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Macroeconomics > AD and AS > Flashcards

AD and AS Flashcards

1
Q

What are the 5 main objectives for the UK economy?

A

economic growth, stable prices, low unemployment, balance of payments and fairer distribution of income

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2
Q

What is the target inflation rate?

A

2%

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3
Q

How is economic growth measured

A

GDP - as GDP increases more consumers and businesses are buying more goods and services

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4
Q

what are the 2 types of economic growth

A

short - term and long - term

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5
Q

what can a 6th objective be

A

balancing their books (so they do not get into serious debt)

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6
Q

Define aggregate demand

A

all expenditures for the entire economy added together or the sum of all demand in the economy

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7
Q

What is the equation for AD

A

C+I+G+(X-M)

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8
Q

What are the 4 different types of income

A

rent, wages, interest and profit

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9
Q

what are the 3 methods of calculating national income

A

expenditure method, income method and output method

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10
Q

What is the output method

A

the value added by each enterprise in the production of goods and services is measured

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11
Q

Describe the circular flow of income

A

households supply the labor. firms pay the households. Households use their wages to buy the goods and services the firms make.

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12
Q

What does the AD curve show

A

total demand altering as the price level changes

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13
Q

Why is the AD curve downwards sloping

A

economic agents buy less at higher prices, more at lower prices

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14
Q

What can cause the AD curve to shift

A

A change in any one of C, I, G, X or M

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15
Q

define unemployment

A

workers that do not have jobs but are willing and able to work

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16
Q

define employment

A

all the members of the economy, aged 16 or over, who has completed at least one hour of work in the period being measured

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17
Q

define unemployment rate

A

The % of the labor force not currently in paid employment

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18
Q

define full employment

A

level of employment rates where there is no cyclical unemployment

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19
Q

what are the 2 main measures of unemployment

A

claimant count and labor force survey

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20
Q

what is the LFS

A

survey of 60,000 households every 3 months

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21
Q

What is the claimant count

A

monthly count of those seeking unemployment benefits

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22
Q

advantages and disadvantages of the claimant count

A

+ (bigger than cc, fuller picture of unemployment levels. Good for international comparisons)
- (subject to sampling errors)

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23
Q

advantages and disadvantages of LFS

A

+ (count is generally more accurate than a survey)
- (many unemployed do not claim due to stigma effect, government is always changing criteria and difficult to compare over time)

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24
Q

which one is the better measure of unemployment levels

A

LFS

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25
Q

What is frictional unemployment

A

unemployment caused by the time people take to move between jobs e.g. graduating. relatively short - term

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26
Q

what can cause structual unemployment

A

Occupational immobility (difficulties in learning new skills), geographical immobility (difficulty in moving regions for a job), technological change, structural change in the economy. Often most long - term and most demoralizing

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27
Q

what is demand deficient (cyclical) unemployment

A

Occurs when the economy is below full capacity. There is a time lag. Most likely to lead to mass unemployment.

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28
Q

what is classical (real wage) unemployment

A

wages in a competitive labor market are pushed above the equilibrium. Causes bitterness and disputes.

29
Q

what are the consequences of unemployment

A

lost output - financial cost to the government, social effects on the unemployed.
Makes it easier for firms to recruit god workers, keeps inflation low.

30
Q

what is hysteresis

A

unemployment breeds unemployment. If someone doesn’t have a job for a long time then employers are reluctant to employ them.

31
Q

Define AS

A

total output that producers in an economy are willing and able to supply at a given price level in a given time period

32
Q

What does AS measure

A

the volume of goods and services produced each other

33
Q

what is an LRAS and a SRAS curve

A

long run AS curve - vertical

short run AS curve - slope upwards

34
Q

Describe a keynasian AS curve

A

flat - low output (supply can increase with no change in PL) recession.
curve - higher output/low unemployment (resources more scarce, PL increases) stronger economy.
vertical - max output (inelastic, only PL increases)

35
Q

What causes a shift in SRAS

A

same as supply in micro

36
Q

What causes a shift in LRAS

A

change in quantity and quality of resources

37
Q

How do you increase quality of resources

A

labor - better education

capital - new capital goods

38
Q

How do you increase quantity of resources

A

Labor - immigration, increase retirement age
Capital - increase investment
Enterprise - deregulation, privatization
Land - discovery of natural resources

