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MacroEconomics > 10 - How the Macroeconomy Works > Flashcards

10 - How the Macroeconomy Works Flashcards

1
Q

When is the Economy in equilibrium?

A

When savings and investments are equal.

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2
Q

Why can investment never exceed savings?

A

Banks use the money that households deposit to provide investment.

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3
Q

Is investment an injection or a leakage?

A

Injection.

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4
Q

What are the transactions between banks and firms?

A

Banks can provide business investment, and small business loans.

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5
Q

Do savings represent a leakage, or an injection?

A

Leakage.

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6
Q

Do Savings and Injections represent real or money flows?

A

Money Flows.

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7
Q

What are the transactions between banks and households?

A

Banks provide loans to households, and households have savings accounts with banks.

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8
Q

What is the third economic agent?

A

Banks/Financial Sector.

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9
Q

How is income created through households?

A

Through the purchase of goods and services.

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10
Q

Do banks represent real or money flows?

A

Both.

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11
Q

How do firms benefit households?

A

They provide goods and services, and pay wages to workers.

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12
Q

Do firms and households represent real or money flows?

A

Real Flows.

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13
Q

How do households benefit firms?

A

They purchase goods and services, which generates revenue.

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14
Q

What are the two main economic agents?

A

Households, Firms.

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15
Q

What is the fourth economic agent?

A

Government.

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16
Q

What are the transactions between households and government?

A

Households pay taxes to government, households receive public services such as the NHS, and transfer payments, such as universal credit.

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17
Q

Do government decide Fiscal or monetary policy?

A

Fiscal Policy.

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18
Q

What are the transactions between government and firms?

A

Firms pay taxes to the government, such as corporation tax. Government can give subsidies, or purchase things from firms.

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19
Q

What are government grants?

A

Money that the government gives to businesses that doesn’t need to be paid back, in order to reduce unemployment.

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20
Q

What are the transactions between government and banks?

A

The government rely on banks to enforce the monetary policy, which is decided by the Bank of England. Government can bail out banks if necessary.

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21
Q

Why is it the governments’ responsibility to keep the banking system stable?

A

To ensure consumer can access the system, and the money they have tied up in it.

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22
Q

What is an example of the government bailing out banks?

A

After the 2008 Financial crisis, the banking system was at risk of collapse, so the government bailed out RBS.

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23
Q

What is a balanced budget?

A

One where spending is equal to taxation.

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24
Q

What are the three injections into an economy?

A

Investment, Government Spending, Exports.

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25
Q

What are the three leakages to an economy?

A

Savings, Taxation, Imports.

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26
Q

What is the relationship between households, firms, and the rest of the world?

A

Households and firms purchase goods and services from the rest of the world, and the rest of the world purchase goods from firms within a country.

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27
Q

Give three countries within the EU.

A

France, Germany, Italy.

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28
Q

What are the economic benefits of the EU?

A

Largest trade bloc in the world, free trade with other members, world’s biggest exporter of manufactured goods. Shared resources in R and D.

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29
Q

What are the economic drawbacks of the EU?

A

Cost of membership, Being tied to the Euro, Financial pressure from Brussels.

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30
Q

Give three Commonwealth countries.

A

India, Canada, Australia.

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31
Q

What are the economic benefits of the commonwealth?

A

The UK has a trade surplus of £3 Billion with the commonwealth.

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32
Q

What is the equation for Aggregate Demand?

A

AD = Consumption + Investment + Government Spending + (Exports-Imports).

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33
Q

Which Letter Denotes Aggregate Demand?

A

AD.

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34
Q

Which Letter denotes Consumption?

A

C.

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35
Q

Which letter denotes Investment?

A

I.

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36
Q

Which letter denotes Government Spending?

A

G.

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37
Q

Which letter denotes exports?

A

X.

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38
Q

Which letter denotes Imports?

A

M.

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39
Q

What is the largest component of AD?

A

Consumption.

40
Q

What % of GDP is Consumption?

A

60%.

41
Q

What is the level of consumption primarily affected by?

A

Income Levels.

42
Q

What else is consumption affected by?

A

Interest rates, Wealth, Expected Income, Consumer confidence, Tax rates, Job security, Level of Savings.

43
Q

Why does an increase in Income lead to higher consumption?

A

People have higher levels of disposable income, which they can spend.

44
Q

Why does an increase in interest rates lead to lower consumption?

A

There is a larger reward for saving, so people save more, which represents money leaked from the economy.

45
Q

Why does high consumer confidence lead to more consumption?

A

Consumers are more likely to make bigger purchases, as they’re more confident of their ability to repay.

46
Q

Why might an inflation expectation affect consumption?

A

It may increase spending now to prepare for a decrease later on.

47
Q

What will the expectation of redundancy do to consumption?

A

Present consumption will decrease, with the hope of finding another job, which would increase consumption in the future.

48
Q

Which changes increase consumption?

A

Wage growth, Lower taxes, Low interest rates, High levels of wealth, Credit availability, Job security.

49
Q

Which changes decrease consumption?

A

High inflation, Wage freeze, Higher taxes, High interest rates, Low level of wealth, Redundancy.

50
Q

What is the second biggest component of AD?

A

Investment.

51
Q

What is the Multiplier effect?

A

An initial change in spending leading to a larger, more widespread final impact on the economy.

52
Q

What are the effects of the government injecting money into house building?

A

Provides jobs for local builders, as government purchase their services. Expands the capacity of the town, expands the local economy.

