Macro Flashcards
What are the macroeconomic objectives?
- balance of payments
- full employment
- low inflation
- economic growth
What is the trade off between unemployment and inflation?
An increase in AD causes higher real GDP therefore firms can employ more workers and unemployment falls. However, this can lead to an increase in inflationary pressure due to demand pull inflation
What does the Phillips curve show?
The trade off between inflation and unemployment
What is an unemployed person?
A person of working age, out of irk who is actively seeking work
What is the claimant count?
Measures unemployment by recording everybody claiming benefits
Why might the claimant count not be an accurate measurement of unemployment?
Generally underestimates unemployment as not everyone claims benefits
What is the labour force survey?
A way to measure unemployment by asking a selection of people if they feel they are unemployed
What does economically active mean?
People who are in work plus those seeking and available to work
What is economically inactive?
People of working age who have stopped an active search for paid work in the labour market
What is the natural rate of unemployment?
The rate of unemployment when the labour market is in equilibrium
What is real wage unemployment?
If wages are kept artificially high or are not able to fall the market equilibrium then the supply of labour would exceed the demand of labour therefore there would be more unemployment
What is cyclical unemployment?
The unemployment which is caused by changes in the economic cycle, economic upturn or downturn
What is seasonal unemployment?
Where workers are unemployed at certain times of the year when demand has decreased
What is frictional unemployment
The unemployment experienced by workers between leaving one job and starting another
What is structural unemployment?
Caused by a decline in a certain industry or occultation - usually, due to a change in consumer preferences or technological advances, or the availability of cheaper alternatives
How can a perfect labour market be achieved?
- greater quality and availability of job information
- increasing the flexibility of the labour market
- increasing the level of skills and education amongst the unemployed
- lowering benefits /reducing income tax
- increase labour mobility (occupational and geographical)
What are the costs of unemployment?
- less consumption
- extra demand on the nhs
- lower GDP
- more spending on benefits
- budget deficit
- Less tax revenue
- Welfare benefit tendency
- high poverty
Benefits of unemployment?
- increase in self-employed startups as an alternative to being unemployed
- increased leisure time
- pool of unemployed labour available to growing firms
- encouragement to gain skills + education
What factors affect consumption?
- amount of disposable income
- wealth effect
- household composition
- inflation
- interest rates
- consumer confidence
- availability of credit
What are sudden changes in the savings ratio an indicator of?
- future changes in spending and AD
- can indicate future inflation or deflation
- a rise in the savings ratio may indicate a fall in consumer confidence
- a fall in the savings ratio may indicate a rise in confidence and spending, which can trigger a rise in the price level
What is investment?
Spending by firms on capital goods
What is replacement investment?
Replaces capital goods that have been worn out
What is net investment?
New investment
What factors affect investment?
- tax
- interest rates
- business confidence
- availability of credit
- relative prices of capital compared to labour
- technology
What is the accelerator theory?
when there is a rise in national income, firms will spend more on investment. They do this in order to meet higher demand
What are the implications of the accelerator effect?
- investment tends to be more volatile than economic growth
- if GDP falls, investment spending can fall very significantly
- investment spending can fall even when GDP is rising
What is the multiplier?
When an initial injection in an economy causes a bigger final increase in national income
What determines the value of the multiplier?
- determined by the size of the savings ratio
what determines the value of the multiplier?
- determined by the size of the savings ratio
What is the downward (or reverse)multiplier?
A withdrawal of income from the circular flow which will lead to a downward multiplier effect
What factors affect government spending?
- Increasing tax means that the government has more money to spend
- if the economy is in a recession government spending increases to generate more output
- governments targets and political viewpoint can influence where the government spending is
What is an export?
Goods and services sold to foreigners
What are imports?
Goods and services bought from foreigners
What are the factors affecting exports and imports?
- income in the UK economy
- relative price/inflation of goods and services
- the exchange rate
- non-price factors / uk productivity
-degree of protectionism - state if the world economy / trading partners
Where can disposable income come from?
- wages
- salary
- benefits
- renting
- savings
- investments
What are the issues with comparing GDP over time?
- technology change makes it difficult to compare GDP over time
- due to technology some items may be higher quality but cost less than previous years
- some economic activity may not be measured
What are limitations of GDP / GDP per capita?
