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AS Macroeconomics > Econ2 Key Terms > Flashcards

Econ2 Key Terms Flashcards

1
Q

CPI

A

Consumer price index

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2
Q

AD

A

Aggregate demand - the total demand for scarce resources. The sum of C,I,G,X - M.

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3
Q

The trade effect

A

Lower prices = lower interest and exchange rates = pound falls in value = more exports (as cheaper) and fewer imports.

Visa versa

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4
Q

The wealth effect

A

When prices decrease, interest rates fall = house prices rise. People think their worth more so they spend more.

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5
Q

AS

A

Aggregate supply - the total amount of goods and services produced and supplied by an economy’s firms.

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6
Q

Traded goods

A

Goods and services made for export

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7
Q

Inflation

A

The percentage change in prices over a period of time.

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8
Q

Circular flow of income

A

The macroeconomic cycle whereby output generates income which in turn generates expenditure.

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9
Q

GDP

A

Total uk ought of goods and services which is equivalent to total incomes earned in making UK output and total expenditure on buying UK output.

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10
Q

Nominal GDP

A

The value of GDP measured using current prices of goods and services in the year output is produced. This does NOT subtract inflation. Also known as money GDP or GDP at current prices.

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11
Q

Real GDP

A

Measures the value of GDP over time, excluding the effect of general price inflation so that prices are constant. An increase in real GDP = increase in quantity of goods and services. GDP at constant prices.

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12
Q

The multiplier effect

A

An initial change in a component of AD generates further changes in AD. The final impact on AD is greater than the initial change in AD.

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13
Q

Consumption

A

Total value of expenditure on goods and services by households.

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14
Q

Disposable income

A

Total gross household income (wages, benefits, interest) minus income tax and national insurance. It represents the net income that households have to spend on goods and services.

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15
Q

Consumer confidence

A

Measured by regular surveys of households, which reflects their views about their future financial situation and the general economic output for the country. Rising confidence is closely linked to rising expenditure.

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16
Q

Consumer savings ratio

A

Savings are a part of disposable income which is not spent on goods and services. The ratio is the ratio of total savings to total disposable income. Savings can be used to accumulate financial wealth or pay off debt.

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17
Q

Precautionary saving

A

Saving that is motivated by anxiety about the future. It is strongly linked to anxieties about future unemployment.

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18
Q

Credit crunch

A

Financial losses and stresses in the banking system causing reduced levels of lending to households and firms, which reduces levels of consumption and investment.

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19
Q

Interest rate

A

The financial reward for savers and the price that borrowers have to pay for credit. Rising and falling rates affect the incentive to save and borrow.

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20
Q

Investment

A

Expenditure by firms on capital equipment e.g buildings, machinery, ICT, vehicles.

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21
Q

Accelerator theory

A

Investment is positively related to the rate of economic growth. An increase in economic growth will increase investment proportionately more.

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22
Q

Animal spirits

A

A phrase of Keynes, describing how entrepreneurs and firms are affected by waves of optimism and pessimism about the future health of the economy.

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23
Q

Government expenditure

A

Expenditure by national and local government on goods and services, investment projects and social security benefits.

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24
Q

Exports

A

Expenditure by foreigners on goods and services produced in the uk.

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25
Q

Imports

A

Expenditure by uk households on goods and services produced in the U.K.

26
Q

Current account surplus

A

Total value of exports is greater than total value of imports.

27
Q

Current account deficit

A

Total value of imports is greater than total value of exports.

28
Q

Long run aggregate supply

A

LRAS measures the UK’s full capacity output of goods and services, it’s full productive potential. A shift in the LRAS is equivalent to a shift in the PPF.

29
Q

Short run AS

A

The SRAS curve measures the way in which the general price level changes as real GDP changes. Shifts in the SRAS curve occur when costs of production of UK firms rise and fall.

30
Q

Positive output gap.

A

Actual GDP is greater than full productive potential of the economy, due to excess AD. Actual > Trend. The economy is operating at abnormal unsustainably high levels of overtime and capacity utilisation.

31
Q

Negative output gap

A

Actual growth

32
Q

Long run economic growth

A

The rate at which the UK’s full productive potential expands in an average year. Also know as underlying, trend rate of growth.

33
Q

Productivity

A

Output per unit of a factor of production per unit of time. Hugh labour productivity generates high real GDP per capita.

34
Q

Short run economic growth

A

The rate at which the actual level of real GDP fluctuates from year to year. The fluctuations are known as the trade or business cycle.

