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Macro economics > Growth > Flashcards

Growth Flashcards

1
Q

define inflation

A

a general increase in prices and fall in the purchasing power

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2
Q

define economic growth

A

An increase in GDP over a period of time

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3
Q

Sustained recovery

A

A steady rise in GDP following a recession

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4
Q

Reccession

A

In the UK a recession is a period of negative economic growth for two consecutive quarters.

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5
Q

Growth rate

A

the rate at which a nation’s Gross Domestic product (GDP) changes/grows from one year to another

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6
Q

4 problems with growth?

A
  1. Inflation (caused by an increased AD)
  2. environmental problems ->Quality of life can decrease if pollution is caused.
  3. Potential widening of equality
  4. Current account deficit
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7
Q

Postive output gap

A

Economy is operating at full capacity

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8
Q

Negative output gap

A

Economy is operating with spare capacity

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9
Q

Current account deficit

A

When a country imports more than exports. The UK is susceptible to a current account deficit during high growth because the UK has a high marginal propensity to import.

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10
Q

What is the problem with a current account deficit

A
  1. depreciating exchange
  2. cost push inflation
  3. firms may be less able to compete

however in the long term the current account my recover assuming the marshal Lerner condition holds

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11
Q

Why is environmental damage problematic?

A

Damage to nature. Air/land/water pollution causes health problems and can damage the productivity of land (as more non renewable resources are used up) and seas. Causing generational inequality

Increased pollution from economic growth will cause health problems such as asthma and therefore will reduce the quality of life.

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12
Q

3 ways Environmental damage is being mitigated

A

subsidised renewable energy
Tradable pollution permits
taxes on pollutants

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13
Q

4 reasons why is inflation problematic?

A
  1. As it decreases purchasing power of consumers meaning some basic necessities may be unable to access
  2. it decreases confidence -> firms may delay spending to wait for prices to fall
  3. current account deficit may cause a depreciation of the pound making imports more expensive
  4. Can cause a wage price spiral which could lead to more unemployment as firms struggle due to rising costs
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14
Q

What is the UK’s Inflation target

A

1-3%

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15
Q

The multiplier effect

A

The multiplier effect refers to the increase in final income arising from any new injection of spending.

Relationship between how AD rises as a result of injections

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16
Q

The accelerator effect

A

states that an increase in the rate of economic growth will cause a correspondingly larger increase in the level of investment.

  1. there is an increase in consumer demand
  2. firms get close to full capacity
  3. invest in factors of production to increase spare capacity to prepare for an increase in AD.
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17
Q

How to calculate the multiplier?

A

change in real GDP/ change in injections
1/size of leakages
1/1- marginal propensity to consume

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18
Q

What is MPC

A

The marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption

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19
Q

How is MPC calculated

A

consumption/change in disposable income

for example, if an individual gains an extra £10, and spends £7.50, then the marginal propensity to consume will be £7.5/10 = 0.75.

c on ice

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20
Q

Leakages?

A

Taxes
Imports
saving

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21
Q

Injections

A

Government spending
Exports
Investment

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22
Q

5 Benefits of economic growth

A
  1. Higher incomes
  2. The govt can have greater tax revenues as a result
  3. Lower unemployment. With higher output and positive economic growth, firms tend to employ more workers creating more employment.
  4. Better confidence may cause increased investments
  5. helps satisfy some of the unlimited needs and wants
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23
Q

Name 4 causes of demand sided growth

what increases AD

A
  1. Higher real incomes
  2. Lower interest rates
  3. Increased govt spending
  4. cuts in taxes
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24
Q

Evaluation of AD

A
  1. If inflation is too high it can cause a wage price spiral (so you want low AD)
  2. Cyclical unemployment can cause structural unemployment-> due to hysteresis (so you want high AD)
  3. Structural unemployment can fall with high AD in there is increased investment and in training. (so you want high AD)
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25
Q

Benefits of a weak pound

A

A weak pound makes imports more expensive and British exports cheaper.

