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Economics > AL Unit 9: The Macroeconomy > Flashcards

AL Unit 9: The Macroeconomy Flashcards

1
Q

The multiplier

A

It measures the extent to which an increase in an injection into the circular flow brings about a magnified effect on the level of national income. An increase in injections will also affect the withdrawals. Each successive increase in AD will therefore become progressively less

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2
Q

Calculation of the multiplier

A

2-sector economy (households and firms): 1/MPS
3-sector economy (households, firms and the government): 1/MPS+MPT
4-sector economy (households, firms, governments and foreign trade): 1/MPS+MPT+MPM
Overall 1/marginal propensity to withdraw

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3
Q

Average propensity to consumer and save

A

The proportion of income spent on consumption can be measured by the average propensity to consume. This refers to the average proportion of income that is actually spent on goods and services. The proportion of income that is not spent is saved so can refer to the average propensity to save

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4
Q

Dissaving

A

Consumption may exceed income so needs to be financed by past savings

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5
Q

Paradox of thrift

A

Saving is generally regarded as good because people can buy in the future but it is also a withdrawal from the circular flow so could contribute to a fall in national income which is the paradox of thrift

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6
Q

Marginal propensity to consume and save

A

Consumption can also be measured by the marginal propensity to consume which is concerned with a change in income and the proportion of that extra income that is spent. The proportion of extra income not spent is saved so refers to the marginal propensity to save

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7
Q

Influences on conusmption

A

Main influence is the level of disposable income but also includes:
Distribution of income and wealth
Rate of interest
Availability of credit
Expectation about future economic prospects

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8
Q

Average and marginal propensity to tax and import

A

Will also be needed to calculate the multiplier in a 4-sector economy

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9
Q

National income determination with AD and income

A

The level of income in an economy is determined at the point where AD equals output. The economy is at equilibrium where AD crosses the 45 degree line at Ye

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10
Q

Changing AD effect on national income

A

A change in AD can have a greater final impact on the level of equilibrium national income than the initial change due to the multiplier. An initial injection into the circular flow stimulates the future rounds of spending. Will eventually lead to a bigger effect on output and employment than initially. The size of the multiplier = change in real GDP/ change in AD

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11
Q

Positive multiplier

A

When an initial increase in an injection or a decrease in a leakage leads to a greater final decrease in real GDP

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12
Q

Negative multiplier

A

When an initial decrease in an injection or an increase in a leakage leads to a greater final decrease in real GDP

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13
Q

Components and determinants of AD

A

AD is the total demand for and expenditure on all that is produced in an economy. AD = C+I+G+(X-M)

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14
Q

The consumption function

A

Shows the relationship between consumer spending and the factors affecting it. The main influence on consumption is the level of disposable income and the consumption function shows the relationship between income and consumption

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15
Q

Autonomous consumption

A

Consumption that is not related to income

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16
Q

Induced consumption

A

Consumption related to income. As extra income is gained, some of this will be spent

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17
Q

The savings function

A

Shows the relationship between saving and the factors affecting it

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18
Q

Autonomous saving

A

Savings that are not related to income

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19
Q

Induced saving

A

Savings related to income. As extra income is gained, some of this will be saved

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20
Q

The investment function

A

Investment is the capital expenditure by firms in an economy over a period of time. The investment function shows the relationship between investment spending and the factors affecting it

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21
Q

Influences on investment decisions

A

Rate of interest
Changes in technology
Productivity of labour
Cost of capital goods
Changes in consumer demand
Expectations about future economic prospects
Government policies

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22
Q

Autonomous investment

A

Refers to expenditure on capital investment that is not the result of any changes in the level of national income. An increase or decrease will be shown by an upward or downward shift of the AD curve

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23
Q

Induced investment

A

Refers to expenditure on capital equipment directly related to changes in income. It is an important part of the accelerator theory of investment

