitute products if they are priced cheaply. Since consumption is part of aggregate demand, purchasing less of the commodity causes the aggregate expenditure to go down. Another reason for the inverse relationship is that as prices increase, interest rates also increase. This compels people to spend more to sustain the previous level of expenditure (Woodford, 1-35).
Works Cited
Woodford, Michael. Simple Analytics of the Government Expenditure Multiplier. American Economic Journal: Macroeconomics, 3 (1): 1–35.
