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IB ECONOMICS: Unit 3 - Macroeconomics > 3.3 Macroeconomic Objectives (growth, unemployment, inflation) > Flashcards

3.3 Macroeconomic Objectives (growth, unemployment, inflation) Flashcards

1
Q

low and stable inflation and fiscal policy

A
  • contractionary taxation policies
  • promote price stability
  • closes inflationary gap by reducing AD
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2
Q

Low unemployment and fiscal policy

A
  • depends on type of unemployment
  • fiscal policy best for cyclical unemployment
  • expansionary fiscal policy i.e reduction in taxes or increased government spending
  • increase AD and demand for labour
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3
Q

Promoting stable and long term economic growth through fiscal policy

A
  • higher tax rates reduce incentives
  • lower taxes attract FDI
  • taxes must be high enough for government spending
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4
Q

fiscal policy reduce business cycle fluctuations

A
  • reduce impacts of a recession by running a budget deficit

- budget deficit can be repaid during a boom when tax revenue is higher and less spending is required

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5
Q

Fiscal policy and equitable income distribution

A
  • high marginal tax rates in a progressive tax system
  • wealth taxes to fund the provision of essential services
  • transfer payments like unemployment benefits, childcare grants, social housing or state pensions
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6
Q

Fiscal policy to promote external balance

A
  • refers to nations exports being equal to imports ( x = m )
  • indirect taxes on imports and subsidized exports
  • external balance essential for long term growth and development
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7
Q

consequences of issues with external balance

A
  • x > m = external disequilibrium leading to inflationary pressures
  • M>X economy will face net withdrawals from circular flow of income
  • overly protectionist measures likely to cause trade retaliation
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8
Q

issue with fiscal policy and unemployment

A
  • best suited to deal with cyclical unemployment

- may not deal with root causes like incentives and wage acceptance

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9
Q

expansionary fiscal policy definition

A

demand-side policies used to stimulate the economy during an economic recession

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10
Q

benefits of expansionary fiscal policy

A
  • boosts consumption and investment
  • Keynesian economists believe there is a need for direct intervention through demand-side policies
  • Keynesian believe necessary to stimulate growth to the full employment level of output
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11
Q

monetarist critiques of demand-side fiscal policy

A
  • ineffective in the long run as they have no real effect on national output
  • economy restores itself to full employment in the long run
  • supply-side policies that reduce natural unemployment are more effective
  • emphasize the importance of low inflation
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12
Q

contractionary fiscal policy

A
  • used to reduce level of economuc activity by decreasing government spending or limiting consumption and investment.
  • used to reduce inflationary pressures during booms
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13
Q

Keynesian multiplier

A
  • Shown that any increase in the value of injections in the circular flow of income leads to a proportionally larger increase in aggregate demand
  • knock on spending effects
  • value of KM reduced by leakages and withdrawls
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14
Q

negative multiplier effect

A
  • initial leakage leads to a greater than proportional fall in final real GDP
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15
Q

determinants of the size of the multiplier effect

A
  • marginal propensity to consume
  • marginal propensity to import
  • marginal propensity to save
  • marginal propensity to tax
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16
Q

marginal propensity to consume

A
  • measures the proportion of an increase in household income that is spent on goods and services rather than saved
  • MPC = Δ C ÷ ΔY
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17
Q

marginal propensity to import

A
  • measures the proportion of an increase in household income that is spent on imports
  • MPM = Δ M ÷ ΔY
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18
Q

Marginal propensity to save

A
  • measure the proportion of an increase in household income that is saved rather than spent
  • MPS = Δ S ÷ ΔY
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19
Q

Marginal propensity to tax

A
  • proportion of each extra dollar of income that is taxed
  • dependant on marginal tax rate paid by household
  • MPT = Δ T ÷ ΔY
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20
Q

Formulas for Keynesian multiplier

A
  1. 1 ÷ ( 1 - MPC)