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24
Q

The accelerator

A

Based on the link between changes in the level of national income and changes in induced investment. It states that investment is a function of change in national income and it assumes a fixed capital:output ratio. Concerned not with the level of output but with the rate of change of output

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25
Q

Government spending

A

Can include current spending on wages and salaries of the public sector and capital spending on investment projects

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26
Q

Influences on government spending decisions

A

Policy commitments on aspects of society
Amount of tax revenue
Demographic changes

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27
Q

Net exports

A

Exports-imports determined by relative prices of a countries exports and imports, the quality, reliability and reputation of a countries exports and imports and exchange rate movements

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28
Q

Inflationary gap

A

A situation where equilibrium income is greater than full employment equilibrium. AD is greater than full employment of AS

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29
Q

Deflationary gap

A

Where equilibrium income is less than the full employment equilibrium. AD is less than full employment of AS

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30
Q

Actual economic growth

A

Economic growth can come about using existing factors of production more effectively. Shown by movement from within a PPC to a position on the curve. Also known as demand side economic growth because it is affected by changes in demand measured by an increase in real GDP over time

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31
Q

Potential economic growth

A

The PPC can shift outward due to an increase in the quantity or quality of available factors of production

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32
Q

Output gaps

A

An output gap indicates the difference between actual output and maximum potential output of an economy as a percentage of GDP

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33
Q

Positive output gaps

A

Where an economy is outperforming expectations because actual output is higher than the recognised maximum capacity output

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34
Q

Negative output gaps

A

Where actual output is below full capacity output

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35
Q

The business cycle

A

The business or trade cycle is the fluctuations in the full employment level of national output. The cycles vary in length and seriousness but tend to follow the path of economic growth

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36
Q

Phases of the business cycle

A

Boom: a period of relatively high economic growth
Recession: a period of economic downturn defined as 2 successive quarters of negative GDP growth
Trough: a period of low AD and relatively high unemployment
Recovery: a period when the level of AD begins to increase

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37
Q

Causes of the trade cycle

A

Changes in interest rates
Changes in technology
Changes in global trade
Changes in levels of economic confidence
Changes in exchange rates
Changes in house prices
The multiplier effect
The accelerator effect
Changes in the level of liquidity in the financial sector
Volatility in stock market indices
Changes in fiscal policy

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38
Q

The role of automatic stabilisers

A

Reduce the rate of economic growth. A government will receive more tax revenue creating a greater withdrawal. from the circular flow
Increasing the rate of economic growth. A government will increase spending on unemployment benefits creating an injection into the circular flow

39
Q

Policies to promote economic growth

A

An increase in the number of workers
An improvement in the quality of labour
Greater commitment to R&D in invention and innovation
An improvement in the state of technology
Investment in capital stock
A move towards more capital intensive production
Increasing mobility and flexibility of factors of production
More efficient allocation of resources
Development of new markets to export to
Reduction in taxes on profits to allow firms to finance investment
Upturn in the business cycle

40
Q

The effectiveness of policies to promote economic growth

A

Effectiveness will depend on economic circumstances but key factor are investment which increases productivity, education and training which enhances the quality of human capital, technological change which leads to the availability of better machines and new markets for exports which increase demand for a country’s goods and services

41
Q

Inclusive economic growth

A

Growth that is distributed fairly across society and creates opportunities for all

42
Q

Impact of inclusive economic growth on equity and equality

A

It aims to ensure that economic growth benefits everyone and therefore has a positive impact on equity and equality

43
Q

Policies to promote inclusive economic growth in specific areas

A

Takes place in sectors in which the poor work
Occurs in places where the poor live
Uses factors of production that the poor possess
Reduces prices of goods that the poor consume

44
Q

Policies to promote inclusive economic growth on poverty reduction and eradication

A

Expand access to quality education
Expand access to quality healthcare
Investing in infrastructure
Deepening financial inclusion for vulnerable poeple
Incentivising female labour force participation

