1: Intro to Macroeconomics Flashcards
What Is Economics?
Concerned with the problems that face individuals nations and the world
The need to analyse the costs and the benefits of altering the allocation of scarce resources
Divided into 2 main areas; Microeconomics and Macroeconomics
Microeconomics?
Studies how individuals and businesses make decisions regarding the allocation of limited resources
Focuses on the behaviours and interactions of households and firms
Examples; buyer, producer or individual market in which consumers and suppliers trade
Macroeconomics?
Is about the economy and examines its performance as a whole
Is focused on factors such as economic growth, unemployment, inflation, interest rates and international trade and their interactions
Aims to understand how these elements influence the overall economy
Macroeconomics?
Is about the economy and examines its performance as a whole
Is focused on factors such as economic growth, unemployment, inflation, interest rates and international trade and their interactions
Aims to understand how these elements influence the overall economy
Macroeconomic Policy Objectives
Full employment
Price stability
A high and sustainable rate of economic growth
Keep the balance of payments in equilibrium (stable condition, forces are balanced)
Macroeconomic Policy Objectives
(CONFLICTED)
If an economy grows too quickly due to excessive consumer spending, then demand will outstrip supply and prices will rise
High growth creates issue to keep stable inflation
But if the priority is to decrease the high level of inflation, there is a need to increase the interest rates
Therefore making borrowing more expensive - people will have less to spend, demand will go down and price will decrease, reducing inflation
Often restricting growth via reduced consumer spending and investment
Lower Interest Rates Lead To?
Higher spending
Higher employment
Higher economic growth
Higher inflation (a general increase in the prices of goods and services in an economy over time)
High interest rate leads to reduced spending, lower inflation and higher unemployment
High Emplyment Rate Leads To?
High employment is associated with high inflation - it is inversely related
When employment is high the demand for labour by employers may exceed supply
Employers will offer high wages to attract employees leading to rising wage inflation
Low interest rate pushes spending up, increasing employment and leading to higher inflation
Imports
Means to bring goods or services into a country from another country for sale or use
When currency increases in value (strong), import goes up as it becomes cheaper
Uk imports benefit from an increase in the value of sterling
Exports
Means to send goods or services from one country to another for sale or use
When currency decreases in value, export goes up
Uk exports benefit from a fall in the value of sterling
Excess Exports are not good, why?
May lead to pollution
Higher interest rates
Cannot be sufficient to meet domestic needs which can lead to a decline in domestic living standards
Excess Imports are not good, why?
When a country imports more than it exports, it has a trade deficit (more money is flowing out of the county than into it) therefore we need to borrow more
Currency devaluation = a country has imports, exports -> trade deficit, with less demand for a country’s currency
Recession?
A technical recession occurs when a nation’s real gross domestic product (GDP) declines for two consecutive quarters, indicating a contraction in the overall economic output
But there is often a sharp slowdown in the rate of growth of output, spending and income can feel like a recession
Causes of a Recession?
Financial markets that do not work efficiently
Lack of liquidity in the financial system
Excessive risk taking by investors
Banks granting loans to consumers who are likely to default
Over-valuation of certain assets
Over-reliance on leverage and debt
Characteristics of a Recession
Declining demand for output leading to higher levels of spare productive capacity
A sharp fall in business confidence and profits
A decrease in fixed capital investment spending because there is insufficient demand to justify new capital projects
Falling demand for imports
Increased government borrowing
De-stocking and heavy price discounting - leading to lower inflation