53
Q

What is an example of expansionary fiscal policy?

A

Building Homes.

54
Q

What does growth of the local economy mean for local people?

A

People have more disposable income, meaning shops and restaurants in the area have more demand.

55
Q

What does the multiplier ratio show?

A

The increase in GDP following an initial injection.

56
Q

What is the difference between savings and capital investment?

A

Savings are a leakage from the circular flow of income, as money which is saved can’t be spent on consumption.

57
Q

Which factors influence planned investment?

A

Actual and expected demand for goods and services, expected profits and taxes, interest rates, and availability of finance.

58
Q

What happens if businesses aren’t confident for the future?

A

They won’t invest, as they won’t expect a profit from their investment.

59
Q

What is the accelerator effect?

A

The relationship between increased GDP and capital investment.

60
Q

How may firms respond to a growing economy?

A

Intensifying existing capacity, increasing spending on machinery.

61
Q

What does falling business confidence lead to?

A

Less business investment - business confidence was 102 before 2008, 93 following.

62
Q

What is government spending?

A

The government spending money on state provided goods and services.

63
Q

What are the three types of government spending?

A

Transfer payments, Current spending, capital spending.

64
Q

What is current spending?

A

Spending on current goods and services, such as wages of public sector workers.

65
Q

What is capital spending?

A

Spending on improvements to infrastructure.

66
Q

What is the equation for total government spending?

A

Transfer payments + Current spending + capital spending.

67
Q

What is net trade?

A

The difference between imports and exports.

68
Q

Does the UK have a trade surplus or a trade deficit?

A

Trade deficit.

69
Q

Which factors increase the savings ratio?

A

Rise in interest rates, expectation of future job losses, restriction of credit availability.

70
Q

Which factors decrease savings ratio?

A

Rising consumer confidence, Taxes on savings, Lower interest rates, Job security.

71
Q

What does the AD/AS model show?

A

Shows the performance of the economy.

72
Q

What is an example of British industry investment?

A

British Volt - Building a new gigafactory to manufacture car batteries, in an area where unemployment is well above national average.

73
Q

What are the statistics around British Volt’s Investment?

A

£2 Billion investment, 3000 jobs, Open in 2024, Capacity to produce 300,000 batteries per year.

74
Q

What is the equation for marginal propensity to consume?

A

Change in consumption/Change in income.

75
Q

What is the equation for marginal propensity to save?

A

Change in saving/Change in income.

76
Q

What does the aggregate supply curve illustrate?

A

The level of supply in the whole economy at any given level of average prices.

77
Q

What may businesses be affected by in the short run?

A

Wage rates, Raw materials, Taxes, Subsidies.

78
Q

What effect does a rise in wage rates have on SRAS?

A

Increased costs, as workers are paid more. SRAS curve shifts leftward.

79
Q

What does a rise in raw material prices mean for SRAS?

A

Increased costs, as it costs more for the same product, SRAS curve shifts leftward.

80
Q

What does a decline in the value of sterling mean for SRAS?

A

Increased costs, as imported goods become more expensive. SRAS curve shifts leftward.

81
Q

What does an increase in corporation tax mean for SRAS?

A

Less profit for businesses, as more goes to tax. SRAS shifts leftward.

82
Q

What does a fall in interest rates mean for SRAS?

A

Decreased costs, as borrowing becomes less expensive. SRAS curve shifts right.

83
Q

Why does a section of the SRAS curve become steeper?

A

At low levels of production, there is excess capacity, meaning there are unemployed resources. As production increases, towards full capacity, further increased may result in rising costs.

84
Q

Which factors affect LRAS?

A

Technology, Productivity, Worker attitudes, Factor mobility, economic incentives.

85
Q

How do increases in the use of capital equipment affect LRAS?

A

Increase in output, outward shift in LRAS.

86
Q

Which other factors cause an outward shift in LRAS?

A

New technology, Increasing number of business start ups, policies intended to increase incentives to work, productivity improvements.

87
Q

Why is the LRAS curve vertical?

A

All factors of production are fully employed, a change in price doesn’t change LRAS.

88
Q

What do Keynesian economists believe in?

A

The importance of influencing aggregate demand through monetary and fiscal policy.

89
Q

How does a cut in interest rates affect an AD/AS diagram?

A

The LRAS curve shifts outwards.

90
Q

Why does the LRAS curve shift outwards in response to interest rates?

A

A cut in interest rates will encourage firms to invest more, in more expensive capital goods, which they may need for the expansion of their business.

91
Q

What are examples of supply side policies which can increase LRAS?

A

Deregulate financial markets, Privatisation, Reduce power of unions, Reducing income tax.

92
Q

What is the universal credit system?

A

A means-tested system which combines six benefits for working age households with low incomes.

93
Q

What have changes been to child benefit since 2010?

A

Child benefit was frozen for three years from 2011/12. Child tax credit reduced for those who earn more than £40,000.

94
Q

What is the housing benefit cap?

A

Limits the total amount of benefits you can receive to £486.90 per week.

95
Q

How can supply side policy reduce the amount of income tax paid by individuals pay?

A

Lower income tax rates, Increase in income tax thresholds, Tax credits - supplementing income for those on low pay.

96
Q

What is the current threshold for income tax?

A

£12570.

97
Q

What are the different bands of income tax, and what are they taxed at?

A

Basic Rate - 20%. Higher Rate - 40%. New Higher Rate - 45%.

MacroEconomics (15 decks)

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