macro Flashcards
aggregate demand
value of total demand for all goods and services in the economy for a time period at all price levels
difference between gdp and ad
gdp is the value of actual expenditure over the yr but ad is the planned expenditure within a given time period at a general price level
beliefs of the monetarist model [3]
- government interventions often destabilise more than they help
- central bank should be bound to fixed rules in conducting monetary policy
- diff between short run and long run
gdp definition
total market values of all final goods and services produced inside the economy in a period of time
gni
total income received by residents of a country. regardless of where the factors are located
real gdp
total market values of all final goods and services produced inside the economy in a period of time accounting inflation as well
sustainability
situation that we can meet the needs of the current generation without compromising the needs of the future generation
infrastructure
large scale of public system provided by the government to increase productivity
investment
expense spent by the firms to buy capitals
business confidence
expectations of firms to future profit
consumer confidence
expectations of households to future income
foreign direct investment
long term investment from the multinational cooperations from the foreign economy to the hosting economy
what + when sticky in monetarist
wages and factor prices
short run
m: why output increase when price level increase
firms earn more profit so produce more
factors that shift the sras curve
any factors that affect the cost of production
as definition
total planned national output being produced at different price levels
m: why are factor prices not perfectly flexible with output prices
contracts and trade unions
so the percentage change in factor price is less than the percentage change in price level
monetarist long run
total market value of all locally produced goods and services provided by firms at different price levels, when the factor prices are perfectly flexible with the output prices
what causes movement along the sras or lras
changes in price level
what causes shift the lras
factors that increase the production capacity of the economy
why is the ad curve downward sloping
- wealth effect
- interest rate effect
- exchange rate effect
details of the wealth effect
- pl decrease
- purchasing power
- c so change in ad
details of interest rate effect
- pl decrease
- save more
- more funds available in bank for borrowing
decrease interest rate to attract borrowing - c + i increase so ad increase
details of exchange rate effect
- pl decrease
- pl of exports decrease, imports increase COMPARATIVELY
- more exports fewer imports
- net export increase so ad increase
what causes shift in ad curve
any changes in any of the ad components
C, I, G, NX
what causes movement along the ad curve
change in price level
what causes G to increase [2]
- expansionary fiscal policy
- expansionary monetary policy
what causes net exports to increase [4]
- local currency depreciates (exports cheaper)
- price level of foreign country increases (exports cheaper to them)
- foreign country gdp increase (exports increase, imports constant)
- local trade barrier (import decrease)
deflationary gap
when output equilibrium is below the optimal output
when does deflationary gap occur
recession
why does deflationary gap occur
not enough ad in the economy to make it worthwhile for the firms to produce at potential output
inflationary gap
when the equilibrium output is greater than the optimal output
when does the inflationary gap occur
inflation
explanation for the deflationary gap [6]
- excess supply of factors
- pressure for the factor prices to decrease
- production cost decrease
- sras increase
- pl decrease and output increase
- long run equilibrium achieved
explanation for inflationary gap [6]
long run: excess demand of factors
- pressure for factor price to increase
- sras decrease
- pl increase and output decrease
- long run equilibrium achieved
lras what does it show
- full employment
- optimal and stable output an economy can get, leaving aside the price level
when will government intervension be helpful in monetarist
when the economy is not at its potential output
(under or over producing)
m: changes in ad short or long
short run output fluctuations
- will self adjust
monetarist: changes to ad on lras
ineffective in promoting economic growth but can only lead to higher price level
best policy for monetarists
supply side policies so changes the lras and is permanent
k: recession
stuck in the deflationary gap bc hard for the economy to recover
assumptions in k [3]
- no diff between short run and long run
- downward rigidity of factor price
- firms prefer cutting workforce than cutting wages
why is there a downward rigidity of factor price in k [3]
- worker’s morale
- contracts
- trade union
why are production prices sticky
avoid reducing profits
1st section in k [7]
- low real gdp
- recession
- large amount of spare capacity
- high unemployment
- low degree of resource employment
- high unemployment
- pl constant bc firms dont need to attract workers
2nd section in k [4]
- real gdp increases with price level
- decreasing amount of spare capacity
- increasing degree of resource employment
- extra factors of production is needed→ resources rise when more output is produced
section 3 in k [4]
- real GDP is maximised
- no spare capacity
- full degree of resource employment
- any attempts to increase output → rapid increase in price level
explanation of sustained deflationary gap [5]
- excess supply of factors because of downward rigid of factor price
- factor price cant decrease
- production cost cant decrease automatically
- Y equilibrium is sucked below Yf
- deflationary gap sustained
solutions for deflationary gap in k
- expansionary monetary policy
- expansionary fiscal policy
so AD increase
factors that causes k: as to shift
- quantity of factors
- quality of factors
factors that affect consumer expenditure (C) [6]
- consumer confidence
- interest rates
- wealth
- income taxes
- level of household indebtedness
- expectations of future price level
factors that affect investment (I) [5]
- interest rates
- business confidence
- technology
- business taxes
- level of corporate indebtedness
factors that affect government expenditure (G) [2]
