A2 MACRO Flashcards
Long run economic growth
an increase in the potential output of an economy, shown by an output movement in country’s PPF
Short Run economic growth
Actual growth, an increase in output from making use of spare capacity and unemployed labour, known as an economic recovery.
Productivity
Output per unit of input.
Economic Cycle
a period between 4 and 10 years in which actual output fluctuates above and below the trend line.
Aggregate Demand
the total planned spending on goods and services in an economy within a particular time period.
Short-Run aggregate supply
the quantities of real output businesses plan to produce and sell at real prices levels.
Macroeconomic equilibrium
When AD=AS and when injections into the circular flow of income equal the leakages.
Long-Run aggregate supply
the real output that can be supplied when an economy is on its PPF.
Natural level of output
the long-run equilibrium level of potential output
Output gap
the difference between actual output and the trend level of output.
Negative output gap
when actual output is less than the trend growth level of output.
Positive output gap
when actual output is more than the trend growth level of output.
The national income multiplier
measures the relationship between a change in one of the components of AD and the resultant change in national income.
Government spending multiplier
measures the relationship between and change in government spending and the resulting change in the equilibrium level of national income.
Full employment
according to the Beveridge definition, occurs when only 3% of the labour force are unemployed.
Equilibrium unemployment
when the labour market is in equilibrium the level of people unemployed.
The natural rate of unemployment
the rate of unemployment when the labour market is in equilibrium.
The claimant count
measure of the number of people unemployed by counting the number of people on unemployment related benefits.
The labour force survey
a survey which estimates the level of unemployment by surveying 60,000 households to see if they are looking for work.
Frictional unemployment
The unemployment that occurs while people are between jobs.
Seasonal unemployment
unemployment resulting from seasonal demand for labour.
Structural unemployment
unemployment resulting from the decline of an industry and unemployment as a result of nontransferable skills.
Classical or real wage unemployment
a form of disequilibrium unemployment that occurs when the labour market fails to clear. Caused by real wage rates being too high.
Cyclical unemployment
Involuntary unemployment. Caused by a lack of demand in the economy causing a lack of derived demand for labour.
Inflation
the continuous and persistent rise in the average price level and a fall in the value of money.
Deflation
the continuous and persistent fall in the price level and an increase in the value of money.
Reflation
an increase in real output and employment following an increase in AD.
Retail price index
the UK price index for welfare benefit increases. Includes housing costs.
Consumer price index
the most used UK price index used in monetary policy, based on basket of goods.
Price index
and index that measures price level.
Quantity theory of money
The theory inflation is caused by a prior increase in the money supply.
Fischer equation of exchange
MV=PT
Demand-pull inflation
inflation caused by excess AD.
Cost-push inflation
inflation caused by rising business costs of production.
Short-run Philips curve
a downward sloping curve showing the trade off between reducing inflation and reducing unemployment.
Long-run Phillips curve
a vertical curve showing how trade-offs between inflation and decreasing unemployment are not possible.
Natural rate of unemployment (Philips curve)
Where the LR and SR Philips curves intersect the employment axis.
Adaptive expectations
describes how economic agents adapt their expectations on the future based on events in the recent past.
Rational expectations
Explain how economic agents form expectations of what is likely to happen based on the most up-to-date and relevant information available.
Money
Both a medium of exchange and a store of value.
Bank
an institution that accepts deposits and creates deposits when lending to customers who wish to borrow.
Central Bank
the bank that implements monetary policy and also issues and controls fiat money.
Monetary policy
the part of monetary policy that is used to control inflation eg interest rates and quantative easing.
Rate of interest
the cost of borrowing and the reward for saving.
Taxation
compulsory levies charged by the government to raise revenue, primarily to finance government spending.
Regressive tax
a tax when proportion of income paid in tax decreases as income increases.
Proportionate/Flat tax
a tax where the proportion of income paid stays the same as income increases.
Principles of taxation
Equity
Flexibility
Efficiency
Fiscal policy
The use of government spending and taxation and the government’s budgetary position to achieve a government’s policy objectives.