2. 1 ÷ ( MPS + MPT + MPM)

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21
Q

Marginal propensity to withdraw

A

sum of MPS + MPT + MPM

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22
Q

employment

A
  • the use of the factors of production in the production process
  • usually refers to labour resources
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23
Q

labour suppluy

A

number of people willing and able to work at the prevailing equilibrium wage rate

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24
Q

unemployment definition

A

situation when people are willing and able to work and are actively seeking employment but are unable to find work

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25
Q

reasons to try for low unemployment

A
  • complements economic growth
  • increased tax revenue
  • reduces burden on government
  • reduces brain drain
  • improves quality of life
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26
Q

unemployment rate

A
  • percentage of unemployed work force per time period
  • (number of unemployed people/ labour force) x 100
  • labour force = employed and unemployed people
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27
Q

claimant count

A

people elligible to claim unemployment benefits, alternative method of determining unemployment in an economy

28
Q

criticism of claimant count

A

does not necessarily reflect full level of unemploymeny due to hesitancy in claiming and false claims

29
Q

difficulties in measuring unemployment

A
  1. hidden unemployment
  2. voluntary unemployment
  3. underemployment
  4. disparities
30
Q

hidden unemplpoyment

A
  • people not considered due to choice of measurement

- discouraged workers who have stopped searching for jobs

31
Q

voluntary unemployment

A
  • caretakers and early retirees
32
Q

underemployment

A
  • inadequately employed
  • underutilization of the labour force
  • involuntary part-time workers
  • skills mismatch
  • limits productivity growth and intl. competitiveness
33
Q

disparities and unemployment

A
  • unemployment rate does not reflect regional, ethnic, gender, age and disability unemployment
34
Q

causes of unemployment

A
  1. cyclical unemployment
  2. structural unemployment
  3. seasonal unemployment
  4. frictional unemployment
35
Q

cyclical unemployment

A
  • results form a downturn in the business cycle
  • caused by a lack of aggregate demand
  • demand defficient unemployment
  • closed by reducing a deflationary gap
36
Q

sturtcural unemployment

A
  • demand for goods and services in a particular industry continuously falls, thereby reducing the demand for labour
  • skills mismatch
  • changes in geographical location in industries
  • labour market rigidities
  • physical capital replacing human capital
  • occupational or geographical immobility
  • interdependence and globalisation
37
Q

seasonal unemployment

A
  • caused by regular and periodical changes in demand for certain goods and services
  • particularly harmful to low icnome households
  • solutions = diversify away from seasonal industries + government training
38
Q

frictional unemployment

A
  • AKA transitional unemployment
  • labour market unable to immediately match demand with supply of appropriate jobs
  • unavoidable
  • healthy sign as workers switch to more fulfilling and better paying jobs
  • constant creation and destruction of jobs
39
Q

natural unemployment

A
  • equillibrium rate of unemployment determined by calculating the rate of unemployment when the labour market is in equilibrium
  • everyone who wants to work at prevailing wage rate is employed
  • no involuntary unemployment
  • sum of structural, seasonal and frictional unemployment
40
Q

how to address natural unemployment

A
  • inevitable
  • address components
  • higher real wage rate
  • correct labour market imperfections
41
Q

costs of unemployment

A
  • personal
  • social
  • economic
42
Q

personal costs of unemployment

A
  • stress, suicide and depression
  • self esteem
  • poverty, hunger, health
  • family breakdowns
43
Q

social costs of unemployment

A
  • crime and antisocial behaviour
  • indebtedness
  • social deprivation (community breakdown)
44
Q

economic costs of unemployment

A
  • lower GDP
  • loss of tax revenue
  • burden on governments
  • loss of individual incomes (multiplier effect means knock off effects to economy as a whole)
  • greater income distribution disparities
45
Q

inflation

A

sustained rate of increase in the general price level in an economy over a general period of time

