Macro Flashcards
What are the Macro objectives
1-Economic Growth
2-Stable prices
3-Low Unemployment
4-Balanced balance of payments
5- Equality in the distribution of income and wealth
6-Balanced budget
7-Protection of the environment
What is the circular flow of income
The circular flow of income shows the flow of goods and services, Money and factors of production between firms and households
Define injections
Money going into the circular flow of income
Define Leakages
Money flowing out of the circular flow of income.
Aggregate Demand
Total demand for goods and services in an economy.
Which External demand factors is made up in an economy
Consumption 65%
Investment 10-15%
Government Spending
Net Exports
What are the elements which affect Consumption in the economy
Real disposable income (RDI)
Wealth
Consumer confidence
Interest Rates
Age structure of the population
Inflation
Explain how RDI may affect consumption in the economy and why your explanation may not hold
RDI increases=consumption increases
Consumption increases=Aggregate demand Increases
Some income is saved
During periods of high inflation luxuries will see a fall in demand
Explain how wealth may affect consumption in the economy and why your explanation may not hold
Assets—> House, saving, gold
Wealth effect- As asset prices increase people feel richer and they spend more =consumption Increases
People may prefer investing
Some people may not be psychologically affected by the wealth effect
Explain how consumer confidednce may affect consumption in the economy and why your explanation may not hold
Confidence increases = Consumption increases = Aggregate demand increases
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Some may not be confident
If interest rates are going up people may choose to save instead of spend
Household salaries may fall making people reluctant to spend
What are interest rates
The reward of saving
The cost of borrowing
Explain how interest rates may affect consumption in the economy and why your explanation may not hold
If the base rates increase = Commercial banks increase Interest rates = Pass it onto consumers Who will save more money / borrow less, decreasing consumption.
Commercial banks may not pass on the interest rates
Not all households will eb affected especially the rich household
Explain how Age structure may affect consumption in the economy and why your explanation may not hold
Middle age people save
Young people spend
Old people spend
Old people may save money to pass onto their children
Explain how inflation may affect consumption in the economy and why your explanation may not hold
-Average increase in price level across the economy
-People will cut back on luxuries but spend the same on necessities
Hyperinflation may lead to people spending more
Define Marginal propensity to Consume (MPC)
The change in Consumption from a change in income
What is the formula for Marginal propensity to consume (MPC)
Define Marginal propensity to save (MPS)
The change in savings from a change in income
What are the factors which affect the Volume of saving in the economy
RDI
Interest rates
Confidence
Government policies
Age structure
Access to banks
How does RDI affect saving in the economy and why might your explanation not hold
Higher disposable income means savings increase therefore consumption and aggregate demand decreases
Some may choose to spend the wealth affect
You can spend and save at the same time
How does Interest rates affect saving in the economy and why might your explanation not hold
High interest rates = Greater saving
Some people may choose to spend especially the rich
How does Confidence affect saving in the economy and why might your explanation not hold
Higher confidence levels = less saving and more spending therefore consumption increases
The rich won’t be affected
This will only have an affect on some people, some may save as they are optimistic about the future
How does Government policies affect saving in the economy and why might your explanation not hold
Some countries such as the UK will provide incentives for people to save e.g. pensions and benefits fog the old
Some may choose not to save instead they do leisure activities
How does age structure affect saving in the economy and why might your explanation not hold
Middle age people save
Young people spend
Old people spend
Old people may save in order to pass down money to their children in the future
How does Access to Banks affect saving in the economy and why might your explanation not hold
If access to banks increases = savings will increase = Consumption decreases
If you have access some may spend especially the rich
Some people may save money in their homes
Which factors affect investment in the Economy
-Economic growth/Income
-Business confidence
-Profit levels
-Corporation tax
-Interest rates
-Capacity utilisation
-Demand for exports
How can Economic Growth/Income affect Investment in an economy and why might your explanation not hold
Economic growth increases=Consumption increases=Aggregate Demand increases=Supply demand increases
Businesses may choose to pay dividends instead of investing
There may not be enough capital
Some may choose to save instead of purchase goods
How can Business confidence affect Investment in an economy and why might your explanation not hold
Business confidence increases = Consumer confidence Increases = Investment increases
Businesses may have the wrong information about the future
Confidence Levels are volatile
How can Profit Levels affect Investment in an economy and why might your explanation not hold
Profit Levels increases=Investment Increases
Investment opportunity may not be there
Businesses may pay off dividends
Some businesses may not have the main goal to make profit
How can Corporation tax affect Investment in an economy and why might your explanation not hold
Tax increases = investment decreases
UK corporation tax=25%
if confidence is high businesses may still choose to invest
How can Capacity Utilisation affect Investment in an economy and why might your explanation not hold
Capacity Utilisation means how much of a factories production is currently being Utilised
If the Capacity Utilisation is full=Investment on capital goods increases
Some companies might be confident about future demand and may choose to invest in capital goods beforehand
How can Demand for Exports affect Investment in an economy and why might your explanation not hold
Demand for exports increases=Investment Increases
Some governments wont be able to handle the demand therefore there is no reason to invest
Political relations may be poor
What factors influence Government Spending
-Level of economic activity
-Economic Objectives
-Political situations
How can The Level of Economic Activity affect Government Spending and why might your explanation not hold?
A greater Level of Economic activity means more tax therefore the Government is more likely to spend more money
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Corruption may affect Government Spending
Some Governments don’t collect taxes
How can Economic Objectives affect Government Spending and why might your explanation not hold?
The Government would increase their Spending if Economic Objectives aren’t being met
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Corruption
How can the Political Situation of a country affect Government Spending and why might your explanation not hold?
If there is a war the government would spend more on defense
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Even in times of war, governments may face resource constraints that limit their ability to significantly increase defense spending.
What factors influence how much money the government spends on healthcare
Access to Finance
Health crisis
Ageing population
