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Economics > macro > Flashcards

macro Flashcards

1
Q

What are the macroeconomic objectives?

A
  • sustainable economic growth
  • low and stable unemployment
  • low and stable inflation (2% +/-1%)
  • balance of payments acceptable
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2
Q

What is monetary policy?

A

A change in economic variables to alter the flow of money e.g. interest rates, exchange rates, QE, helicopter money etc

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3
Q

What is fiscal policy?

A

Taxation and gov spending

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4
Q

What is the circular flow of income?

A

The model of the economy which shows the flow of goods, services and payments around the economy

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5
Q

What are injections in the circular flow of income?

A
  • investment
  • exports
  • gov spending
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6
Q

What are leakages in the circular flow of income?

A
  • savings
  • imports
  • taxation
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7
Q

What are the key uses of national income data?

A
  • rate of economic growth
  • living standards
  • changes in distribution of income
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8
Q

What is GDP?

A

Measures the total value of national output at market prices produced in a given time period (Gross Domestic Product)

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9
Q

What is a nominal value?

A

Monetary values for data not adjusted for inflation

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10
Q

What is a real value?

A

Adjusted for inflation and prices are held at a level of chosen base year

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11
Q

What is PPP?

A

Purchasing Power Parity- measures how many units of one country’s currency are needed to but the same basket of goods that can be bought with another country’s currency

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12
Q

What is income?

A

The flow of money going to the Fops- wages, profits, dividends

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13
Q

What is wealth?

A

Stock/store of money and assets- savings, shares, property, bonds

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14
Q

How much of GDP is spent on consumption?

A

61% household consumption

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15
Q

How much of GDP is spent on government spending?

A

23%

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16
Q

How much of GDP is spent on investment?

A

15%

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17
Q

What are durable goods?

A

Consumed over a long period of time e.g. TV or a car

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18
Q

What are non-durable goods?

A

Consumed almost immediately e.g. ice cream or washing powder

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19
Q

What is the Marginal Propensity to Consume?

A

How much extra is spent on on consumption as a result of receiving one extra £ of income

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20
Q

What is the Marginal Propensity to Save?

A

How much extra is saved as a result of receiving one extra £ of income

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21
Q

What is net investment?

A

Gross investment- depreciation

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22
Q

What is the accelerator theory?

A

If you increase I, AD goes up and economic growth goes up too, business and consumer confidence goes up and then I goes up again, creating a cycle

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23
Q

What is current spending in terms of gov spending?

A

E.g. wages of teachers/public sector workers

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24
Q

What is capital spending in terms of gov spending?

A

E.g. spending on building social housing, roads etc

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25
Q

Does AD slope upwards or downwards?

A

Downwards- as PL rises, then the real value of income falls, rise in the PL will make imports cheaper

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26
Q

What is the multiplier?

A

States that any £1 injection into the economy will cause an increase in national income greater than £1 and circulate around the economy until it leaks out

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27
Q

How is the multiplier calculated?

A

1/MPW= 1/1-MPC= 1/MPS

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28
Q

What causes SRAS to shift?

A
  • changes in wages
  • productivity
  • VAT
  • subsidies
  • supply shocks (Hurricanes/ Natural disasters)
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29
Q

Why is LRAS fixed and in a straight line?

A

As there is a limit on how much a firm can supply because of supply constraints

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30
Q

What are examples of supply side policies that cause LRAS to shift?

A
  • technological advances
  • productivity
  • education and skills
  • active workers
  • factor mobility
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31
Q

What are causes of an inward shift in LRAS?

A
  • natural disasters
  • outward labour migration
  • trend decline in productivity
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32
Q

What are external supply side shocks?

A
  • energy
  • raw materials
  • commodities
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33
Q

What happens in the Keynesian AD diagram when AS becomes vertical?

A

The economy has reached full employment levels and a further increase would cause inflationary pressures

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34
Q

What are examples of demand side shocks?

A
  • housing market bubbles
  • stock market crash
  • global recession
  • rises/decreases in interest rates
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35
Q

What are examples of supply side shocks?

A
  • A sudden rise/fall in commodity prices
  • sudden increase/decrease in TU action
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36
Q

Effects of economic growth in the SR?

A
  • interest rates
  • fiscal policy
  • commodity prices
  • exchange rates
  • trading conditions
  • confidence
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37
Q

Causes of economic growth in the LR?

A
  • investment
  • productivity
  • labour supply
  • research
  • innovation
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38
Q

What are the benefits of economic growth?

A
  • people have all the basics
  • housing standards improve
  • literacy improves
  • health improves- therefore life expectancy improves too
  • jobs created
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39
Q

What are the problems with economic growth?