35
Q

Inflation

A

A sustained increase in the general price level. The government has set a target for a 2% annual increase in the CPI.

36
Q

Demand pull inflation

A

Inflation caused by AD growing too fast relative to the UK’s productive potential. The economy is overheating with a positive output gap

37
Q

Cost push inflation

A

Inflation caused by a leftward shift in the SRAS curve with rising costs of production pushing prices upwards as firms protect profit margins.

38
Q

Wage price spirals

A

Wages rise as employees/trade unions attempt to increase or protect their real income, which raises costs of production and so prices which puts further upward pressure on wages. Caused by money illusion or second round effects.

39
Q

Second round effects

A

Where wages increase in response to some other kind of upward cost push pressure e.g rising import prices or higher indirect taxation.

40
Q

Inflationary expectations

A

The rate of inflation that UK households believe will occur in the future. High inflationary expectations can generate wage price spirals.

41
Q

Bank of England independence

A

The monetary policy committee sets the base rate of interest for the financial system without needing the government’s agreement

42
Q

Deflation

A

A sustained decrease in the general price level.

43
Q

Benign deflation

A

Deflation caused by higher productivity or lower import prices, that generates a rightward shift in the SRAS curve, lowering costs of production and higher real household income.

44
Q

Malevolent deflation

A

Deflation caused by falling AD and the emergence of a negative output gap.

45
Q

Stagflation

A

The economy simultaneously experiences negative economic growth and inflationary pressure

46
Q

Unemployment

A

People who are actively looking for work and don’t currently have employment

47
Q

Demand deficient unemployment

A

The economy is suffering from a negative output gap with inadequate demand for UK goods, generating inadequate derived demand for labour. Also know as Keynesian, cyclical, involuntary unemployment.

48
Q

Structural unemployment

A

Unemployment caused by a change in the structure of the economy, either a changing pattern for demand or technological change that makes production more capital intensive. Unemployed individuals suffer from occupational/geographical immobility.

49
Q

Frictional unemployment

A

Unemployment caused by individuals taking time to search for work. The unemployment trap arises when the tax and benefits system fails to incentivise employment so individuals don’t search seiously.

50
Q

Current account of the balance of payments

A

The balance of payments is a record of the UK’s economic transactions with the rest of the world. The current account records exports and imports of goods, services, investment income and transfers.

51
Q

Exchange rate of the £

A

The value of the £ in terms of foreign currencies. A rising/appreciating exchange makes the £ worth more. A falling/depreciating exchange rate makes the £ worth less.

52
Q

Globalisation

A

The integration of world economies, with more international trade.

53
Q

Demand management

A

Global policies that fine tune the level of AD in order to achieve macroeconomic objectives

54
Q

Fiscal policy

A

The manipulation of levels of taxation and government expenditure through the Budget to achieve macroeconomic objectives. This policy affects AD and has a supply side impact.

55
Q

Budget deficit

A

Government expenditure > taxation revenue. The government must borrow money which increases national debt

56
Q

Budget surplus

A

Taxation revenue > government expenditure. The government can repay past borrowing which reduces the national debt.

57
Q

Automatic stabilisers

A

The size of the budget deficit or surplus fluctuates due to trade cycle fluctuations. The structure if tax and social security benefit system automatically generates changes in the level of tax revenue and gov expenditure. AD is boosted in an economy suffering a negative output gap and AD is reduced in an economy suffering a positive output gap.

58
Q

Monetary policy

A

The manipulation of short term untested rates by the monetary policy committee of the Bank of England. Also refers to quantitative easing - policies to support the banking system and influence the growth of lending, and influence the exchange rate.

59
Q

Supply side policies

A

Policies which increase the productive potential of the economy by shifting LRAS to the right. Successful policies help to achieve four macroeconomic objectives.

60
Q

Policy trade offs

A

The extent to which the government is able to achieve all four macroeconomic objectives simultaneously. The promotion of one policy objective carries an opportunity cost in terms of another policy objective.

61
Q

Rebalancing

A

The need for the economy to move away from excessive dependence on the growth of consumption and government spending, especially when it has caused high levels of debt. Future growth of AD should come from investment and new exports.

62
Q

NICE decade

A

The period between mid 1990s and mid 2000s where the UK experienced non inflationary continuous expansion. Inflation was close to the target and there were 63 consecutive quarters of positive economic growth.

AS Macroeconomics (3 decks)

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