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3- Economics- Macro > 1.2- How The Macroeconomy Works > Flashcards

1.2- How The Macroeconomy Works Flashcards

1
Q

Reflationary policies

A

-policies that increase aggregate demand with the intention of increasing real output and employment

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2
Q

Inflation

A

A continuing rise in the price levels

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3
Q

Economic shck

A

An unexpected event hitting the economy
-can be supply-side (2014 storms damage to infrastructure OR covid-19 pandemic meant labour unused in order to limit spead)
-or demand-side

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4
Q

Consumption

A

Total planned spening by households on consumer goods and services produced within the econmy

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5
Q

Rate of interest

A

Reward for lending savings to somebody else (eg. Bank) and the cost of borrowing

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6
Q

when looking at growth in gdp- identify two key features

A

-period of time it spans
-largest increase- by how much and when
-largest decrease

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7
Q

Essay on various stages of economic cycle using key economic indicators

A

-GDP growth
-unemployment
-cpi inflation
-current account of the balance of payments
-equity

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8
Q

Gross National income

A

Total income earned by countries residents inc income oevrseas investment
Includeds income earned by residents overseas

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9
Q

National capital stock

A

Stock of capital goods in the economy that has accumulated overt ime and measured at a point in time

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10
Q

National wealth

A

Stock of all goods that exist at a point in time that have value in the econom

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11
Q

Open economy

A

Economy open to international trade

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12
Q

Withdrawals

A

-leakages
-flow of spending out of the circular flow of income
-tax, savings, inports

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13
Q

Injections

A

Spending entering the circular flow of income
Eg. Gov spending, injections, exports

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14
Q

Saving

A

Income that is not spemt

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15
Q

Closed economy

A

Economy with no international trade

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16
Q

Injections>withdrwas

A

-expansion of circular flow of income
-positive multiplier
-increase GDP and national income

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17
Q

Injections<withdrawals

A

-reduction/contraction of circular flow of income
-negative multiplier
-gdp fall andn ational income fall

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18
Q

Sum of planned injections+withdrawals

A

Circular flow of income in equilibirum

S+T+M+I+G+X

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19
Q

Multiplier effect explanation -negative

A

-proportional decrease in spending as net withdrawals greater than injections
-investment falls
Workers in firms producing capital loose jobs- spend less
-demand for goods and services decrease- spend less
More loose jobs
-cycle repeats
-contraction of econmy
-gdp decreases

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20
Q

Increase in GDP=

A

Multiplier x increase net injections`

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21
Q

How to calculate multiplier

A

1/1-MPC + 1/MPS+MPM+MPT
MPS+MPT+MPM+MPC=1
Save tax import consume

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22
Q

Marginal propensity

A

Proportion of income

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23
Q

When does the multiplier take place

A

Disequilibrium between net withdrawals and net injections
-not when consumer spending changes

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24
Q

SRAS

A

Short run aggregate supply
-total supply of goods and service w/in an economy at one moment in time
-time period in which the quanity of atleast one factor of production is fixed

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25
Q

AD

A

Aggregate demand
-total demand for all goods and services w/in an economy

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26
Q

AD=

A

C+I+G+ (X-M)

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27
Q

What cuases a shift in AD

A

-change in consumption, investment, gov spending, or imports/exports
-which often changes the economic cycle

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28
Q

LRAS curve shift

A

-v slow over time
-not affected by changes in prices

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29
Q

What cause a LRAS shift right

A

Increase in quantity or quality of factors of production
-casuing ppf to shift

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30
Q

which curve is affected by chanegs in price

A

SRAS as producers are incentivised to sell products at higher price in short term

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31
Q

There is an output gap when

A

National output is higher or lower than it would have beejn if the country had grown continously at its trend rate of growth

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32
Q

The gov is concerned that without any change to its current economic policy, the rate of growth of the economy will fall below its trend rate. Which of the following policy changes is most likely to prevent this from happening

A

An increase in gov expendatiture (increase aggregate demand)

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33
Q

The policy most appropriate to close the positive output gap by influencing aggregate demand would be

A

An increase in the rate of interest (reduces demand)

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34
Q

The underlying trend rate of growth in an economy is declineing and the economu is also experiening an increase in its rate of unemploymenyt
What is most effective in dealing with these problems

