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Economics > 4.2.2 Macroeconomic Theory > Flashcards

4.2.2 Macroeconomic Theory Flashcards

1
Q

What does national income measure?

A

The flow of new output produced by an economy in a period, measured by the flow of factor of production incomes

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2
Q

What is the difference between nominal and real income?

A

Nominal - current, real - adjusted for inflation

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3
Q

What is real national income an indicator of?

A

Economic performance

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4
Q

What is the circular flow of income?

A

1) Households supply FOP to Firms
2) Firms supply Income Flow to Households
3) Households supply Expenditure Flow to Firms
4) Firms supply Output Flow to Households

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5
Q

How is income, output and expenditure related in the circular flow?

A

Income = output = expenditure

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6
Q

What is equilibrium in the circular flow of income?

A

Where households spend all income and then firms pay it back to them
Rate of withdrawals = rate of injections

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7
Q

What is full employment income?

A

The total output of an economy when unemployment is minimised/ at government target (2%) (accounts for frictional unemployment)

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8
Q

What are examples of withdrawals in an economy?

A

Taxes, savings, imports

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9
Q

What are examples of injections into an economy?

A

Exports, government spending, investment (in capital goods)

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10
Q

What is the effect of net injections into the economy on national income?

A

Expansion of national output

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11
Q

What is the effect of net withdrawals into the economy on national income?

A

Contraction of production, so output decreases

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12
Q

What curves represent changes in the price level?

A

Aggregate demand (AD) and aggregate supply (AS)

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13
Q

What factors shift the AD curve?

A

Consumption, investment, government spending, imports, exports

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14
Q

How will an increase in consumption shift the AD curve?

A

Increase in AD

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15
Q

How will an increase in investment shift the AD curve?

A

Increase in AD

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16
Q

How will an increase in government spending shift the AD curve?

A

Increase in AD

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17
Q

How will an increase in exports shift the AD curve?

A

Increase in AD

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18
Q

How will an increase in imports shift the AD curve?

A

Decrease in AD

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19
Q

What are the factors that shift the short run AS curve?

A

Price level and costs of production:
- Subsidies and indirect taxes (VAT, excise duty on tobacco/fuel)
- Exchange rate changes (changing import costs)
- Labour costs
- Raw material costs
- Productivity changes
- Supply-side shocks (one-off unexpected events that impact SRAS)

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20
Q

What shift of what curve represents underlying economic growth?

A

Rightward shift in the long run AS curve

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21
Q

Where is macroeconomic equilibrium on an AD/AS diagram?

A

The point where AD and AS meet

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22
Q

How do demand-side shocks affect the macroeconomy?

A

If firms have less confidence or there is a recession, AD shifts left, causing price level and national output (real GDP) to fall

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23
Q

How do supply-side shocks affect the macroeconomy?

A

If the economy becomes more productive or if there is an increase in efficiency, AS shifts right, lowering price level and increasing national output

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24
Q

What is aggregate demand?

A

The total demand for goods and services in a country

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25
Q

How is AD calculated?

A

AD = C + I + G + X - M

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26
Q

What is consumption?
How much of AD does it make up?

A

The amount spent on goods and services by UK consumers, making up 2/3rds of AD

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27
Q

What is the importance of increased consumption?

A

More revenue for businesses -> more profit -> potentially more capital investment
Increased imports -> worsens trade deficit

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28
Q

What impacts consumption?

A

Current GDP, interest rates, consumer confidence, housing market, availability of credit, taxes

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29
Q

What are the impacts of increased consumption?

A

More imports - worsens trade deficit
Potential for demand-pull inflation (increased AD) - firms may put up pressure
Greater GDP - increased consumption - through the multiplier effect - even bigger increase in GDP
Greater employment

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30
Q

How does nominal GDP impact consumption?

A

Greater GDP means more consumption

31
Q

Why do savings limit consumption?

A

APC + APS (AP to save) = 1

32
Q

How do interest rates have an impact on consumption?

A

If bank rates increase, commercial banks increase interest rates, lowering consumption as borrowing costs increase, so: less is borrowed to spend; mortgage repayments increase decreasing discretionary income; there is more incentive to save

33
Q

How does consumer confidence impact consumption?

A

More security in work, and pay rises, means more consumption

34
Q

How does the housing market have an impact on consumption?

A

If house prices increase, people perceive themselves to have greater wealth, and therefore more confidence, so there is more consumption

35
Q

How does the availability of credit impact consumption?

A

If it is easier to get credit at a cheap ‘cost’ = more consumption

36
Q

How do taxes have an impact on consumption?

A

Direct taxes: if income tax increases -> disposable income decreases -> less consumption
Indirect taxes: higher VAT -> less consumption

37
Q

What does investment usually refer to?

A

Physical capital investment by UK firms: spending on capital goods (machinery/factories)
Includes: Foreign Direct investment (FDI), human capital investment, research + development

38
Q

What are the importances of investment?

A

Investment is part of AD -> if there is more investment in SR -> more demand for capital goods -> creates jobs, increased NI, multiplier effects
In long run economy will have higher quantity/quality of capital goods (shift PPF outwards in LR)
Increase in productivity -> decreased average costs -> lower prices -> increased competitiveness against other countries

39
Q

What are the determinants of investment?