- no indication of how income is distributed in a country
- hard to measure shadow economy
- no indication of what money is spent on
- different countries include different things in GDP
- some goods and services are not given a financial value because they are done by volunteers
What is aggregate supply?
The total value of goods and services produced in an economy
What causes shifts in SRAS?
- cost of raw materials
- level of tax
- cost of labour
- productivity
- the exchange rate
What is long run aggregate supply?
The maximum output that an economy can produce when using all its factors o production
What factors shift LRAS?
- productivity
- institutional structure of the economy
- economic attitudes and incentives
- quantity and quality of factors of production
- enterprise
- factor mobility
- technology
Which government policies boost productivity?
- privatisation
- deregulation
- reducing the power of trade union
- increasing funding to schools and universities
-giving subsidies to firms to produce more - improved healthcare means workers will take less time off
- improved telecommunications infrastructure
What causes an increase in short run economic growth?
- increased disposable income
- increase in government spending
- increase in consumption
- increase in investments
- decrease in tax
- increase in consumer confidence
- fall in interest rates
- rising house prices
- fall in value of currency
- increased real wages
What factors impact long run growth?
- increase in productivity
- advancements in technology
- factor mobility
- increased capital
- discovering new raw materials
- low inflation
- increased investment
- greater confidence in the future of the economy
- increased working population
- low inflation
Benefits of economic growth
- potential environmental benefits
- higher living standards
- the accelerator effect of growth on capital investment
- less unemployment
- growing income and consumption
- ## greater business confidence
Costs of economic growth
- environmental degradation
- income inequality
- potential for economic instability
- growing trade deficit
What are the causes of cyclical instability?
- volatile commodity prices
- exchange rate shocks
- political issues
- natural disasters/ impacts
- many demand side shocks
What are demand side causes of a recession?
- less disposable income due to unemployment
- falling consumer confidence
- lack of credit
- high interest rates
- contractionary fiscal policy
What is economic growth?
An increase in the production of goods and services in an economy
What is inflation?
A sustained increase in the average price level of a country
What is disinflation?
A slowdown in the rate of inflation
What is demand pull inflation?
Occurs when there is excess aggregate demand in the economy or market
What are the main cause of demand pull inflation?
- lower interest rates
- exchange rate going down
- higher wage rates
- high growth in uk export markets
- rising consumer confidence
What is cost push inflation?
Occurs when costs of production are rising
What are the main causes of cost push inflation?
- Higher capital costs
- higher taxes
- Increased labour costs
- increased cost of raw materials
What are the consequences of inflation?
- more unemployment
- real value of debt decreases
- interest rates increase to combat inflation
- wages unlikely to increase at the same rate as inflation
- less disposable income
- value of assets will increase
What is the quantity theory of money?
Theory of inflation, state that inflation is caused by a persistent increase in the supply of money
What are the government’s macroeconomic objectives?
- low inflation
- economic growth
- full employment
- balance of payments
What is the UK’s inflation target?
2%
What are withdrawals in the circular flow of income?
- tax
- imports
- saving
What are the injections in the circular flow of income?
- governments
- exports
- investments
What is a negative output gap?
The difference between the level of actual output and trend output when actual output is below trend output
When in the economic cycle do negative output gaps occur?
During a recession
What is a positive output gap?
The difference between the level of actual output and trend output when actual output is above trend output
What is the difficulty in measuring output gaps?
Difficult to measure potential output
What is spare capacity?
When a business is not making full use of its available capacity
What is monetary policy?
Involves the central bank taking action to influence interest rates, the supply of money and credit and the exchange rate
What is expansionary monetary policy?
Uses lower interest rates to increase AD and shift it to the right
What is contractionary monetary policy?
Uses higher interest rates to decrease AD and to shift the AD curve to the left
What is forward guidance?
Attempts to send signal to financial markets, businesses and individuals, about the Bank of England’s interest rate policy in the months and years ahead, so that economic agents are not surprised by a sudden and unexpected change in policy
What is quantitative easing?
Is when the Bank of England buys assets, usually government bonds, with money that the Bank has created electronically
What is credit?
The ability of an individual or organisation to obtain goods or services before payment, based on an agreement to pay later