A

An expandionary monetary policy and supply-side policies
Boosts demand and increases supply

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35
Q

Real growth/other measure calculation

A

Nominal/money (gdp)- inflation = real (gdp)

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36
Q

An economy is currently operating inside its ppf. In th ehsort run if the rate of growth of aggregate demand is less than the rate of growth of productive capactity, then the economy is most likely to experience

A

An increase in unemployment

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37
Q

If a gov’s primary objective is to increase the growth potential of an economy, it mught also simultaneously

A

Think bigfeet

Aim to balance its spending and tax revenues over the long term

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38
Q

The main economic reason that a gov is likely to have the objective of minimising unemployemnt is to

A

Avoid the waste of a scarce resource

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39
Q

Conflict can arise between the various gov objectives, at least in the short run. For example, when attempting to achieve economic growth through reduced interest rates, this can lead to

A

Demand-pull inflation

If interest rates reduced- likely to cause increase in consumption and investment- both components of aggregate demand
This will increase aggregate demand which will give rise to deman-pull inflation

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40
Q

Care must be taken in comparing gdp over a period of time because

A

It is presented in money terms, and therefore, reflects changes in prices as well as output

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41
Q

One way in which retail price index differs from the cpi is that

A

It includes mortgage interest payments

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42
Q

The level of unemployment is a reliable measure of economic performance because

A

It provides a relative measure of how an economy is performing in relation to its productive potential

Since a measure of unemployment using a particular methodology is retained for a significant period of time, relative assessments can usefully be made about how well an economy achieves its productive potential

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43
Q

An improvement in an economy’s factor productivity performance, all other things being equal, will contrubute to

A

An increase in exports and a reduction in a trade deficit

An imporvemnt in an economy’s factor productivity reduces average costsm thereby allows g&s to be more competitively proced. Exports are more attractive to foreign buyers and imports are relatively less attractive to domestic buyers. As a result the trade balance will improve-eg. Reducing a trade deficit

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44
Q

In order to calculate the retail price index a ;basket of goods’ bought by the ‘average family’ is drawn up and a set of ‘weights’ are calculated and applied to each iotem. The reason for calculating the weights that are applied to each item in the construction of the rpi is

A

To reflect the relative importance of the items in the average family’s basket of goods

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45
Q

What does the LRAS curve show about the economy

A

Potential output

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46
Q

The shift of the LRAS right can be explained by an increase in

A

Government expendaiture on education and training

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47
Q

What is the position of an economy’s lras determined by

A

Production capacity of the economy

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48
Q

The real national output of OY (OY being on x axis- y being lras)

A

The economy is on its production posibility frontier

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49
Q

What is likely to move the economy to a new equilibirum- LRAS shift right

A

An increase in capital stock

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50
Q

When does macro-economic disequilibrium exist

A

Aggregate supply is not equal to aggregate demand

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51
Q

The shift of LRAS is likely to be caused by a fall in

A

Capital stock

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52
Q

All other things being equal, which one of the following is most likely to cause a simultaneous shift to the right in LRAS and SRAS

An increase in

A

The number of immigrants entering the country

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53
Q

Short run as

A

Time perio

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54
Q

Short run AS- explanation

A

-unlikely to hire new workers
As may not be needed longer term
Also expensive to sack and hire people
-demand increases- firms try to get existing workers to work harder or longer
But overtime is costly- costs rise as output expand
Higher price, needed for supply
-extra demand- bigger increase output than in prices

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55
Q

Factors which shift SRAS

A

-raw materials, high wages, interest wages- costs increase
Sras- moves to left- gives lower profit margin and fims increasingly less incentive to priduce
-higher businesses taxes- sras left
Eg. Corperation tax, rates or vate
Add to final costs
-productivity increasingly reduces cost
Sras right

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56
Q

LRAS

A

Normal position for an economy
Operation of free market- cause economy to move natural capacity of output- ppb
-any changes in q and q of factors of production cause shift

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57
Q

Neoclassical lras -shape

A

Vertticle line

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58
Q

How can gov policies affect lras

A

-high corperation taxes
-incentives- business start up schemes
-new technologies
-more motivated workforce
-banking system- cheap and available funding for investment
-supply side policies

