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Macroeconomics > Economic Performance > Flashcards

Economic Performance Flashcards

1
Q

What are counted as withdrawals in the circular flow of income?

A

Imports
Taxation
Savings

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2
Q

What are counted as injections in the circular flow of income?

A

Exports
Government expenditure
Investment

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3
Q

What does a current account deficit mean?

A

Spending more on imports from other countries

Than is being earned from exports to other countries

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4
Q

Definition of inflation?

A

The sustained rise in general price level over time

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5
Q

Definition of deflation?

A

Average price level in the economy falls

Negative inflation rate

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6
Q

Definition of disinflation?

A

Falling rate of inflation

Price level is rising but at a slower level

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7
Q

Two umbrella causes of inflation?

A

Demand pull

Cost push

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8
Q

Describe how demand pull causes inflation?

A

When aggregate demand grows unsustainably
Pressure put on resources
Producers increase prices
Earn more profits

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9
Q

Describe how cost push causes inflation?

A

When firms face rising cost

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10
Q

When does cost push occur?

A

Changes in world commodity prices e.g. Raw materials

Labour becomes more expensive e.g. Trade unions

Depreciation in exchange rate - imports more expensive

Indirect taxes - increase goods as producers choose to pass cost on to consumer

Expectation of inflation - consumers ask for higher wages

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11
Q

What effect does inflation have on consumers?

A

Purchasing power falls
Value of loan repayment is lower
People made redundant as firms cut costs

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12
Q

What effect does inflation have on the government?

A

Increased value of state pensions and welfare

As cost of living increases

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13
Q

What effect does inflation have on firms?

A

Borrowing + investing is less attractive as cost is higher
Workers demand higher wages increasing costs of production
Less competitive price on global scale
Reduced business confidence leading to less investment

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14
Q

What is bad deflation?

A

When people see prices falling and postpone consumption or spending

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15
Q

What is good deflation?

A

When prices fall due to improvements in technology (due to four factors of production)

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16
Q

Short run economic growth?

A

When there is an increase in real output of the economy

But the same resources are being employed

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17
Q

Long run economic growth?

A

An increase in real output due to an increase in the productive capacity of a country

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18
Q

What is caused by an increase in aggregate supply?

A

Long run economic growth

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19
Q

What is caused by an increase in aggregate demand?

A

Short run economic growth

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20
Q

Characteristics of a boom?

A 
High economic growth
Positive output gap
Full employment 
Confidence to invest
Demand pull inflation
Improvements in government budgets
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21
Q

Characteristics of a bust?

A 
Low economic growth 
Negative output gap
Reduced government budget
Unemployment
Less confidence to invest 
Low inflation
22
Q

Definition of a recession?

A

Negative economic growth for 2 consecutive quarters

23
Q

Why are recessions rare?

A

Economics normally grow over time
Factors of production improve
Increased wealth

24
Q

Example of a cause of a recession?

A

Supply side shock e.g. Earthquake

Unusual event e.g. Brexit

25
Q

Index number formulae?

A

Price level in gear being compared
/
Price level in base year

*100

26
Q

Describe economic growth?

A

Increase in the capacity of an economy to produce output pcompared from one time period to another
Measured by GDP

27
Q

When does a negative output gap occur?

A

When the actual level of output is less than the potential level of output

28
Q

Characteristics of a negative output gap?

A

Downward pressure on inflation
Usually means an unemployment or resources in an economy
Lots of spare capacity

29
Q

Characteristics of a positive output gap?

A

Resources being used beyond the normal capacity e.g. Overtime labour
Productivity growth
Upward pressure on inflation

30
Q

How might a government handle a recession?

A

Increase spending to stimulate economy
Spending on welfare payments to help those lost their jobs
Cutting tax
Cutting interest

31
Q

What is equal in the circular flow?

A

Income = output = expenditure

32
Q

What is an injection into the circular flow?

A 
Money entering the economy
In the form of:
Government spending
Investment
Exports
33
Q

What is a withdrawal into the circular flow?

A 
Money that leaves the economy
Form of:
Taxes
Savings
Inputs
34
Q

Why does long run economic grown occur?

A

Investment in FOP
Education - labour
Technology - capital
Low tax - enterprise (people set up businesses)

35
Q

factors influencing LRAS?

A

Technological advances - more money spent on improving technology, the economy can produce goods in larger volumes / improve the quality of goods produced
Productivity - more productive labour and capital input produces more output for same input
Education and skills - improves quality of human capital, more productive, wider variety of goods and services produced
Government regulations - can limit how productive and efficient a firm can be if excessive (red tape)
Demographic changes and migration - onward migration of working age increases the size of the labour force increasing output

36
Q

determinants of SRAS?

A

Cost of employment e.g. taxes wages labour productivity
Cost of other inputs e.g. raw materials commodity prices exchange rates (stronger currency reduces price of imports so they’re cheaper)
Government regulation/ intervention e.g. environmental laws, green taxes, buisness regulation (red tape)
Outward migration of workers leads to brain drain on domestic economy as skills leave
Fall in capital spending

37
Q

what is stagflation

A

when inflation is high

but economic growth is minimal

38
Q

why may stagflation occur

A

supply side shock - prices go up, costs of production go up so supply goes down (unemployment and lower wages), demand falls, profit falls

39
Q

causes of long run economic growth

A 
increase in productivity
advancement in technology
increase in investment (capital)
government spending improving infrastructure 
increase in migration
40
Q

example of demand side shock

A

housing market crash

41
Q

example of supply side shock

A

sudden increase in price of oil or commodities or raw materials

42
Q

why does inflation go up as demand increases

A

as move closer to FE
more pressure put on existing factors of production
exhausting more spare capacity in economy
pressure on land labour capital
more pressure put on them price increases due to scarcity
eg workers want higher wages

43
Q

which type of inflation is detrimental for the economy

A

cost push

44
Q

what is good inflation

A

demand side

45
Q

what is bad inflation

A

supply side

46
Q

what is good deflation

A

supply side

47
Q

what is bad deflation

A

demand side

deflational spiral

48
Q

what determines business confidence?

A

expected profit

expected demand in the economy

49
Q

why does low growth in the rest of the world affect the recovery of the uk economy i

A

fall in demand for u.k. exports

50
Q

explain why lower growth in the rest of the world slows economic recovery in u.k.

A 
demand for exports falls 
exports are a component of AD 
AD falls 
firms cut back on production
job losses
rising unemployment

falling incomes in export sector lead to a negative multiplier

fall in consumer spending which reduces output and income in other sectors of the economy

51
Q

how can reductions in corporation tax increase labour productivity in the U.K.?

A

Increase incentive to invest
new machines are more efficient as they incorporate latest technology
increase in capital stock (more machines per worker) increases output per worker

52
Q

how can increased government spending improve labour productivity in the u.k.?

A

Finances education and training
improved skills of labour force
more flexible carry out a wider range of tasks
poor quality output and mistakes reduced
increased flexibility of labour force
easier for firms to implement changes in working practises
leads to a rise in productivity

Macroeconomics (4 decks)

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