46
Q

price stability definition

A

low and stable rate of inflation

47
Q

consumer price index

A
  • weighted index of average consumer prices of good and services over time
  • base year with assigned value of 100 is a starting point
  • measured on a monthly basis but reported for a 12 month period
48
Q

steps in calculating CPI

A
  • Base year assigner (value of 100)
  • collect price data ( sample of prices in an average household basket of goods)
  • assign items a statistical weighting based on relative importance determined by value spent on or quantities purchased or % of income spent
49
Q

Limitations of the CPI in measuring inflation

A
  1. atypical households
  2. regional and international disparities
  3. different income earners
  4. changes in product quality
  5. changing consumption patterns
  6. time lags
  7. volume or value of quantities purchased
50
Q

causes of inflation

A
  • Keynes: increase in aggregate demand and must be controlled by contractionary fiscal policy
  • Monetarist: Need to control money supply
  • Demand pull vs cost push
51
Q

demand-pull inflation

A
  • inflation triggered by higher levels of aggregate demand, driving up GPL
  • minimal effect if there is spare capacity and AS is price elastic
52
Q

cost-push inflation

A
  • inflation caused by higher costs of production, shifting AS curve left and forcing up general price leve;s
53
Q

costs of high inflation rate

A 
R - redistributive effects 
E- export competitiveness 
U - uncertainty 
S - savings 
E - economic growth 
R - resource allocation
54
Q

redistributive effects of inflation

A
  • effects of inflation not evenly distributed amongst stakeholders
  • regressive impact on low income households
  • those with fixed incomes suffer
55
Q

inflation effects on savings

A
  • savers lose due to high inflation assuming no interest change (money saved has lower purchasing power)
  • particularly harmful to elderly who rely on interest from pensions
  • borrowers can gain as money needed to be repaid is less value than orginal loan - creditors lose out
56
Q

inflation and damage to export competitiveness

A
  • exports become less price competitive
  • imports become cheaper
  • sent eternal balance into a deficit
57
Q

inflation impact on economic gwoth

A
  • combination of uncertainty and lower ecoected rates of return on investment
  • long run, lower investment diminishes productive capacity and productive potential
58
Q

inflation and inefficient resource allocation

A
  • higher prices distort resource location
  • enter into a wage price spiral (higher prices = higher waged demanded = higher prices)
  • more time spend finding deals ( shoe leather costs)
59
Q

inflation control

A

inflation that is controlled and stable leads to certainty and can be a sign of increased growth, erratic inflation decreases confidence and can lead to limited economic growth including decreased FDI

60
Q

deflation

A
  • persistent fall in general price level in an economy over time
  • caused by continued fall in aggregate demand and/or an increase in SRAS
61
Q

benign deflation

A
  • caused by a shift in the SRAS / LRAS curve
  • positive as the economy is able to produce more
  • causes a boost in output while prices decrease
62
Q

malign deflation

A
  • harmful to the economy
  • caused by fall in aggregate demand
  • characterized by a recession and high unemployment
63
Q

disinflation

A
  • fall in the general rate of inflation
  • prices rising at a slower pace
  • can lead to deflation if not controlled
  • AD slowed down
64
Q

costs of deflation

A 
R  - redistributive effects 
U - uncertainty 
C- consumption (deferred) 
U - unemployment (cyclical)
P - policy ineffectiveness 
I - inefficient resource allocation
D - debt (increase in real value)
65
Q

redistributive effects of deflation

A
  • fall in the value of asstes and household wealth, incl shares = reduced wealth of asset owners and shareholders
  • real value of debt increases = redistribution from debtors to creditors
66
Q

policy ineffectiveness and deflation

A

monetary policy ineffective as interest rates are already low

67
Q

unemployment vs. inflation

A
  • decrease unemployment through govt spending = increase in inflation (SR)
  • both macro policy objectives
  • prioritization depends on context
  • misery index = sum of unemployment and inflation

IB ECONOMICS: Unit 3 - Macroeconomics (3 decks)

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