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59
Q

How high corperatuion tax affect lras

A

Firms reluctant to invest in uk or even more abroad

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60
Q

How business start up scheme cause lras shift

A

Encourage enterprise

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61
Q

How more motivated workforce- lras

A

Increase productivity- right

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62
Q

Economic growth

A

Increase real output over time

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63
Q

Expaknation LRAS

A

-if ad shift right- sr- higher natural rate of output and positive output gap
-long term equilibrium will return to old output, but at a higher price
-in response to high prices- ad shift left- negative output gap, lower natural rate of output, prices drip

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64
Q

Sras beyond ppb

A

Not sustainable
Eg. Workers 24h/dzy

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65
Q

Ppb

A

Long run move output

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66
Q

Neoclassical explanation

A

-as ad decrease (eg. Sharp decrease bank lending)
-gdp fall and so does price level
-unemployment increase0 economy under natural rate of output- negative output gap
-negative multiplier effect- injections less withdrwal
-economy- recession /(if fall 2 consequtive quaters)
-rising unemployment, falls ad
Cause wages and price fall
Reduce cost production
Sras to right
-firms encouraged to expand output and increase workers-lower wages and costs
-economy lift out of recession and return to lras but at lower price

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67
Q

What lras show- neoclassical

A

Verticle
Can go over in sras- increase wages persuade more workers to enter job market

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68
Q

Economy not full potential-why not

A

Voluntarily unemployed- dont want to work at current wage rate

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69
Q

What does necoclassical assume

A

-mobility of factors of production- eg. Labour market flecibilyy
-assumes economy wil revet to natural rate of output and employment
Given state of technological develipment, skills of workforce, barriers to entry into market (influences competition on micro level)

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70
Q

What does neoclassical suggest

A

-deregulation as much as possible and reduce taxes- reducing barriers to entry
-no need for gov intervention as return from recessiuon

If prices down,
Down cost of production
Decrease wages
Increase finding employment

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71
Q

Labour flexibility

A

Easy to alter quantuty and structure of workforce

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72
Q

Why is labour flexibility sucessful/important

A

Allows firms to alter their workforce as condition sto change and workers adopt new practises
-economy related lr capacity more easily

73
Q

Characteristics of labour flexibity

A

-flexibly employment practises
Skills w/in workforce
Hours
-ease and cost of hiring and firing worker
Reduce cost of employment
Modifications to suit labour force
Output and employment more easily matched
-switch to shorter term employment contracts
Eg. 6 month or zero hours
-greater flexibility on policy arrangements
Expanision of performance related pay
Or regionalisation of pay- vary diff region based on productivity
-increased locational flexibility
Many businesses now expect worker to be able to move within and between diff regions

74
Q

Performance related pay

A

-some of total pay (remuneration) package linked to productivity, compacy profit- indicators of performance

75
Q

Keynsian beliefs

A

Not necessarily automatic forces at work- naturally return an economuy to its natural rate of output
-economies get stuck in recession- great depression 1930s

76
Q

Keynsian graph

A

One as curve- horizontal at low levels output
Psoitivly sloped as economy nears full capacity
Verticle when economy operates at full capacity

77
Q

Economies stuck in recession -how keynes

A

Consumer and business confidence lwo, falling prices lead to lower wages, not enough to encourage consumers to spend
Encourages firms to take on more workers and expand output as cheaper
Income- key determinate of consumer spending
Real incomes falling- higher unemployment
Causing spend less- ad less
Firms cut back on investment- no incentives to take on more workers to expand produvtivity
Despite lower cost labour
Ad less

78
Q

Keynes what to do

A

Govs should intervene- kick off positive multiplier
If gov spend on large infrastructure proejcts- often labour intensive construction
Creating jobs to increase ad

Gov spending counteracts decision in investment (Fiirms)- gdp rise, unemployment decrease

79
Q

How is gov spending- keynes - sorted

A

Funded issuing gov bonds(loans)/borrowing
Paid off during growth stage of economic- aim for gov to balance burget over course of economic cycle