A
  • sometimes is unsustainable- forces gov to step in
  • inflation
  • gov debt
  • inequality
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40
Q

What is inflation?

A

A sustained rise in the general PL across an economy

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41
Q

What is deflation?

A

General decline in prices

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42
Q

What is disinfaltion?

A

Prices are rising but at a decreasing level

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43
Q

What is hyperinflation?

A

When inflation is very high e.g. Germany in 1923 with 29500% inflation

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44
Q

What is reflation?

A

An economies GDP grows following a recession

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45
Q

What is stagflation?

A

Inflation is rising at the same time the economy is in recession

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46
Q

What are shoe leather costs?

A

Costs that people incur to minimise their cash holding during times of high inflation

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47
Q

What are menu costs?

A

Costs a business faces when it decided to change it’s prices

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48
Q

What is the definition of economically inactive?

A

People of a working age who are not employed or seeking employment

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49
Q

What is underemployment?

A

Workers do not have as much work as they would like or where a worker has a full time job without fully utilising their skills e.g. a brain surgeon working in Aldi

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50
Q

What is unemployment?

A

People who are not employed but actively seeking employment

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51
Q

What are measures of unemployment?

A

LFS (labour force survey), claimant count (unemployed and claiming job seekers allowance)

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52
Q

What is the equation for the employment rate?

A

Employment rate= those in work/ population of working age

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53
Q

What is the equation for the unemployment rate?

A

Unemployment rate= unemployed/ labour force

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54
Q

What is frictional unemployment?

A

Workers that are in between jobs

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55
Q

What is seasonal unemployment?

A

Specific times of year or a change in season leads to this type of unemployment

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56
Q

What is structural unemployment?

A

Regional unemployment, Sectoral unemployment, technological unemployment

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57
Q

What is cyclical unemployment?

A

Unemployment caused by job loss in recessions

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58
Q

What is classical (real wage) unemployment?

A

Due to wages increasing (employers can’t pay everyone a higher wage so therefore they let people go)

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59
Q

What are the costs of unemployment?

A

Loss of income, medical illness, increased suicide risk, increased benefit payments, increased cost to NHS

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60
Q

What are policies to reduce unemployment?

A
  • cut interest rates
  • cut tax and higher spending
  • geographical subsidies
  • remove labour market regulations
  • higher/lower min wage
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61
Q

What does the SR Phillip’s curve show?

A

A trade off between the inflation rate and unemployment

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62
Q

What does the LR Phillip’s curve show?

A

No trade off between inflation and unemployment- only believed by neoclassicals

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63
Q

What does globalisation refer to?

A
  • migration
  • technology
  • foreign ownership
  • proportion of national output that is traded abroad
64
Q

When is there a surplus on the balance of trade?

A

When X is greater than M

65
Q

What is meant by the current account?

A

The value of goods and services exported - the value of goods and services imported + net property income from abroad

66
Q

What are financial and capital accounts?

A

Show the flows of money between the UK and other countries

67
Q

What is meant by a government deficit?

A

Gov spending is higher than the tax revenue meaning some money has to be borrowed

68
Q

What is the national debt?

A

Net total of all the annual deficits and surpluses

69
Q

What is direct tax?

A

Levied directly on the individuals e.g. income tax

70
Q

What is indirect tax?

A

Levied on goods and services meaning if you don’t buy them, you don’t pay the tax, also levied through companies e.g. VAT

71
Q

What is meant by a progressive tax?

A

The proportion of income paid in taxed rises as income rises

72
Q

What is meant by regressive tax?

A

The proportion of income paid in tax decreases as income increases

73
Q

What is meant by Proportional tax?

A

The proportion of income paid in tax remains constant as income rises

74
Q

What is meant by pro-cyclical tax?

A

Tax revenue rises in booms and falls in a recession

75
Q

What is a structural deficit?

A

Gov have a deficit over the cycle period provided the size of the deficit is equal to capital expenditure by gov

76
Q

What is QE?

A

BoE created electronic money and used it to buy gov bonds (IOUs) from the private sector (mainly pension funds)- private sector then had money instead of bonds to spend into economy (bought shares, houses/ invested) and by buying bond the interest rate paid on bonds to go down encouraging lending/borrowing

77
Q

What was the positive money estimated regarding QE?

A

Around 8p of every £1 of QE found it’s way into the economy

78
Q

What are the downsides of QE?

A
  • creates inequality
  • may be impossible to reverse
79
Q

What is a liquidity trap?

A

Following GFC, central banks reduced the interest rates dramatically with did not stimulate demand (due to high amounts of debt and low animal spirits- they were unsure of the future so saved)

80
Q

How can the gov affect exchange rates?

A
  • buying and selling currency
  • changing interest rates to cause hot money currency flows
81
Q

What are market based supply side policies?

