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Macroeconomics > Macro 1-4 > Flashcards

Macro 1-4 Flashcards

1
Q

What 7 things should successful economic policy result in?

A
  1. Economic growth
  2. Stable prices
  3. Low unemployment
  4. Balanced balance of payments (imports and exports record)
  5. Equality in distribution of income and wealth
  6. Balanced budget
  7. Protection of the environment
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2
Q

Circular flow of income model

A

Households give labour and expenditure

Firms give wages and goods/services

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3
Q

Injections into the circular flow of income model

A

X - Exports
I - Investment
G - Government spending

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4
Q

Leakages from the circular flow of income model

A

M - Imports
S - Savings
T - Taxes

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5
Q

Injections definition

A

Money flowing into the circular flow of income

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6
Q

Leakages definition

A

Money flowing out of the circular flow of income

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7
Q

Aggregate demand definition

A

total demand of goods and services in an economy

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8
Q

What is aggregate demand made up of?

A
  1. Consumption (65%)
  2. Investment (15%)
  3. Government spending (G)
  4. Net exports (X-m)
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9
Q

What are 6 determinants of consumption?

A
  1. RDI
  2. Wealth
  3. Consumer confidence
  4. Interest rates
  5. Age structure
  6. Inflation
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10
Q

How does RDI Increase consumption

A

RDI increase = Consumption increase = AD increase

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11
Q

Why might RDI not increase consumption

A
  • some Y (money) is saved
  • Low Y people will spend more than High Y people
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12
Q

How does wealth affect consumption?

A

Wealth effect -> Assets price increase, people feel richer and spend more
, consumption increases

UK is nation of homeowners so wealth effect is significant

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13
Q

Why might wealth not affect consumption?

A

people might save Y

Most people are unlikely to make spending decisions based on a one off increase in house price.

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14
Q

Why will consumer confidence affect consumption?

A

Confidence -> Consumption -> AG

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15
Q

Why will confidence not affect consumption?

A

Some people won’t feel confident

Fall in salary, people will be less inclined to spend

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16
Q

How will Interest Rates effect consumption

A

Save more -> Borrow less -> spending decrease -> Consumption decrease, AD decrease

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17
Q

Why will interest rates not affect consumption?

A

Commercial banks may not pass on rate changes
Rich households not affected

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18
Q

How does Age structure of population affect consumption?

A

Young - spend for education and luxuries

Middle - Save for kids, spend for family and house

Old - Likely to spend

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19
Q

Why might age structure not affect consumption?

A

Middle aged may not save for retirement

old people may save for children

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20
Q

Why might inflation affect consumption

A

People cut back on luxuries but spend same on needs.

Consumption decreases

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21
Q

Why might inflation not affect consumption

A

hyperinflation - people spend very quickly

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22
Q

Marginal propensity to Consume (MPC)

A

The change in consumption from a change in income

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23
Q

What happens when MPC increases?

A

An increase in consumption in response to an increase in income

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24
Q

MPC Formula

A

Change in consumption / Change in money

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25
Q

Can the MPC ever be greater than 1?

A

Yes, when assets are sold for more finance

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26
Q

Marginal propensity to save (MPS)

A

The change in savings from a change in income

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27
Q

What happens when saving increases?

A

Consumption decreases

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28
Q

What 6 things determine volume of saving

A
  1. RDI
  2. Interest rates
  3. Confidence and expectations
  4. Government policy’s
  5. Age structure of population
  6. Access to banks
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29
Q

How does RDI affect volume of saving?

A

Higher RDI -> more saving -> Consumption decreases

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30
Q

Why might RDI not affect volume of saving?

A

People may spend Y
May not apply to wealthy households

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31
Q

How does interest rates affect volume of saving?

A

Increase = save more
lower = borrow more, save less

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32
Q

Why won’t interest rates affect volume of savings?

A

Not all households affected

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33
Q

How does Confidence and expectations affect volume of savings?

A

Higher confidence -> less savings

Less confidence -> more saving

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34
Q

Why might confidence and expectations not affect volume of savings?

A

Rich not affected
If interest rates increase, people might save anyway

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35
Q

How does government policy’s affect volume of savings?

A

Government may provide incentives to save so:

Inflation decreases
Gov spending decreases

36
Q

Why might government policy’s not affect volume of savings?

A

Some people choose not to save, they choose leisure over savings

37
Q

How does access to banks influence volume of savings?

A

People have interest on their savings

38
Q

What is investment?

A

Investment is the addition to the capital stock of the economy (spending on capital goods)

39
Q

Why is investment so volatile?

A

Totally based on confidence

40
Q

What are the 7 things that determine investment?

A
  1. Economic growth
  2. Animal spirits
  3. Profit levels
  4. Corporation tax / tax on profits
  5. Interest rates
  6. Capacity utilisation
  7. Demand for exports
41
Q

How does economic growth affect investments?