80
Q

What may cause increase in capital

A

Lower rate of interest
Increase investment

81
Q

Impact natural disaster on economy

A

Wipe out caputal stock, reduce output, lead rise unemployment levels

82
Q

Anything that increases labour output

A

Shift curve rught

Increase investment eductation, training, more efficient working practises, improved technology

83
Q

What is SRAS drawn on the assumption of

A

Investment in the economy are constant

84
Q

What is taxation

A

A withdrawal from the circular flow
Increasing total net withdrawals
Negative multiplier

85
Q

What is consumer spending

A

Not an injection
But is componsent of ad
Most likely saving less if spending more
So less withdrawals

86
Q

Are savings a component of ad

A

No
But are a withdrawal

87
Q

What is investment

A

A component of ad
An injection

88
Q

Aggregate demand- chian of logic q

A

Definition of change
Injections and/or component of AD?
Increase or decrease in ad- shift of curve
Net injections net withdrawal
Negative/multiplier effect
Annotated diagram-change in price level and real gdp

89
Q

Impaact of rise in income tax on consumer spending

A

Fall in disposable income
Subsquent fall in consumeer spending

90
Q

Unemployment rate

A

The labour force survey unemployment rate measures all those without paid employment and actively seeking work

Irrespective of whether they are entitled to claim job seekers allowance (or universal credit) or not
This may include those unemployed who have savings or are supported by working partners as well as those claiming job seekers allowance or universal credit

91
Q

Ceteris paribus

A

All things being equal

92
Q

What are the impacts of high gov borrowing

A

Can be detrimental to longer term economic growth
If borrowing not paid off as the economy recovers and unemployment falls

93
Q

Demand deficient unemployment

A

Same as cyclical unemployment

94
Q

Lras- high levels of unemployment and environment

A

Lower economic growth may reduce the resources available for research and development into environmentally friendly technologies in the longer term

95
Q

Social problems associated iwth unemployemnt

A

Rising crime rates
Poor health
Low educational achievement
Family breakdown- implications for social cohesion, social mobility and priciple of fair society

96
Q

What is most likely to cause a fall in aggregate consumer spending

A

A reduction in gov spending on welfare beneifts

97
Q

‘Close to £20bn is expected to be spent using credit and debit cards by the end of dec, up 10% on last year’
The most likely consequence of this increase in spending is a rise in

A

Imports

98
Q

How can savings be beneficial

A

Saving can finance investment expendaiture

99
Q

As a component of ad, consumption is best defined as total expendaiture in the economy…

A

By housholds on all goods and services

100
Q

Disposible income

A

Income recieved after paid taxation + any benefits (uc)
Statutary deductions- tax, national inocme\
Further reduced if take out pensions.mortageges to buy new house

101
Q

Discretionary income

A

Income that’s left over after paying for essentials
Eg. Mortgage, foo, bills
So is spent on non-essentials, holidays or saved

102
Q

Low income groups spenidng

A

Spench higher proportion of income
Much less %income saved
Less discretionary income

103
Q

High income groups spending

A

Spend less
Save more

104
Q

Changes in consumption caused by

A

Income
Wealth effect
Inflation
Rate of interest
Expectations

105
Q

How income impact consumption

A

According to keynes-most important determinant of consumptioon

106
Q

How wealth effect impact consumption

A

Consumers change level of consumtiion if see change in value of their wealth (stock of assets)
Eg. Value of house may increase, borrow against it
Or value of shares increase, spend more as feel wealthier

107
Q

How wealth impact inflation

A

-expectations accelerate inflation in future, consumers may spend more in short term in anticipation of increasing prices
-long term inflation, negative wealth effect

108
Q

How does rate of interest impact consumption

A

Increase interest, save more as rewarded more
-if decrease- consumers save less and spend more

109
Q

How does expectations impact consumption

A

-feel confident about job security- incomes likely to rise in future- spend more
-economy growing strongly, consumers spend more, virtuous cycle of expansion- fuelled by positive multiplier
-negative expecttations- spend less and save more
Eg. Fears of recession, loose job/ earn less (decrease bonuses and less sales commission_- spend less
-life cycle theory of consumption