A

Aim to improve the efficiency of markets by making them fully free markets by removing any barriers that exist meaning reducing the role of the state

82
Q

What does the Laffer curve show?

A

Free market economists argue that high marginal tax rates provide a strong disincentive to work

83
Q

What are interventionist based supply side policies?

A

Aim to make free markets more efficient by correcting the market failures they believe exist meaning the government should intervene more

84
Q

What does it mean by increasing incentives (a supply side policy)?

A
  • Reducing income tax
  • Reducing benefits
  • subsidising workers
  • R&D
85
Q

How can competition be promoted (a supply side policy)?

A
  • privatisation
  • deregulation
  • competition policy
86
Q

What are supply side policies that aim to reform the labour market?

A
  • improve mobility
  • reduce TU power
  • migration
87
Q

Which supply side policies improve the skills of labour?

A
  • quality education and training
  • immigration of skilled workers
88
Q

How are countries classified?

A
  • High and low income
  • Developed, developing emerging
89
Q

What are the BRICS countries?

A

Brazil, Russia, India, China, South Africa

90
Q

What are the characteristics of developing countries?

A
  • low per capita incomes
  • low amounts of human capital
  • poor health
  • high population
  • high unemployment
91
Q

What is the difference between economic growth and economic development?

A
  • EG- (GDP) increase in goods/services produced in an economy
  • ED- reduction/elimination of poverty, unemployment and inequality
92
Q

What is HDI?

A

Human Development index- has 3 indicators which are health, education and income (score between 0-1 and the higher the better)

93
Q

What is IHDI?

A

Adds inequality as a fourth indicator to HDI

94
Q

What is the Harrod-Domar model?

A

States that increased savings leads to increased investment with leads to higher capital stocks leading to higher economic growth which then starts again by leading to increased savings

95
Q

What is FDI?

A

Foreign Direct Investment- investment by a private company into a private company in another country taking form of asset purchasing (company/factory) and is a long-term committed investment and no loan repayments are needed

96
Q

What is Green field FDI?

A

Setting up an entirely new operation

97
Q

What is brown field HDI?

A

Investing in an existing company

98
Q

What are the advantages of FDI?

A
  • Infrastructure improvement
  • capital deepening
  • more training
  • increase in technology
  • more competition
  • creates more jobs
99
Q

What are the disadvantages of FDI?

A
  • Inequality (captured by elites)
  • land grabs
  • limited job creation effects
100
Q

What are remittances?

A

Migrants send money home to relatives which creates significant invisible exports

101
Q

What are free market development strategies?

A
  • trade liberalisation
  • promote FDI
  • remove gov subsidies
  • Privatisation
  • free floating exchange rate
102
Q

What are interventionist development strategies?

A
  • trade protection
  • managed exchange rates
  • infrastructure development
  • state education
103
Q

What is the Lewis model?

A

Assumes industrial workers are more efficient than agricultural workers- gov should encourage industrialisation

104
Q

What is foreign aid?

A

Fills the savings gap and the trade gap and can be in the form of grants and loans

105
Q

What is the IMF?

A

Promote economic stability including the exchange rate and provides temp funding to countries in financial crisis

106
Q

What is the WTO?

A

The World Trade Organisation- promoted trade liberalisation and acts as a forum for international trade agreements to settle disagreements between members

107
Q

What would a fully globalised world look like?

A
  • free trade of goods and services
  • free movement of capital
  • free interchange of tech
108
Q

What are the causes of globalisation?

A
  • increased trade of goods and services
  • growth of multi national companies
  • increased foreign ownership of firms
109
Q

How does globalisation impact consumers?

A
  • increased choice
  • lower prices
  • increased global incomes
  • better quality of choices (specialisation)
110
Q

How does globalisation impact producers?

A
  • increased specialisation
  • tax avoidance
  • exploitation
111
Q

What is absolute advantage?

A

Countries should just specialise in producing what it is best at and trade with other countries with what they’re best at

112
Q

What is comparative advantage?

A

Able to produce a good/service at a lower opportunity cost than it’s trading partners

113
Q

What are the benefits of trade?

A
  • specialisation
  • EoS
  • lower prices
  • increased choice
  • innovation
114
Q

What are the costs of trade?

A
  • over specialisation
  • structural unemployment
  • risky
  • loss of culture
  • sovereignty
115
Q

What are the causes of TOT in the SR?

A
  • demand/supply of exports
  • relative inflation rates
  • exchange rates movements
116
Q

What are the causes of TOT in the LR?

A
  • rising incomes
  • productivity improvements
  • technological advance
117
Q

What are forms of protectionism?

A

Tariffs, quotas, subsidies, exchange rate manipulation

118
Q

Why do countries use protectionism?

