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Macroeconomics 3 > Macro 1 and 2 REVISION > Flashcards

Macro 1 and 2 REVISION Flashcards

1
Q

Actual growth

A

The increase in actual (observed) output

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2
Q

Potential growth

A

The increase in the economy’s capacity

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3
Q

Business cycle

A

The periodic growth and decline of a nation’s economy

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4
Q

Demand-side policies

A

Increasing government spending
Lowering taxes
Monetary policy

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5
Q

Supply-side policies

A

Active labour market policies
Increasing technology
Encouraging investment

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6
Q

Benefits of economic growth

A

Increased consumption
Reduces other macroeconomic issues
Scope of redistribution

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7
Q

Costs of economic growth

A

Effects on distribution of income
Environmental costs
Depletion of resources

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8
Q

Workforce (labour force)

A

Those available and willing to work

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9
Q

Forms of unemployment

A

Frictional - inefficient job search - fluidity of labour market
Structural - Economic structure or regional effect
Seasonal - Interruption of economic activity depending on the season

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10
Q

Inflation

A

The continuous rise in prices of goods and services (measure the percentage change in price level)

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11
Q

Real flows

A

Trade in goods and services through the action of importing and exporting

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12
Q

Monetary flows

A

Transfers of capital that must exist to facilitate the real flows, plus other flows required to maintain exchanges in assets

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13
Q

Floating exchange rate regime

A

Exchange rate is determined freely by demand and supply in the foreign exchange (FOREX) market

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14
Q

Types of economic agents

A

Firms - average firm in the economy
Consumer - average consumer in the economy
Policymaker - a monetary authority

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15
Q

Types of markets

A

Labour market - between workers and firms
Goods market - between the consumer and the firm
Financial market - between the policymaker and both firms and consumers

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16
Q

Circular Flow Model

A

Two agents - Firms and households
Money flows from firms to workers (wage)
Money flows from households to firms (consumption)

Speed of flow can be influenced by:

1) Injections (investment (I), government spending (G), exports (X))
2) Withdrawals (Savings (S) , taxes (T) , imports (M) )

Equilibrium: Injections = Withdrawals
Equilibrium condition:
S+T+M = I+G+X

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17
Q

Keynesian Model

A

Argues the economy is demand led and firm’s production decision is based upon that demand

Aggregate production (Y) is determined by aggregate demand (E) - Y = E

In a closed economy the expenditure function (E) is written in terms of consumption (C), Investment (I) and Government spending (G):
Y = C + I + G

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18
Q

Aggregate Supply / Aggregate Demand Model

A

Demand curve represents average consumer - shows a negative relation between price and output (e.g. higher price means lower demand)

Supply curve represents average firm - predicts positive relation between price and production (e.g. higher price means more supply)

19
Q

Money supply

A

Total amount of money in the economy

20
Q

Role of Central Bank

A

Maintains nation’s currency and foreign exchange reserves
Responsible for monetary policy
Raises cash required for government borrowing’s and printing money when required

21
Q

Types of monetary policy

A

Expansionary - actions that increase the money supply

Contractionary - actions that decrease the money supply

22
Q

Tools of the Central Bank

A

Open market operations (buying or selling bonds)
Lending reserves to commercial banks
Changing required reserve ratio

23
Q

Money market equilibrium

A

The supply and demand for money determine the money market equilibrium

24
Q

Interest rate

A

The price of money - how much you have to pay extra of one currency to get a particular amount of a different currency

25
Q

Expenditure

A

Consumption (C)
Investment (I)
Government Expenditure (G)

Y = C+I+G (represents market for goods and services)

26
Q

Budget Surplus

A

Income exceeds expenditure

27
Q

Budget Deficit

A

Expenditure exceeds income

28
Q

Public Sector Borrowing Requirement (PSBR)

A

Amount of money the government requires to borrow in order to finance a budget deficit

29
Q

Working age population

A

Number of citizens of working age

30
Q

Natural rate of unemployment

A

The normal rate in the absence of shocks

31
Q

Participation rate

A

Percentage of the working age population in the labour force

32
Q

Labour market

A

Place where workers and firms interact to determine and equilibrium wage rate and amount of labour employed in the economy

33
Q

Equilibrium unemployment

A

Unemployment that exists in all states of the economy

34
Q

Disequilibrium unemployment

A

Unemployment ‘depending’ on the state of the labour market (e.g. due to demand deficiency)

35
Q

Price

A

Nominal value at which a good is sold

Price of x = Market Fundamentals + Expected price of x in previous period

36
Q

Aggregate price

A

Average price of a good in the economy

37
Q

Trade off between price stability and economic activity

A

Inflation = Expected inflation + Market Fundamentals

To reduce inflation we can either try to make impact upon the MF or change our expectations of inflation

38
Q

Market Fundamentals (MF)

A

The discounted present value of the stream of future cash flows attached to the asset - also described as the ‘items that have a direct impact on future income streams of a security’

39
Q

Keynesian Cross approach to inflation

A

If equilibrium output is below full employment output then there is a deflationary gap

If equilibrium out is above employment output then there is an inflationary gap

40
Q

Deflationary gap

A

Amount that national income exceeds aggregate expenditure (at full employment)

41
Q

Inflationary gap

A

Amount that aggregate expenditure exceeds national income (at full employment)

42
Q

Phillips curve

A

Maps out relationship between wage inflation and unemployment

Policymakers face a choice between inflation and unemployment:

1) To reduce inflation the central bank can increase interest rates - raises unemployment
2) To reduce unemployment the central bank can lower interest rate - raises inflation

Relationship appeared to be negative (downward sloping)

CONCEPT BROKE DOWN IN THE 1970s

43
Q

Friedman’s Natural Rate Hypothesis (NRH)

A

Unemployment will deviate in the short run around its long run natural rate
Theory separates short run observations from the long run using the difference between inflation and ‘expected’ inflation:

When inflation is at its expected level, unemployment is at its ‘natural’ level

Deviations of unemployment from the natural rate are assumed short run

Reaction of unemployment to expansionary economic policy:

  • Increase in aggregate demand decreases unemployment but creates unexpected inflation
  • Increase in money supply causes movement along SRPC - unemployment declines and inflation is higher than expected - over time expectations adjust, SRPC shifts up and economy returns to natural state

Macroeconomics 3 (5 decks)

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