110
Q

Life cycle theory of consumption

A

Borrow lots early on as expect to pay back when have higher income

111
Q

Consumer spending as component ad

A

-largest- 60%
=dont directly cause multiplier effect- change in consumer spending likely to lead to change in investment
-change impacted by- income/wealth/confidence effect

112
Q

Mortgage equity withdrawals

A

Homeowners borrow extra money against value of home

113
Q

Consumer durables

A

-provide flow of services to a consumer over a period of time
-eg. Cars, electrical goods
-income elastic
-increased demand recently due to decrease prices- rapid advances in technology and the effects of globalization- import cheaply

114
Q

Non-durables

A

Short term benefit
Eg. Chocolate

115
Q

Onsumer services

A

Provision of someting non-physical, yields benefit
Eg. Insurance, education

116
Q

Savings ratio

A

Actual savings/disposable income. X100

117
Q

Factors that affect level of saving

A

Same as with consumption

Interest rates
Income
Wealth
Consumer confidence
Availabilty of credit
Inflation in future

118
Q

Inflation rates on saving

A

If increase, more saving- bettwer reward

119
Q

Income on savings

A

Increase, increase savings
Earn more, save more

120
Q

Wealth on savings

A

Increase, less saving
-already have signs of wealth
Feel can spend more and save less

121
Q

Consumer confidence on savings

A

Increase, decrease savings
-more willing.comfortable to spend more

122
Q

Available credit on saving

A

Increase, decrease
-easier to borrow so less incentive to save

123
Q

Inflation in future on saving

A

Increase, decrease saving
As in short term, consumer spending before increase prices

124
Q

Impact of decreased savings on economu

A

Reduces funds available for investment
Undermine long-term economic growth
Britain doesnt save much but germany and japan do

125
Q

Impact of increased savings

A

Damaging esp in recession
Consumers w/ jobs concerned with job security, decrease consumer confidence, save more

126
Q

V. High levels inequality damaging to economu

A

Low levels economic growth
High icnomem- save more- ad fall but more funds for investment
Low income- spend more domesticaly

127
Q

Impact aging population

A

More likely to save - proportionatley
Worsen econ growth

128
Q

Transfer incomes

A

Not included in ad
Grants eg. Pemsions
Social security- welfare payments

129
Q

Why higher gov spending than pre war

A

Increade welfare- esp. old age pension
Nhs post ww2
Education- school leaving age increase, university tuition subsidised

130
Q

Budget defecit

A

Plans for gov to borrow in one year
= public sector spending - taxation

131
Q

National debt

A

Toatl accumulated debt over years
Gov borrownibg over time

132
Q

Why does gov borrowing increase in recession

A

Cushion impact
Increase benefits as more unemployed
Less tax

133
Q

Investment

A

Total planned spending by firms on real output production in economy
Expendaiture generates further income
Opportunity cost- short term sacrafice (financial) for long term gain
Spend new machinery

134
Q

Replacement investment

A

Swap worn out capital for new machinery
Capital stock same level, AS unmoved
Depreciatiuon

135
Q

Net investment

A

Add capital stock
Increase q and q
Improve productive caoacity- shift AS right, PPF out

136
Q

Investment on ad

A

Right
Invrease demand on machienery from companies

137
Q

Investment on as

A

Shift right in long term’
But may take long time to yield rewards

138
Q

Labour saving investment

A

Robots instead of workerS
Structural unemployment

139
Q

Labour using investment

A

New product development/ innovation
Requires labour for different market- eg. Wifi equipment

140
Q

Overall impact advanced econ
on labour

A

Advanced economies absorb labour in tertiary sector as manufacturing falls

141
Q

Factors which cause investment to change

A

Interest rate
Capacity utilised
Business expectations
Technologucal innovation
Gov policies
Forign direct investment

142
Q

Impact interest rate on invbestment

A

Increas,e decrease investment as more expensive to borrow, or may use retained profits to invest if not

143
Q

Impact capacity utilisation on investment

A

If near full capacity- invest new capital
Spare machinery- put into action before investing
As ad increase, so does investment

144
Q

Business expectations on investment

A

If expect future sales to increase, perhaps due to increase as, may increase investment
0negative expectations- reluctatnt to spend on capital- dongt need extra supply