A

Economic growth -> Investment

Economic growth implies consumption, and firms need to supply the demand

42
Q

Why won’t economic growth affect investments?

A

Businesses may choose to pay dividends to shareholders instead of investing

43
Q

How does animal spirits / confidence affect investment?

A

High animal spirits -> Investment

confident consumers will keep spending

44
Q

Why won’t animal spirits affect investment?

A

Confidence is volatile

45
Q

Why does profit levels affect investment?

A

Profit increase -> Investment increase

46
Q

Why might profit not affect investment?

A

May choose not to invest

47
Q

How does corporation tax (tax on profits) affect investment?

A

25% in UK

Corporate tax increase -> Investment falls

profits decrease, investment falls

48
Q

Why might corporation tax not affect investment?

A

Businesses could make investment decisions independent of tax rates (Keynes suggested animal spirits was more influential)

49
Q

How does interest rates affect investment?

A

Decreases investment

50
Q

Why might interest rates not affect investment?

A

Rich may continue to invest

51
Q

What is capacity utilisation?

A

How much percentage of a factory’s production is currently being utilised

52
Q

How does capacity utilisation affect investment?

A

If factory is at full capacity, it should invest in capital goods

53
Q

Why might capacity utilisation not affect investment?

A

Instead, it could be high animal spirits which cause investment into capital goods

54
Q

Why might demand for exports not cause investment?

A

Some governments won’t be able to handle the demand so there is no reason to invest

55
Q

What is animal spirits?

A

Gut feeling (irrational decision)

56
Q

What is depreciation?

A

a reduction in the value of an asset over time

57
Q

What is net investment calculation?

A

Gross investment (Initial value) - Depreciation = net investment (present value)

58
Q

What is government spending?

A

Spending by central and local government on things like healthcare, infrastructure, military, law enforcement and education.

59
Q

What is transfer payments?

A

A transfer payment is a payment of money for which there are no goods or services exchanged (central to local government)

60
Q

What 3 things determine government spending?

A
  1. Level of economic activity
  2. Economic objectives
  3. political situation
61
Q

How does level of economic activity determine government spending

A

Less economic activity > more gov spending

62
Q

Why might level of economic activity not determine government spending?

A

Corruption
Tax not collected in every country

63
Q

How does economic objectives cause gov spending?

A

Reduce inflation > cut spending

They will spend more money if not meeting economic objectives

64
Q

Why might economic objectives not influence gov spending?

A

Gov spends money even if they are meeting their economic objectives

65
Q

Why does political situation affect gov spending?

A

War > spend more on military

66
Q

What 3 factors influence how much a country spends on healthcare?

A
  1. access to finance
  2. Health crisis
  3. Ageing population
67
Q

What 6 factors influence Net Exports?

A
  1. RDI at home
  2. RDI Abroad
  3. Price level
  4. Exchange rates
  5. Trade barriers
  6. Non-price factors
68
Q

How does RDI at home affect Net exports?

A

RDI increase > Consumption increases > Some in form of M (imports)

69
Q

How long has the uk been in trade deficit?

A

over 30 years

70
Q

Why might RDI at home not affect net exports?

A

It depends on the increase in income

71
Q

WHy does RDI abroad affect net exports?

A

RDI abroad increases > Exports increase

72
Q

Who is uk main trading partner

A

european union

73
Q

Why might RDI abroad not affect net exports?

A

UK not known for producing mass market

74
Q

Why does price level (domestic inflation) affect net exports?

A

High inflation leads to uk goods having less demand

Exports decrease, Imports increase

75
Q

How does exchange rates affect net exports?

A

SPICED - Strong pound makes imports cheaper and exports dearer

WIDEC - Weak pound makes imports dearer and exports cheaper

76
Q

Why does trade barriers affect net exports?

A

Tariffs - tax on M

Quotas - limit on M

So, decrease in X and M

77
Q

Why might trade barriers not affect net exports?

A

Depends on size of tariffs

78
Q

Why does non-price factors affect net exports?

A

Good quality goods - More X
Bad quality goods - less x

79
Q

Why might non-price factors not affect net exports

A

price also heavily determines demand

80
Q

How does an decrease in price level affect AD?

A

Extension of aggregate demand

81
Q

What 3 effects explain why the AD curve is downwards sloping?

A
  1. Wealth effect
  2. Trade effect
  3. Interest rate affect
82
Q

What is the wealth effect?

A

as average price falls, individuals can purchase more of a good or service with the same money. Therefore consumption will increase

83
Q

What is the trade affect?

A

Price falls, exports become more competitive, and sell more exports

84
Q

What is the interest rate affect?

A

Interest rates are low encouraging investment and consumption.

85
Q
A

Macroeconomics (10 decks)

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