45
Q

Ways to bring about inclusive economic growth

A

Progressive incomes and wealth taxes can contribute to reducing inequality without sacrificing growth. A universal basic income where a government provides a guaranteed minimum income for all and has the potential to reduce poverty and inequality

46
Q

Sustainable economic growth

A

Sustainability is the ability to use existing resources to satisfy the needs of the present generation without compromising the ability of future generations to satisfy their needs. Sustainable economic growth takes into account the needs of the future and present generations. Refers to a rate of economic growth a country can maintain without creating other economic problems. There is a trade off between rapid economic growth today and growth in the future

47
Q

Using and conserving resources

A

The use of resources can contribute to economic growth but many natural resources are finite in supply so will eventually run out. It is argued in many economies that there should be conservation of resources. This is a more sustainable approach

48
Q

The impact of economic growth on environment and climate change

A

Higher levels of resource consumption
The depletion or loss of non-renewable resources
Greater pollution causing health problems and reduced quality of life

49
Q

Policies to mitigate the impact of economic growth on the environment and climate change

A

Technology
Human capital development
Deregulation
Incentivisation
Pollution permits
Alternative transportation
Taxation
Legislation
Financial support
Recycling
Commitment to action on climate change
Reforestation

50
Q

Full employment

A

A situation where everyone who wants a job has a job

51
Q

Unemployment

A

Where a number of people in an economy are able and willing to work but are unable to gain employment. The unemployment rate is a percentage of the number of unemployed people divided by the labour force

52
Q

Equilibrium unemployment

A

When the labour market is at equilibrium meaning jobs exist but people are unwilling or unable to take them. Frictional, seasonal and structural

53
Q

Disequilibrium unemployment

A

When the wage rate rises above equilibrium and the labour market is prevented from clearing. Cyclical and real-wage

54
Q

Voluntary unemployment

A

Where a worker deliberately chooses not to work because of a low wage rate

55
Q

Involuntary unemployment

A

Where a worker is willing to work at the market wage but is prevented from doing so by factors beyond their control. There is a surplus of labour

56
Q

Natural rate of unemployment

A

Shows the link between the level of unemployment and the rate of inflation. The level of unemployment which contributes towards a rate of inflation that is non-accelerating. AD for labour is equal to AS of labour at the current wage rate so there is no upward pressure on prices

57
Q

Determinants of the natural rate of unemployment

A

Information: determines how quickly people are frictionally unemployed find work
Benefits: Generous unemployment benefits discourage people taking jobs at the current wage rate, f benefits are low the natural rate will fall
Education: Quality of skills and education influences occupational mobility. A better trained workforce is more occupationally mobiles so the natural rate falls
Geographic mobility: The more people are willing to move, the more mobile they are so the natural rate falls
Labour market: Trade unions can restrict labour supply to certain labour markets making them less flexible and increasing the natural rate
Hysteresis: A recession may cause a rise in the natural rate because when people are unemployed for a long time they become deskilled and demotivated so it is harder to find jobs

58
Q

Policy implications of unemployment

A

Improved education and training to reduce occupational immobility
Better information about job vacancies in different regions to reduce geographical immobility
Greater flexibility of labour markets

59
Q

Patterns and trends in unemployment

A

If unemployment trends upwards the government will devise policies to reduce it. The unemployment rate will fluctuate with changes in economic activity and phases of the business cycle. Economists are interested in long term trends and patterns such as in relation to the primary, secondary and tertiary sectors

60
Q

Forms of labour mobility

A

Mobility of labour is the ability and willingness of labour to move from one place or occupation to another. Geographical mobility refers to a workers ability to move places. Occupational mobility refers to workers ability to move occupations

61
Q

Factors affecting labour mobility

A

Education and training: the more a person is education, the greater the occupational mobility
Transport and communication: more developed will encourage geographical mobility
Job information: availability of appropriate information will improve overall mobility
Wage differences: differences will influence the extent of overall mobility
Cost of living: can vary between regions impacting geographical mobility
Immigration policy: ability to move countries can be restricted