39
Q

What is real GDP

A

an inflation adjusted measure that reflects the value of all goods and services produced by an economy in a given year

40
Q

Why is LRAS inelastic

A

because it is found at full employment. Fixed at Yfe

41
Q

What is full employment

A

the maximum a country is able to produce given its current level of resources

42
Q

What does recession occur

A

when GDP decreases for 2 consecutive quarters

43
Q

What is short run economic growth

A

increasing production by using up existing resources

44
Q

What is long-run economic growth

A

Increasing the capacity of the economy by increasing quantity or quality of the factors of production

45
Q

When does short run economic growth occur

A

increases in AD, increase in AS

46
Q

When does long-run economic growth

A

LRAS shifts right

47
Q

What is a negative consequence of cyclical unemployment for consumers

A

Y has fallen. RDI is lower, a negative output gap has increased, this may create a negative accelerator effect, I falls therefore AD falls.

48
Q

What is a negative consequence of cyclical unemployment for the government

A

Government expenditure will have to increase but tax revenue has fallen (less C, less VAT) increasing the budget deficit and higher national debt in the future.

49
Q

What could be a positive consequence of cyclical unemployment

A

Ad shifted left so equilibrium may be at a lower PL so there may be higher unemployment means potentially lower wage costs for firms which ultimately may shift AS to the right. Lower wage costs may make UK exports more competitive, meaning AD right and may return to Yfe

50
Q

How could you evaluate the consequences of cyclical unemployment

A

Depends on the position of the economy - if on horizontal part of LRAS then PL wont decrease.
Depends on level of government failure in the economy - more failure then they may increase expenditure on wrong things.

51
Q

What are the consequences of structural unemployment

A

Not at efficient level of output due to lack of mobility:

  1. lost output, lower rates of growth than could be achieved.
  2. therefore lower levels of RDI, less AD, lower business profits then are possible.
  3. Worse government finances (like cyclical)
  4. Hysterisis
52
Q

How do you decrease structural unemployment

A

Shift AS right through supply side measures

53
Q

How does full employment benefit an economy

A

Higher RDI, higher AD, lower budget deficits, lower levels of social problems cused by unemployment

54
Q

Why can full employment be bad for an economy

A

shortage of labour, driving up costs of labour therefore cost push inflation, lower business confidence. May include under employment (part time workers/zero hour contracts)

55
Q

How can you evaluate employment

A

the type of employment and economy’s position

56
Q

What are the causes of a negative output gap

A

AD too low, AS too low

57
Q

consequences of a negative output gap

A
  1. low confidence
  2. Increased uncertainty
  3. Lack of economic growth
  4. unemployed resources
58
Q

Evaluating a negative output gap

A

size of NOG, duration, cause (AD decrease may be deliberate), position of economy, are resources efficiently allocated, is it deliberate.

59
Q

What are the 3 functions of money

A
  1. medium of exchange
  2. Store of value
  3. Measure of value
  4. Means of deferred payments
60
Q

What does barter need

A

A double coincidence of wants

61
Q

What are the 6 characteristics of money

A

Durable, divisible, convenient, consistent, limited, acceptable

62
Q

What is M0 (narrow supply of money)

A

The amount of notes and coins in circulation in the country and the operational balances that the main bank keeps within the BofE

63
Q

What is M4 (broad money supply)

A

includes M0 and money deposited in the bank accounts throughout the country

64
Q

What is the reserve ratio

A

the ratio of loans given out and money kept in the bank. e.g. 2% ratio means in order for £100 to be given out there needs at lest £2 cash in the bank

65
Q

What is liquidity

A

Ease with which assets can be converted into cash

66
Q

What is the advantage of having liquid assets

A

helps cope with unexpected crisis. However, don’t have too much because there are low financial returns

67
Q

Which kind of money is the most liquid

A

M0 because it is basically all liquid assets. M4 is less liquid because withdrawing money from savings in the account often has time barriers

68
Q

What is the liquidity trap

A

monetary policy become ineffective due to very low interest rates combined with consumers who pfefer to save rather than invest in higher yielding bonds

Macroeconomics (8 decks)

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