how the macroeconomy works (chapter 7)

Question 1

why are higher prices needed to increase short run aggregate supply?

Answer 1

• firms are unlikely to hire new workers as may not be needed longer term
• any overtime hours need to be payed for so any increase in output increases costs for firms so higher prices are needed to persuade firms to supple more

Question 2

what are factors that shift the short run AS curve?

Answer 2

the cost of factors of production
e.g. higher business taxes shift it left, increases in productivity decrease firms costs so shift the SRAS right

Question 3

what does the long run aggregate supply curve show?

Answer 3

the natural capacity output. It depends of the quantity and quality of the factors of production

Question 4

what factors would cause the LRAS curve to shift?

Answer 4

the same factors that would cause the PPF curve to shift away from the origin will cause the LRAS to shift right. (any improvement in the quantity or quality of the factors of production)

Question 5

how can the government effect the long run aggregate supply?

Answer 5

e.g. a high corporation tax can cause firms to be reluctant to invest in the UK or even move abroad (LRAS would shift left)

Question 6

under the Keynesian model, what would cause a change in price level?

Answer 6

a shift of the AD curve along the positively sloping part of the LRAS (not the vertical or horizontal part)

Question 7

what is wealth?

Answer 7

the stock of assets that have value

Question 8

what is National income?

Answer 8

the flow of new output produced by the economy in a particular time period

Question 9

what’s another name for national income?

Answer 9

national output, national product

Question 10

what counts as an injection into the circular flow of income?

Answer 10

government spending, investment, exports

Question 11

what counts as a withdrawal from the circular flow of income?

Answer 11

taxation, savings, imports

Question 12

when is the national income in equilibrium?

Answer 12

when the sum of planned injections = the sum of planned withdrawals

Question 13

when will the level of national income rise

Answer 13

if the sum of planned injections is greater than the sum of planned withdrawals

Question 14

when will the level of national income fall?

Answer 14

if the sum of planned withdrawals is less than the sum of planned injections

Question 15

what will an increase in withdrawals/leakages lead to?

Answer 15

alll things being equal, it will lead to a contraction of the circular flow of income, via the negative multiplier. GDP will decrease

Question 16

what will an increase in injections lead to?

Answer 16

all things being equal, it will lead to an expansion of the circular flow of income,via the positive multiplier. GDP will increase

Question 17

what is a closed economy?

Answer 17

one with no international trade

Question 18

what is the negative multiplier?

Answer 18

explains how a decrease in spending will lead to a proportionally greater decrease in total income.

Question 19

what is the positive multiplier?

Answer 19

explains how an increase in injections has a greater impact on the economy than the initial amount injected.

Question 20

an example of the positive multiplier

Answer 20

if more workers are employed in the capital goods or export industries, they will have more money to spend on local goods and services and demand will increase. This will create more employment which further increases demand. Thus an increase in injections into the circular flow of income via the positive multiplier. The economy will grow and GDP will increase

Question 21

what is a positive output gap?

Answer 21

occurs when the economy is producing more goods and services than trend output

Question 22

what is a negative output gap?

Answer 22

occurs when the economy is producing less than its trend output

Question 23

what is the economic cycle?

Answer 23

a period of economic growth followed by recovery, further growth and then recession and so on

Question 24

what happens to cyclical unemployment during a recession?

Answer 24

rises - thus lowering living standards

Question 25

what happens to tax revenue and government finance during a recession?

Answer 25

• there is likely to be an increase in government spending on welfare due to increased unemployment.
• decreased tax revenues
• likely to lead to an increase in government borrowing (known as a cyclical budget deficit)

Question 26

what happens to the current account of the balance of payments during a recession?

Answer 26

there will be a reduced deficit because lower incomes result in reduced spending on imports

Question 27

what happens to the environment during a recession?

Answer 27

less economic activity is likely to reduce CO2 emissions and production of non-biodegradable waste

Question 28

what happens to inflation during a recession?

Answer 28

demand-pull inflation falls however there is a risk of malign deflation due to low demand

Question 29

what is a slump

Answer 29

a prolonged period of recession

Question 30

definition of a recession

Answer 30

a decline in GDP for 2 or more consecutive quarters

Question 31

what happens to GDP during the growth stage of the economic cycle?

Answer 31

it rises - more goods and services are being produced

Question 32

what happens unemployment levels during the growth stage of the economic cycle?

Answer 32

there are lower rates of cyclical unemployment - increasing living standards and improving equity in society

Question 33

what happens to government finances during the growth stage of the economic cycle?

Answer 33

-they improve due to higher tax revenues (e.g. VAT from more consumer spending)
- should be less spending on welfare
- cyclical budget deficit should be reduced

Question 34

what is structural budget deficit?

Answer 34

when the government continues to borrow during the growth stage.
Would be seen as positive if used to fund investment in infrastructure or education as this would improve productive capacity.

Question 35

what happens to inflation during the growth stage of economic cycle?

Answer 35

rising aggregate demand is likely to lead to increased demand-pull inflationary pressure

Question 36

what happens to the current account of the balance of payments during the growth stage of the economic cycle

Answer 36

likely to lead to an increased deficit due to increased income leading to increased demand for foreign made goods and services

Question 37

what is short run economic growth?

Answer 37

increased output of goods and services resulting from using idle resources.g. unemployed labour

Question 38

what is long run economic growth?

Answer 38

an increase in the economy’s potential level of real output

Question 39

what is there equation for the multiplier?

Answer 39

1/(1- marginal propensity to consumer)

OR

1/(MPS+marginal propensity to import + marginal propensity to tax)

Question 40

when does the multiplier effect apply?

Answer 40

when there is a disequilibrium between net injections and net withdrawals

Question 41

when does the positive multiplier occur?

Answer 41

when net injections are greater than net withdrawals

Question 42

when does the negative multiplier occur?

Answer 42

when net withdrawals are greater than net injections