Investment
The addition to the capital stock of the economy
Accelerator theory
The theory that the level of planned investment is related to past changes in income
Capital output ratio
The ratio between the amount of capital needed to produce a given quantity of goods and the level of output
Marginal efficiency of capital
The rate of return on the last unit of capital employed
Retained profit
Profit kept back by a firm for its own use which is not distributed to shareholders or used to pay taxation
Aggregate demand
The total of all demands of expenditures in the economy at any given price
Multiplier
A figure used to find the final change in income after an investment.
Full capacity
The level of output where no extra production can take place in the long run with existing resources. The full capacity is shown by the classical long run AS curve.
LRAS curve
Assumes wage rates are variable both upwards and downwards
Classical/supply side economists: wage rates flexible
Keynesian: may be ‘sticky downwards’ so economy may operate at less than full employment even in the long run
SRAS curve
Assumes money wage rates are fixed
Supply side shocks
Factors such as changes in wage rates/commodity prices which cause the short run AS curve to shift