A

Protect infant industries, protect jobs, prevent dumping, prevent unfair competition of cheap labour

119
Q

What is a tariff?

A

A tax imposed by a gov of a country on imports or export- it will cause domestic supply to increase from Q1 to Q3. Consumer surplus will decrease because of the higher prices, producer surplus will increase

120
Q

What are negatives of a tariff?

A
121
Q

What are the positives of a tariff?

A
122
Q

What is a quota?

A

Sets a physical limit on the quantity of a good that can be imported into a country. This will cause the S of domestic goods to increase because of the limit. Consumer surplus will be reduced because of the increase in P, Producer surplus will increase because they are supplying more at a higher price

123
Q

What are the negatives of quotas?

A

Economic welfare loss

124
Q

What are the positives of quotas?

A

More domestic supply

125
Q

What is a trading bloc?

A

A group of countries who have signed an agreement to reduce protectionist barriers between themselves

126
Q

What is a true customs union?

A

No custom posts, identical product standards, common currency

127
Q

What are the benefits of free trade?

A

Massive increase in consumer surplus

128
Q

What are the negatives of free trade?

A

Lose jobs (only Q2 produced domestically- lose Q2 to Q1)

129
Q

What are the advantages of being in the eurozone?

A
  • reduced exchange rate costs
  • more trade and EoS
  • increased FDI
  • price stability
  • price transparency
130
Q

What are the disadvantages of being in the eurozone?

A
  • transition costs
  • loss of monetary policy independence
  • inability to change the value of a currency
  • economic shocks
131
Q

What is trade creation?

A

Moving from a higher cost producer to a low cost producer which can be from joining a customs union

132
Q

What are the causes of trade creation?

A
  • structural unemployment
  • reducing social cohesion
  • increased crime
133
Q

What is the assumption made when discussing trade creation?

A

That neither country is initially in a customs unions

134
Q

What is trade diversion?

A

Movement from a low cost foreign producer to a high cost producer within a customs union

135
Q

What is an example of trade diversion?

A

A country enters a customs union and has to impose a tariff on what was previously the lowest cost producer who is not in a customs union

136
Q

What are criticisms of the WTO?

A
  • Rich countries exploit developing country workers
  • environmental damage
  • forces poor countries to lower trade barriers
  • gives rich the power to set rules
137
Q

What is the current account?

A

Payments related to the purchases of goods and services

138
Q

What is the capital account?

A

Flows of money for savings, speculation

139
Q

What is the financial account?

A

Flows of financial capital in and out and is split into FDI, portfolio investment and other investments

140
Q

What are international capital flows?

A
  • Speculators looking for quick profits
  • trade finance
  • banks operating across borders
  • FDI
  • individuals (remittances/holidays)
141
Q

What are the advantages of international capital flows?

A
  • economic growth
  • provides capital not available domestically
  • can lead to tech transfer
142
Q

What are the disadvantages of international capital flows?

A
  • potential systemic risk
  • potential for foreign ownership
  • encourages firms and govs to over borrow
143
Q

What is liquidity crisis?

A

A lack of cash, or assets that can be easily converted into cash across financial institutions

144
Q

What is a capital crisis?

A

There are not enough assets that can be turned into cash

145
Q

What is a financial crisis?

A

Can be liquidity or capital crisis and occur at a commercial bank level

146
Q

What is a default?

A

When a country refuses or cannot pay their debts

147
Q

What is debt restructuring?

A

Used by countries to avoid the risk of defaulting on existing debts and involves modifying terms to make debt more manageable like reducing interest rates or extended payback period

148
Q

If demand for the £ increases what does this mean?

A

People are buying the £ with the $ and the price in $ for £ will increase

149
Q

What would happen if the S of £ on the FOREX market was high?

A

The price of £ in terms of $ will increase

150
Q

What is a floating exchange rate?

A

Rates are determined by demand and supply of currencies

151
Q

What is a fixed exchange rate?

A

Value of one currency is fixed against another

152
Q

What are managed exchange rates?

A

Determined by free market forces but govs can intervene by buying foreign currency or selling currency reserves

153
Q

What is the Marshall-Lerner condition?

A

A fall in the value of the currency will cause an improvement in the current account of the BoPs where the combined PED of imports and exports is greater than 1

154
Q

What is the J curve?

A

Suggests PED of exports and imports is inelastic in the SR due to existing contracts and lack of knowledge

155
Q

What are the benefits of being internationally competitive?

A
  • current account surplus
  • international investment
  • employment
  • economic growth
  • wage growth
156
Q

What are gov policies that encourage competitiveness?

A
  • supply side policies
  • exchange rate policies
  • macro stability

Economics (6 decks)

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