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macroeconomics > how the macroeconomy works (no AggSupply) > Flashcards

how the macroeconomy works (no AggSupply) Flashcards

1
Q

what are economic systems?

A

These are systems of production, resource allocation and distribution of goods and services in a given geographic area

An economic system is a network of organisations used by a society to resolve the basic problem of what, how much, how and for whom to produce.

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2
Q

There are three possible types of economic systems:

A

The planned economy

The market economy

The mixed economy

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3
Q

list point about the planned economy

A

AKA a command or controlled economy

In this type of economy, the government decides everything

The government controls all the factors of production – land, labour, capital and enterprise

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4
Q

the free market economy

A

In this type of economy, private individuals make the majority of the decisions about what to produce

The job of the government in this economy is minimal

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5
Q

list points about the mixed economy

A

In this type of economy, private sector businesses will provide some goods and services, while the government will organise the provision of others through the public sector

Most countries are mixed economies

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6
Q

GDP = what three components?

A

GDP = national output = national income = national expenditure

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7
Q

what does national output measure?

A

National output measures the actual goods and services produced by the economy

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8
Q

what does national expenditure measure?

A

national expenditure measures the spending of these incomes on the goods and services

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9
Q

what does national income measure?

A

national income measures the incomes received by labour when producing the goods and services

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10
Q

injections equation

A

Injections = I + G + X

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11
Q

withdrawals equation

A

Withdrawals = S + T + M

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12
Q

AD formula

A

AD = C + G + I + (X-M)

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13
Q

what is aggregate demand?

A

Aggregate demand is the total demand for a country’s goods and services at a given price level and in a given time period

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14
Q

what is the price level (according to aggregate demand )

A

The price level is the average of current prices of all products produced in an economy

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15
Q

what are the four agents in an economy ?

A

Products and services can be bought by:
Consumers
Firms
Government
Economic agents living in another country

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16
Q

what are the components of AD?

A

Aggregate demand is made up of the following:
Consumer expenditure (C)
Investment (I)
Government spending (G)
Net exports (X-M)

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17
Q

What is consumption also known as?

A

Consumer expenditure

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18
Q

what is the largest component of aggregate demand in most countries ?

A

Consumer expenditure / ‘consumption’

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19
Q

how is AD cacluated?

A

AD = C + I + G + (X-M)

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20
Q

what are the factors influencing consumer expenditure / consumption?

A

Real disposable income
Rate of interest
Consumer confidence
Asset prices
Level of household indebtedness

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21
Q

what is credit?

A

borrowed money

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22
Q

why do many firms depend on credit?

A

Many firms depend on credit in the form of bank loans and/or overdrafts to help finance their business activities

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23
Q

what is interest rate?

A

refers to the %rate of the reward for lending

It is also defined as the cost of borrowing

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24
Q

what is availability of credit?

A

the level at which banks are willing to lend

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25
Q

There is the possibility that spending may not rise when the rate of interest falls . Why?

A

People may think the reduction is temporary

They may delay spending if they think rates will fall further

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26
Q

what happens if there is a high consumer confidence ?

A

If there is high consumer confidence then consumers will have a higher propensity to consumer

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27
Q

What can affect consumer confidence?

A

Expectations of the future state of the economy – job prospects , levels of unemployment (as well as expected levels of unemployment)

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28
Q

what is asset prices?

A

Asset prices link to wealth – how wealthy people feel

The wealthier people feel, the higher their propensity to consume

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29
Q

describe level of household indebtedness

A

The higher the level of indebtedness, the higher the level of saving

This means that there is less consumption taking place in the economy

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30
Q

what is aggregate demand ?

A

Aggregate demand is the total demand for a country’s goods and services at a given price level and in a given time period

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31
Q

investment

A

spending on factors of production e.g. machines and office buildings , to increase their productive capacity

investment is an asset or item acquired with the goal of generating income or appreciation

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32
Q

appreciation

A

an increase in the value of an asset over time.

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33
Q

Productive capacity

A

the maximum possible level of output that an economy is able to produce

Investment can be into physical or human capital

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34
Q

capital depreciation

A

decrease in asset value

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35
Q

factors affecting investment

A

Interest rates
Business confidence
Corporation tax
Spare capacity
Level of competition
Price of capital

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36
Q

what are the two ways firms will finance investments ?

A

either by borrowing money or by investing retained profits

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37
Q

how would businesses react to interest rates growing ?