62
Q

Fiscal policy to reduce unemployment

A

Will involve the reduction of taxation to increase consumption and investment. Government expenditure can also be increased. This will increase AD and reduce unemployment

63
Q

Monetary policy to reduce unemployment

A

Interest rates could be lowered or money supply increased to encourage spending. A reduced cost of borrowing will encourage more spending and less saving. This is also likely to reduce the exchange rate making exports more price competitive internationally increasing demand for them and therefore derived demand for labour to produce them

64
Q

Supply side policy to reduce unemployment

A

Especially effective to reduce the natural rate of unemployment. Making markets more efficient will increase the number of workers employed. Making the labour market more flexible like with restrictions on trade unions will lead to greater employment as will education and training schemes

65
Q

Barter and its disadvantages

A

Bater involved the direct exchange of goods and services
Needs a double coincidence of wants
Difficult to compare the value of different products
Some products are indivisible
Some products are hard to store while looking for a buyer

66
Q

Money definition

A

Anything that is generally acceptable as a means of payment. Near money is an asset that can be immediately changed into money so can perform some but not all (medium of exchange) functions of money

67
Q

Liquidity and cheques

A

Liquidity is how easy a financial asset can be turned into cash. Many deposits are in the form of bank deposits so is electronic. A cheque is a means of payment but is not always acceptable. The reward for parting with liquidity is interest. Cash desposits in a savings account receive money in the future together with the original deposits

68
Q

Functions of money

A

Medium of exchange: no need to establish a double coincidence of wants
Unit of account: the value of different products can be compared
Store of value: wealth can be stored as money but inflation will reduce value
Standard for deferred payment: people can borrow money and pay it back later which encourages credit and trade

69
Q

Modern characteristics of money

A

Acceptability
Portability
Scarcity
Recognisability
Stability of value
Divisibility
Durability

70
Q

Money supply

A

The total amount of money in an economy at any time

71
Q

Broad money

A

Reflects the total purchasing power that is available including notes, coins and bank and building society deposits

72
Q

Narrow money

A

The cash available including notes and coins held by the general public, cash machines and in balances that financial institutions have with the central bank. Also called a monetary base

73
Q

Quantity theory of money Fischer equation

A

Shows the relationship between money supply, price level and level of output
MV = PT where M is the value of the money supply, V is the velocity of circulation, P is the general price level and T is the number of transactions

74
Q

Quantity theory of money

A

V and T are considered to be constant. M and P are directly linked. If money supply rises, people have access to more funds so greater purchasing power so the general price level will rise. Persistent inflation can only arise through persistent excessive money supply growth so outward AD movement. Criticised for being less of a theory and more of an identity. MV shows total spending and PT is total money received for goods and services

75
Q

Functions of commercial banks

A

Providing deposit accounts: accounts provided include demand deposit or current accounts when money can be deposited or withdrawn at any time, fixed deposit where money is deposited for fixed time and different savings accounts
Lending money: can lend money as an overdraft, where a current account can be withdrawn up to a maximum, a loan where a specific amount of money is lent for a set time and a mortgage
Cash, securities and equity: can hold or provide cash as notes and coins and securities like shares or equities in governments of companies

76
Q

Reserve ratio

A

Refers to central bank regulations that establish minimum capital reserves a commercial bank mush hold as a percentage of deposits. A higher proportion of reserves indicates financial soundness because they could meet any future losses. Calculated by reserves divided by capital

77
Q

Capital ratio

A

Measures the funds it has against the riskier assets it holds that could be vulnerable in a crisis. They sometimes carry out stress tests to check they have enough capital buffer to cope. It is a banks core equity capital divided by total risk weighted assets

78
Q

Objectives of commercial banks

A

Liquidity: their ability to finance all monetary obligations to creditors when due
Security: need to demonstrate they are a safe, secure and trustworthy means of storing money so customers have confidence in them
Profitability: main aim is to make a profit for shareholders