- political priorities
- economic priorities
factors that effect net export (NX) [3]
- income of trading partners
- exchange rates
- trade policies
factors that shifts the SRAS [2]
- cost of factors of production
- indirect taxes
factors that shift LRAS (monetarist) AS (keynesian) (4)
- quantity of FOPs
- quality of FOPs
- changes in efficiency
- changes in institutions
what is unemployment at full employment equilibrium equal to
natural rate of unemployment
expenditure method
value of all spending on the final goods and services in the economy
C + I + G + NX
gdp
market value of all final goods and services produced in an economy over a time period
output method
the value of all final goods and services provided by the economy
- final goods used to avoid the issue of double counting
income method
add up all income earned by the factors of production
gni
total income received by residents within the country, regardless of where the factors are located
gni eq based on gdp
gdp + income from abroad - income paid abroad
nominal gdp
measured using the current market prices
real gdp
measured using constant prices
limitations of gdp/gni
- cant accurately measure the true value of output
- technological advances over time
- doesnt take into account different price levels when making comparisons between countries
- cant accurately measure economic well being
alternatives measures of well being
- OECD better life index
- happiness index
- happy planet index
ways to measure happiness
- real gdp per capita
- social support
- health life expectancy
- freedom to make life choices
- generosity
recession
2 consecutive sessions of negative gdp
leakages + egs
money flowing out of the circular flow of income
- savings
- tax
- imports
injections + egs
money flowing in circular flow of income
- borrow for investments
- government expenditure
- export
green gdp
index of economic growth while considering the environmental consequences of the economic growth factored in
difficulties in measuring unemployment [4]
- hidden unemployment
- discouraged workers (technically doesnt count cuz not actively seeking for a job) - underestimation
- part time workers, can be further utilised - overestimation
- informal sectors - averaged over the entire population and not different population groups in a society
- regional, gender, ethnic, age disparities
consequences of unemployment
- personal- loss of income, mental issues, divorce
- government- less tax revenue, increase government expenditure
- social cost- increase crime rate
- economy- output decreases
natural unemployments
- frictional
- seasonal
- structural
unnatural unemployment
cyclical
solution for natural unemployment
supply side policies
solution for cyclical unemployment
demand side policies
inflation
sustained increase in the general price level for goods and services in an economy
disinflation
inflation improving but still persisting
cpi
measures cost of living for a typical household in an economy
limitations of cpi [6]
- only based on the same baskets of goods and services
- variations in tastes due to cultural and regional factors
- consumers substitution when price changes
- fixed basket of goods and services cannot account for new and old products
- price level doesn reflect the quality of goods and services
- goods with volatile price distorting the entire figure
stakeholders to inflation
workers
gain: firms give them pay rise because inflation increases the cost of living
loss: sticky wages, contract forbids a pay rise (fixed income earners) percentage change of pay rise is lower than percentage of inflation
savers
gain: increase in interest rates, more money received from saving interest % inflation %
loss: the purchasing power of their savings would decrease due to inflation
lenders
gain: higher interest rates, they are paying less to the bank Loss: more people would rather save as there is a price increase
loss: value of money decrease if borrower return the same amount of money
borrowers
employers (i.e. people who pay workersʼ salaries)
gain: no pay rise, value of money decrease, less real cost of production
loss: Costs of production increase because of inflation, and this includes the aforementioned increased wages for workers. They have to either cut workers, cut corners or reduce supply in order to compensate
consequences of inflation
- uncertainty
- consumers and producers save money just in case - menu costs
- reduced international competitiveness
menu costs
cost spent on updating the catalogues
deflation consequences [5]
- redistribution of income
- uncertainty
- menu costs
- inefficient resource allocation
- deflationary spiral
production possibility curve
shows combinations of maximum output that can be produced by an economy with fixed resources and technology
shift in PPC
- quality of goods
- quantity of goods
equality
each individual or group of people is given the same resources or opportunities
equity
recognises that each person has different circumstances and allocates the exact resources and opportunities needed to reach an equal outcome
absolute poverty
poeple with income level less than extreme poverty line and cant afford basic physical needs
relative poverty
compares income of individuals with median incomes
indicator of poverty
- international poverty lines
- minimum income standards
- multidimensional poverty index
difficulty in measuring poverty [4]
- definition of poverty is inconsistent
- indicators use different criteria for measurement
- doesnt take into account wealth, saving, investments
- over/underestimating to achieve different purposes (asking for financial aid)
causes of poverty
- limited income
- inequality of opportunity
- different levels of human capital
- different levels of resource ownership
- unequal status and power
- discrimination
- government tax and policies
- globalisation and technological change
consequences of poverty [5]
- low living standards
- low economic growth
- lack of education
- lack of healthcare
- high crime rate
methods to redistribute income
- transfer payments
- government provision
- government interventions- price control
- universal basic income
- policies to reduce discrimination
- progressive direct tax
transfer payments
payments made by the government for which no goods and services are exchanged, such as unemployment benefits and subsidies