A
  • Interest rates - cost of borrowing will impact viability of investment: higher IR = more incentive to keep money in bank, less investments made (less profitable)
  • Availability of funds (e.g. retained profit) = availability of loans
  • Government policy: subsidise capital investment, cut corporation tax, tax breaks if you invest
  • Relative cost of capital to their FoP (labour)
40
Q

What are the different types of government spending?

A
  • Current spending - running the public sector e.g. salaries
  • Capital spending - spending on infrastructure
41
Q

What are the determinants of government spending?

A
  • Inflation
  • Economy performance
  • Willingness to borrow
  • Size of deficit
42
Q

What are the determinants of exports?

A
  • Cost and availability of FoP
  • Productivity
  • Value of currency (negative correlation)
43
Q

What are the determinants of imports?

A

Tariffs increasing causes imports to decrease

44
Q

What is the accelerator process?

A

It suggests that the level of investment in an economy is related to the change in GDP, with a higher rate of economic growth causing more investment
If the rate of economic growth is slowing, but the economy is still growing, the level of investment might fall
The level of investment is more volatile than the rate of economic growth

45
Q

What is the purpose of the accelerator process?

A

If rate of growth accelerates, investment also goes up, to maintain the ratio, have more money to invest, and increase the productive capacity

46
Q

What is the multiplier process?

A

The relationship between a change in AD and the resulting larger change in NI
If there is net leakage multiplier will be negative

47
Q

Why may an initial change in expenditure lead to a larger impact on local/national income?

A

Due to the multiplier process, the original change in aggregate expenditures is spent more than once, cycling repeatedly through the economy, having a larger impact than the original expenditure change

48
Q

What is the marginal propensity to consume?

A

The extra consumption from additional income (falls as income rises)

49
Q

How is the marginal propensity to consume used to calculate the size of the multiplier?

A

Multiplier = 1/(1- MPC) = 1/(1- ΔC/ΔI)

50
Q

What is discretionary income?

A

The money you have left after tax and paying for essentials

51
Q

Why is AD a downward slope?

A

Wealth/ real money balance effect: as PL falls, money buys you more (increased C)
Interest rate effect: as PL falls, interest falls (increased C and I)
Trade effect: as PL falls, exports increase, imports decrease

52
Q

What does aggregate supply show?

A

The level of real national output that producers are willing and able to supply at different average price levels in a given time period

53
Q

What are the assumptions made when discussing AS?

A

Cost of production, levels of technology, and productivity are all fixed
Firms aim to maximise profits
Rising marginal costs of production are faced
To get firms to produce more, the price level has to increase to cover the extra costs

54
Q

What does long run AS show?

A

The real output that can be supplied when the economy is operating on the PPF (productively efficient)

55
Q

What are the determinants of long run AS?

A

Level of technology, productivity, enterprise, factor mobility, economic incentives, government capital spending, immigration, birth rate, direct taxes (income/corporation taxes), training/education

56
Q

What does the vertical LRAS curve represent?

A

The normal capacity level of output of the economy

57
Q

What is the Keynesian AS curve?

A

Keynes believes that the price level in an economy is fixed until resources are fully employed
The horizontal section shows the output and price level when resources are not fully employed; there is spare capacity in the economy
The vertical section is when resources are fully employed

58
Q

How would an increase in VAT affect a macroeconomic graph?

A

SRAS shifts left
Contraction in AD

59
Q

How would an increase in business confidence affect a macroeconomic graph?

A

LRAS shifts right
AD shifts right

60
Q

How would a decrease in income tax affect a macroeconomic graph?

A

LRAS shifts right
AD shifts right

61
Q

How would an increase in government spending on infrastructure affect a macroeconomic graph?

A

LRAS shifts right
Extension in AD

62
Q

How would an increase in unemployment affect a macroeconomic graph?

A

AD shifts left
Contraction in SRAS

63
Q

How would a decrease in labour costs affect a macroeconomic graph?

A

SRAS shifts right
Extension in AD

64
Q

How would a decrease in corporation tax affect a macroeconomic graph?

A

LRAS shifts right
AD shifts right

65
Q

How would a decrease in interest rates affect a macroeconomic graph?

A

AD shifts right
Extension in SRAS

66
Q

How would an increase in consumer confidence affect a Keynesian macroeconomic graph?

A

AD shifts right
Extension in AS

67
Q

How would an increase in unemployment affect a Keynesian macroeconomic graph?

A

AD shift left
Contraction in AS

68
Q

How would an increase in VAT affect a Keynesian macroeconomic graph?

A

AS shift up increasing the PL with no change to the YFE
Extension in AD

69
Q

How would an increase in training/education spending affect a Keynesian macroeconomic graph?

A

AD shifts right
AS shifts right (same PL YFE increase)

70
Q

How would a decrease in interest rates affect a Keynesian macroeconomic graph?

A

AD shifts right
Extension in AS

71
Q

How would an increase in spending on public sector wages affect a Keynesian macroeconomic graph?

A

AD shifts right
Extension in AS

72
Q

What are the benefits of saving?

A

Savings can be used to lend, so borrowing an investment can increase
More savings now means more spending in the future

73
Q

What are the negatives of saving?

A

Savings are leakages, so there is less money being spent, decreasing real GDP

Economics (14 decks)

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