This means the UK can benefit from greater injections due to the increase in exports

(Dependant on the PED of the majority of the exports and imports is elastic)

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26
Q

Causes of weak pounds

A

Quantitative easing-> increasing the supply of money decreases the value
current account deficit as the interest rate decreases causing hot money outflows

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27
Q

how is long run growth caused

A

Increases in the quantity and quality of FOPS
capital- investing in more efficient tech
land- discovery of new resources
labour- increasing size of labour force (by lowering taxes) or better education

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28
Q

What is long run growth

A

when there is an increase in production possibilities of a nation (causing an outward shift in ppc)

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29
Q

What is short run growth

A

increase in output (economy still operates within the ppc

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30
Q

how does a current account deficit cause a weaker pond

A

Will mean that the demand for pounds to buy UK exports is lower than the UK consumers’ demand for foreign currency to buy imports. The value of the pound will fall

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31
Q

why may the demand pull inflation may be a small problem for the UK

A

We are still in the early stages of an economic recovery and there is plenty of spare capacity

32
Q

2 ways in which economic growth can widen inequality

A
  1. In recent years, in the UK, we have seen faster wage growth for highly paid jobs than unskilled jobs.
  2. Interest-bearing wealth. The wealthy gain interest and dividends from their assets. This rent, interest and dividends can be used to re-invest in increasing their wealth
33
Q

What does the lras macro model assume

A
  1. Says that the economy is opertating at a positivity output gap and that wages and prices are flexible.
  2. wages increase with inflation
  3. macro economy will correct itself with changes in demand
34
Q

Why is the Keynesian as flat at the start

A
  1. As firms are not willing to offer lower prices as they seek to aim profit
  2. as workers are not willing to work for a lower wage
35
Q

What causes a shift is sras

A

changes costs of factors of production

36
Q

what causes a shift in lras

A

quantity and quality of fops for an improvement in productive efficiency

37
Q

What is hysteresis

A

when workers become unskilled as a result of long term periods of unemployment

38
Q

Name 3 market based supply side policies

A
  1. trade liberalisation
  2. deregulation
  3. privatisation
    The aim is to increase competition
39
Q

WHen does spare capacity exist

A

when the current level of output is below the maximum possible in the short run. Meaning spare labour and capital inputs are available to use

40
Q

how does demand pull inflation occur

A
  1. to prevent increasing demand from outstripping supply
  2. they will increase output and need to employ more
  3. in doing so resources will become more scarce
  4. as a consequences factor prices will rise as firms compete for them
  5. to maintain profit margins firms raise prices

but in doing so business will pay extra as a result of the law of diminishing returns and prices will rise as a result

41
Q

what is discretionary income

A

income after necessities are bought and tax is paid

42
Q

what is disposable income

A

income after tax

43
Q

law of diminishing returns

A

any increase in production over the optimum level will result in smaller levels of output

44
Q

how does cost push inflation occur

A

as supply shifts inwards firms will be unable to operate at the same cost and prices will have to rise as a result

45
Q

what is the transmission mechanism

A

is the way in which changing the monetary policy can effect AD

46
Q

evaluation of monetary policy

A
  1. there is around an 18 month time lag
47
Q

how does an expansionary monetary policy affect AD

A
  1. lower interest rates means home owners paying a variable mortgage have to pay less of their income on repayments of borrowing. This increases their discretional income. 46% of people are on variable mortgages in the UK
  2. as it becomes cheaper to get a mortgage home demand for houses increase and home owner feel more wealthy (wealth effect) and need to save less.
  3. low interest makes investment easier as the opportunity cost goes down and the returns from investing are higher than saving
48
Q
  1. what is the liquidity trap
  2. why may it occur
    (an argument that Keynesian economists will use)
A
  1. When monetary policy becomes ineffective because, despite zero/very low-interest rates, people want to hold cash rather than spend or buy illiquid assets.

This may occur because when the interest rate has been low everyone will have got a loan from the bank. any further decrease in the interest rate isn’t likely to increase AD as the extra spending has already occurred

49
Q

what does the success of monetary policy depend upon?