145
Q

Technological innovation on investment levels

A

Spark growth economic cyle
Improved technology- esp cheaper or better quality
Firms forced to improve, upgrade to keep up with competition

146
Q

Gov policies on investment

A

May give grants to firms to invest

147
Q

Foreign direct investment on investment

A

Occurs when multinationals set up productions in other countries
Increaseing skill and workforve
Eg. Nissan micras in sunderland snet to france

148
Q

Acceleration gdp

A

Cause an increase in investment

149
Q

Net investment this year=

A

Capital-interwst ratio x (current ni - ni last year)

150
Q

Increase income each year same

A

No change in investment

151
Q

Sped up increase gdp/ni

A

Investment increase

152
Q

Decrease rate of griwth- gdp/ni

A

Investment decrese

153
Q

What does acceleration show

A

How volatile component investment is of ad

154
Q

What is likely to cause firms to increase the amount of investment they undertake

A

A fall in company taxation

155
Q

All other things being equal, if gov policies succeed in raising the level of investment in the economy then

A

The future productive capacity will be affected

156
Q

A rise in level of domestic investment will most likely result from a rise in

A

Company profits

157
Q

Increase exports

A

Foreigners buy more uk goods
Uk firms more likely to produce more output
Exports are injections to circular flow of oincome

158
Q

Exports increase- impact on ad

A

If net injections > net withdrawals
Set off positive multiplier

159
Q

Imports function

A

Dont add to demand
Included- subtracted (-M)
=consumer spending on british goods and imports

160
Q

Causes of increasing uk exports

A

-world income up
-more innovation
-sterling exchange rate depreciates
-uk incomes fall due to recession
-export led growth

161
Q

Impact of increasing world income on uk exports

A

Increase
Foreigners buy more products and sevices overall- so some likely to be british

162
Q

More innovation impact on exports

A

Or high quality products
Eg. Sattelite dishes, wind turbine, land rovers

163
Q

Sterling exchange rate depreciates- exports

A

-uk goods bought cheaper from overseas- more likely to be bought
-imports more costlier- less likely to purchase

164
Q

Uk incomes decrease in recession- impact on exports

A

Uk imports decrease
And current account of the balance of payments improves
-poorer uk consumers buy fewer goods and services from abroad

165
Q

Export led growth- impact on exports

A

Boost gdp
If imports are increased at expense of domestic good- import sistitution
-cause problems for domestic firms

166
Q

Import substitution

A

When increasing imports at sacrafice of domestic goods

167
Q

Examples of birtish exports

A

Pharmaceuticals
Armaments
Cars
It, transport, entertainmet and financial services

168
Q

What is the impact of increasing net imports on AD/AS graph

A

AD shift left
Price level decrease
P1 to p2 d
Gdp decrease

169
Q

Which would lead to a new equilibrium position with a fall in the price level

A

A FALL IN exports

170
Q

When planned injections equal planned leakages

A

There will be macro economic equilibrum

171
Q

If exports were to increase, but, over the same period, imports were to increase even more, an economist would expect the economy to settle at a new equilibrium where

A

The price level and real output were lower

172
Q

The fall in the price level (as a resulkt of sras shifting right), is most likelly caused by

A

Productivity increasing faster than money wages

173
Q

If exports were to increase by 3% and imports were to increase by 8%

A

Real output would fall by more than the changes in ad

174
Q

What forms part of the institutional structure of the economy that is important in determining aggregate supply

A

The banking system

175
Q

Factors which may effect low interest rates

A

Saving and borrowing- loans and mortgages
Consumption
Investment
Exchange rate
Confidecne

176
Q

Benefits of low interest rates

A

Growth
Unemployment
Inflation or avvoidance deflatuon
Bop

177
Q

Reflationary policies

A

Policies that increase ad with the intention of increasing real output and employment

178
Q

Life cycle theory of consumption

A

A theory that explains consumption and saving in terms of how poeple expect their incomes to change over the whole of their lifespan cyces
Ie when buy house

179
Q

Determinants of investmen

A

Certainty
Relative prices of capital and labour- if labour cheap minimal investment
Nature of technical progress- keep machinery up to date
Adequacy of financial institutions in supply of investment funds- interest rates and how wiling banks are

3- Economics- Macro (21 decks)

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