Keynesian fiscal policy
where fiscal policy is used to manage AD
Supply-side fiscal policy
where fiscal policy is used to increase personal incentives, favoured by free market economists.
Balanced budget
when G=T over a particular time period.
The borrowing requirement
the amount a government must borrow to finance a budget deficit.
Automatic stabiliser
a factor that changes automatically to stabilise AD and the economic cycle. eg progressive taxation and unemployment benefits.
Expansionary fiscal policy
using fiscal policy to increase AD and shift the AD curve to the right.
Contractionary fiscal policy
Using fiscal policy to decrease AD to shift the AD curve to the left.
Crowding out
A process where private sector spending and output is displaced by the growth of the public sector spending and output.
Golden Rule
net borrowing over a cycle should only include new infrastructure eg roads, bridges.
Sustainable investment rule
public sector debt should be kept to 40% of GDP
Supply-side policies
aim to make markets more competitive ad efficient, increasing the production potential and shift the LRAS.
Laffer curve
shows tax revenues first rising and then falling as % tax increases.
The stability and growth pact
An agreement by EU countries to limit budget deficits in order to promote economic convergence between member states.
Closed economy
An economy that undertakes no trade with the rest of the world.
Open economy
An economy is completely open to trade with the rest of the world.
International division of labour
Describes different countries specialising by producing different goods.
Absolute advantage
occurs when a country is absolutely best at producing a good compared to other countries, or more technically efficient.
Comparative advantage
The country which has the least opportunity cost when producing a good has a comparative advantage over the other.
Import controls
Include tariffs, import duties, quotas, export subsidies and informal controls.
Globalisation
the process of growing economic integration of the world’s economies.
Balance of payments
Measures all the currency flows in and out of an economy in a given time period.
The current account
Part of the BoP, measuring income currency flows, especially payments for imports and exports.
Transfers
Payments between countries, which have no return, e.g. foreign aid and grants.
Investment income
The profit and interest income flowing into a country generated by assets abroad.
Direct oversea investment
Occurs when firms invest in or buy real productive assets located in foreign countries.
Portfolio overseas investment
Occurs when financial services firms by financial assets such as bonds issued in foreign countries.
Speculative capital flows
Occurs when firms, countries or individuals buy up a currency in order to earn high rate of interest on bank deposits in that country or when they speculate a rise in the currencies exchange rate will help them make a capital gain in the future.
Balance of payments equilibrium
Occurs when the capital account more or less balances out of a period.
Deflationary policy
involves contractionary monetary or fiscal policy to shift the AD curve left.
Devaluation
A fall in the currencies exchange rate brought about either formally by a government or through a downward float or depreciation of the exchange rate.
J-curve
A J shaped curve that maps the possible path of the current account after a devaluation.
Exchange rate
The external price of a currency usually measured against another currency.
Free-floating exchange rate
An exchange rate solely determined by market forces.
Disequilibrium exchange rate
A rate at which there is excess demand for or excess supply of a currency.
Fixed exchange rate
When an exchange rate is fixed at a certain level by a country’s central bank and maintained by the central bank’s intervention in the foreign exchange market.
Managed exchange rate
Similar to fixed exchange rate by which a central bank intervenes in the foreign exchange market in order to determine a currencies exchange rate.
Adjustable peg exchange rate
A manged exchange rate similar to a fixed exchange rate accept the central bank may alter and revalue the exchange rate.
Exchange equalisation
When a central bank buys or sells its own currency to maintain a particular exchange rate.
Dirty floating
A manged exchange rate system in which the central bank intervenes in the foreign exchange market whilst the currency is still floating.
Reserve currency
A currency widely held in foreign currency reserves of other countries and is used by them to pay for trade.
Euro
The single currency used in the eurozone.
Eurozone
Contains the countries where the euro has replaced the national currency.
European central bank
The central bank for the eurozone.
Economic and Monetary union
Involves a common monetary arrangement in the eurozone and the goal in the Eu of further economic integration.