79
Q

Commercial banks as sources of credit creation

A

Financial institutions can create new money due to additional deposits. Only a certain proportion of customers want to take out money at any time. A large proportion of deposited money can be loaned to customers through fractional reserve banking being the requirement that commercial banks need to hold a certain percentage of total liabilities of cash reserves

80
Q

The bank credit multiplier

A

The ratio of new money created to initial deposits is the credit multiplier calculated as 1 divided by deposited cash ratio that is held. The smaller the cash ratio the larger the credit multiplier

81
Q

The role of a central bank

A

May wish to control the ability of commercial banks to lend money through open market operations. This is the process of buying or selling government securities which are bonds or shares issued by the government. If a central bank wants to encourage lending it will buy government securities

82
Q

Government deficit financing

A

If expenditure is greater than revenue there is a budget deficit. Deficit financing is the generation of funds to finance the deficit. Could be financed by borrowing from commercial or central banks leading to an increase in money supply from an increased ability to lend

83
Q

Quantitative easing

A

Is the process of the central bank buying existing government securities. They are leading to an increase in bank deposits creating more liquidity and a greater money supply

84
Q

Changes in the balance of payments

A

Total currency flow is a part of a balance of payments and shows the total inflow and outflow of money due to international transactions. If the flow is positive, it will increase the foreign exchange reserves of a country. This net inflow of money will increase its money supply

85
Q

Fiscal policy to reduce inflation and its effectiveness

A

If a government reduces spending or increases taxation, this will reduce AD reducing inflation which is especially useful when inflation is demand-pull

86
Q

Monetary policy to reduce inflation and its effectiveness

A

If a government increases the rate of interest or reduces the money supply, this will reduce AD reducing inflation. Especially useful when inflation is demand-pull

87
Q

Supply side policy to reduce inflation and its effectiveness

A

If the labour market is made more competitive and efficient such as by reducing the power of trade unions or reducing unemployment benefits, this will increase AS. Could also increase market competition by privatising state owned firms and encouraging SM businesses, AS will increase

88
Q

Liquidity preference theory

A

Demand for money and determination of interest rates can be shown by liquidity preference theory. Based on 3 motives for holding money being transactions demand for money, precautionary demand for money and speculative demand for money

89
Q

Transactions demand for money

A

Where money is demanded for everyday purchases. This is an active balance and interest elastic

90
Q

Precautionary demand for money

A

Where money is demanded for unexpected expenses. It is an active balance and is interest inelastic

91
Q

Speculative demand for money

A

Where money is demanded to buy government bonds. Is an idle balance is interest elastic. An influence on demand for a bond is the yield which is the annual income obtained from the bond as a proportion of current market price. Price of government bonds and interest rates move in opposite directions because if interest rates are high, the desire to hold money falls. If the interest rate is low there is less incentive to switch out of money into other assets. The demand curve is downward sloping.

92
Q

Liquidity trap

A

At low rates of interest, liquidity preference become horizontal so a change in money supply has no effect on interest rates. Demand for money is perfectly elastic. The liquidity trap occurs when an increase in money supply does not affect interest rates so does not affect investment or AD. A shift of the money supply curve to the right would normally lead to a fall in interest rates but when there is a liquidity trap there is no effect

93
Q

Keynesian theory of interest rate determination

A

Suggests that interest is a reward for parting with liquidity for a time. The rate of interest is determined by the supply and demand of money. The demand for money comes from the transaction, precautionary and speculative motives. The supply of money is fixed and controlled by the monetary authority and is perfectly interest inelastic

94
Q

Loanable funds theory of interest rate determination

A

States that the rate of interest is determined by the supply and demand of loanable funds in financial markets. The demand for loanable funds comes from firms wanting to invest, households wanting to buy consumer products and a government aiming to fund a budget deficit. Demand curve for loanable funs slopes down from left to right. Supply comes from savings and slopes up from left to right. The intersection is the rate of interest

Economics (14 decks)

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