A

if interest rates grows - then the cost of borrowing is higher for firms, which may lead to a lower incentive for businesses thereby Resulting in lower investments as the propensity to invest will be lower (opposite happens when interest rates fall)

38
Q

what determines business confidence?
what happens if business expectation are high?

A

What determines business confidence is the expectation of future profit and the expectation of future demand in the economy

if these expectations are high, then business will be more propense to make sure investment take place so they can meet the demand- investment will rise

(opposite occurs when these expectations are low)

39
Q

what is retained profit?

A

the amount of profit left after corporation tax

40
Q

what is corporation tax?

A

a tax on business profits

41
Q

describe the effect of levels of corporation tax on investments

A

A cut in corporation tax results in a higher incentive to invest, because businesses have higher retained profit left and therefore there is a greater potential for businesses to invest

Therefore, investments will inevitably increase

42
Q

what is spare capacity?

A

when there are unused factors of production

e.g. machinery a manufacturing firm my not be using up all its machines and therefore not producing as much as it could do at its full potential

43
Q

if there is spare capacity do firms need to invest?

A

no

44
Q

describe the effect of spare capacity on investments

A

So, the greater the level of spare capacity, the lower will be businesses’ propensity to invest as there is not as much needed for capital

Opposite occurs when businesses are operating close to capacity

45
Q

describe the effects of level of competition on investments

A

If competition is strong and lots of firms are improving their technology, spending more on R&D, spending more on innovation, then it is likely that other businesses will react to it

This means that more and more businesses are investing in the economy leading to a much higher investment level

Businesses will try all they can to get ahead of their competition thereby increasing investment

46
Q

what is the accelerator effect ?

A

when the expectation of growth of GDP in the economy is high and this encourages further investment by businesses

47
Q

describe the effects of price capital on investments

A

The lower the price of capital the higher the incentive to invest because investment is less costly

48
Q

what is government spending ?

A

spending by the public sector on goods and services such as education , health care and defence

49
Q

what is the government budget?

A

The government budget is a document prepared by the government presenting its anticipated revenues and proposed spending for the coming financial year

50
Q

revenues

A

the income that a firm receives from the sale of a good or service to its customers

Revenues - the value of output sold, that is the number of units times the price per unit

51
Q

what are the four types of government spending?

A

current spending
capital spending
welfare spending
debt interest payments

52
Q

current spending

A

(1)Current spending – spending on maintenance of public services (maintain of the NHS, schooling etc) and payment of public sector wages

53
Q

capital spending

A

(2)Capital spending – spending on infrastructure projects (e.g. spending on new airports, motorways, bridges etc.)

54
Q

welfare spending

A

(3)Welfare spending – spending on benefits and pensions, child support (for the UK biggest chunk of government spending)

55
Q

debt interest payments

A

(4)Debt interest payments – debts a nation needs to pay

56
Q

what happens if current , capital and welfare spending increase?

A

If 1,2 and 3 increases – this results in government spending going up shifting AD to the right

Crucially, an increase in (4) this may not result in higher G because some of the debts may be to foreign countries or the EU etc

57
Q

budget deficit

A

where G > T( tax revenue ) government spending is larger than the taxation revenue in one fiscal year

58
Q

budget surplus

A

Budget surplus – where T > G in one fiscal year

59
Q

national debt

A

National debt – the total accumulation of debt over time

60
Q

what are some factors influencing government spending ?

A

government intervention level
level of economic activity in the country
a desire to please the electorate

61
Q

Factors influencing government spending :

Government intervention level

A

Government intervention level – generally the higher the level of intervention the higher government spending

In countries where there is a high level of state intervention there is a positive correlation to the amount spent by governments as a proportion of AD

62
Q

Factors influencing government spending:level of economic activity in the country

A

If there is high unemployment, a government may increase spending to raise aggregate demand and the output of the economy

63
Q

Factors influencing government spending: a desire to please the electorate

A

Voters can put pressure on the government to spend money in certain areas, such as health and education

This is especially true during the run-up to the general election

64
Q

trade surplus

A

A trade surplus is when exports are greater than imports and is added to AD (X>M)

65
Q

trade deficit

A

A trade deficit is when exports are less than imports and is taken away from AD (X<M)

66
Q

exports

A

Exports are goods and services sold from abroad, income from exports counts as an injection in the circular flow of income and adds to AD

67
Q

imports

A

Imports are the goods and services bought from abroad, imports count as a leakage from the circular flow of income that can shift AD to the left

68
Q

formula for net exports

A

x-m

69
Q

AD formula

A

AD = C + I + G + (X – M)

70
Q

what happens to AD if exports increase and (X-M) is positive?