3 things

A
  1. amount of spare capacity
    if the economy is operating at full capacity an fall in interest rates will result in inflation instead of growth.
  2. confidence
    if consumers are unconfident as a result of a major political/economic change can lead to uncertainty such as lockdowns surrounding Corona virus they my be unwilling to borrow
  3. the size of the decrease of interest.
    if it is big it will have a bigger impact on AD
50
Q

why may the accelerator effect occur

A
  1. economies of scale. it is much more efficient to make a large investment to increase capacity rather than making incremental changes
  2. favourable economic conditions such as low interest rates
51
Q

Purchasing power parity

A

the exchange rate at which a currency can buy you the same basket of goods for the same price in either country

52
Q

how does the income effect impact high interest rates

A

If interest rates are high savers get more income from saving. Therefore giving them more to spend and spending may increase as a result

53
Q

how does the substitution effect impact high interest rates

A

the opportunity cost of saving increases as saving becomes more profitable. Spending may decrease as a result

54
Q

Nominal GDP

A

growth without adjustment for inflation

55
Q

structural budget deficit

A

a budget deficit that occurs at full employment and capacity

EG investing in the HS2

56
Q

cyclical budget deficit

A

a budget deficit that is dictated by the economic cycle

usually in a recession

57
Q

what is a positive statement

A

one that can be proved and can be tested against facts

58
Q

what is a normative statement

A

one based on opinion

59
Q

what is capital

A

Capital goods are fixed assets which are used in the productive process in order to produce a finished ‘consumer’ good. Capital goods are not bought for their own utility

60
Q

why may improved employment opportunities (as a result of economic growth) not always result in increased employment

A

depends on structural unemployment. many workers may have been unemployed for a long time and may have suffered from hysteresis as a result.

The government may be required to invest in supply side policies as a result.

61
Q

what’s value judgement

A

A value judgement is an evaluative statement of how good or bad you think an idea or action is

62
Q

what’s the institutional structure in the economy

A

the banking system

63
Q

in the circular flow of income what three things are equal

A

income= output=expenditure

64
Q

why may deflation be good

A

if it is benign. (caused by an outward shift in LRAS)

such as increased investment into the HS2 resulting in a decline in frictional unemployment

65
Q

what type of GDP does the multiplier effect impact

A

nominal GDP

66
Q

how does the bank identify when the economy is nearing or past full employment

A

when wage rates are increasing it suggests inflation is likely.

Firms may be unable to finance an increase in wages in the long term so they may increase prices

67
Q

why may a fall in the bank rate translate to lower interest rates

A

This is because the reward for saving with the BOE falls and they may chose to loan it out as it is more profitable as a result.
Supply of loanable funds increases as a result.

68
Q

why may monetary policy not be effective

A
  1. time lag (when the economy is unpredictable its hard to implement the monetary policy 2 years in advance to keep things stable).
  2. if consumers aren’t confident. during a recession they may be unwilling to take out a loan due to fears of failure of repayment if they are made unemployed.
  3. if the interest is already so low an further decrease in the interest may not translate into further consumption as everyone who has a loan has one (liquidity trap)
69
Q

what’s the difference between nominal and real GDP

A

Nominal GDP is the total value of all goods and services produced in a given time period. Real GDP is nominal GDP adjusted for inflation.

70
Q

what is turkeys interest rate

A

14% (second highest in the EU)
This may encourage hot money outflows as wealthy earners seek to save in Turkey instead and the value of the pound will depreciate as a result

71
Q

what’s inflation in the UK

A

7%

72
Q

what inflation in France

A

3.6%

73
Q

when is inflation good

A
  1. when it avoids deflation->inflation encourages consumers to spend as consumers want to save money when buying products
  2. it can allow for wage adjustments (It is difficult to cut wages so by increasing wages of productive workers and keeping the unproductive workers wages constant it prevents unemployment)
74
Q

give 3 reasons why deflation is bad

A
  1. sticky wages can lead to real wage unemployment. ->as workers resist nominal wage cuts (as they are used to seeing pay increases each year)
  2. discouraged consumer spending-> consumers will wait for further price cuts before buying their (luxury product) to save money
  3. increase in REAL interest rates causing consumers to save
75
Q

how does demand pull deflation occur

A

..

Macro economics (10 decks)

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