A

AD shifts to the right

71
Q

what happens to AD If imports increase and (X-M) is negative?

A

AD shifts to the left

72
Q

discuss the effects of Real disposable income abroad

A

If there is a boom abroad then individuals abroad are getting wealthier therefore their marginal propensity to import is likely to increase

This means that for the domestic country , will be able to export more abroad so exports will increase and so will AD

Visa versa

73
Q

discuss the effects of Real disposable income earned in the domestic country

A

If there is a boom in the UK, then the marginal propensity to import in the UK is likely to rise

This is also known as the sucking-in effect of imports

Therefore, import expenditure is likely to rise, which will increase M pulling down the value of (X – M ) and finally resulting in a shift to the left in AD if the other components do not change

74
Q

what does SPICED stand for ?

A

Strong pound, imports cheap, exports dear (expensive)

when the pound is strong, imports go up and exports decrease so AD shifts inwards

75
Q

what does WIDEC stand for?

A

Weak pound, imports dear, exports cheap

when the pound is weak, imports go down and exports increases and AD shifts outwards

76
Q

what is protectionism and what is its aim?

A

Protectionism involves any attempt by a country to impose restrictions on the open trade in goods and services

The main aim of protectionism is to protect domestic businesses and industries from overseas competition

77
Q

discuss protectionism at home and abroad

A

Where there is strong protectionism abroad, the value of X will be lower and when protectionism is not strong abroad then the value of X will be higher

If there is protectionism at home then the value of M will be low (e.g. America vs China), whereas when we do not have strong domestic protectionist, it is easier for foreign countries to trade with us, therefore X will rise

78
Q

discuss the effects of relative inflation at home and abroad

A

If inflation in the UK is higher than inflation in other countries around the world, especially than in countries that are our major trading partners, then it is less attractive for such foreign countries to purchase UK goods. Therefore, demand for X decreases and M increases and vice-versa

If there is low relative UK inflation, and therefore if inflation is higher in foreign countries than in the UK, it becomes more attractive for foreign countries to purchase from the UK and therefore X increases but M decreases

79
Q

wealth effect

A

when the price levels are high, inflation is going up . This means that the value of assets falls. Therefore spending levels in the economy decreases. People feel less wealthy.

80
Q

interest rate effect

A

if price levels are high, then interest rates will be raised. This will cut spending

81
Q

international trade effect

A

the higher the price levels in the domestic economy (UK), the lower individuals abroad purchase from the UK

82
Q

what is a demand side shock?
give an example of a negative shock

A

is anything (positive or negative) that causes AD to change.

Examples of a negative shock could be an interest rate rise, a collapse in the housing market, etc.

83
Q

what are the effects of a demand side shock?

A

As well as a fall in real GDP, this could have a knock-on effect on confidence, leading to further falls in activity.

The multiplier and accelerator effects could magnify the impact of any initial negative shock.

Keynesians may suggest government intervention would be required at this point.

84
Q

according to AD, what can changes in the average price level lead to?

A

The average price level can lead to several things:

Real incomes: A rise in the average price level can lead to the real value of income to drop.

Balance of trade: If the average price level of a foreign country fell, domestic consumers would demand more imports, causing a contraction in AD.

Interest rates: If the average price level rises, there will be inflation.

85
Q

what does MPC stand for?

A

marginal propensity to consume

86
Q

MPC definition

A

the tendency to spend or to consume some portion of each extra amount of income received

87
Q

MPS defintion

A

the tendency to save a proportion of income you receive

88
Q

MPC + MPS =

A

1 or 100%

89
Q

what is the multiplier?

A

The multiplier is the process by which any change in the components of AD will lead to an even greater change in national output (GDP)

90
Q

multiplier formula

A

Multiplier = 1/(1-MPC ) - work out value in brackets first

91
Q

multiplier x initial change in spending =

A

Change in GDP

92
Q

accelerator effect

A

The accelerator effect focuses on the component of investment

It simply states that changes in investment can be directly linked to changes in the rate of GDP

Therefore, when the rate of growth is increasing, firms will be more willing to invest because these firms think demand will be higher in the future. If growth is higher in the future then now is a good time to invest in new capital

And visa-versa

macroeconomics (2 decks)

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