Macro Flashcards

Question

Limitations of the multiplier effect

Answer 1

Model is very simplified Ideal for economies with spare capacity and not at full employment

Answer 2

PV ( cash inflows ) - PV ( cash outflows ) Metric to analyse the profitability of a projected investment

Answer 3

One should only invest into project with a positive net present value

Answer 4

MNPV = MR - MC / ( 1+ R ) ^a Measure of additional value on NPV that a small change in scale or characteristics bring

Answer 5

phenomenon that a small change in demand for consumer goods can lead to much larger change in demand for capital goods

Answer 6

1) increase in demand for consumer goods 2) factors reach full capacity 3) firms invest in capital goods ( machinery ) to increase capacity lead to increase in demand for capital goods - Capital goods a) increase in the rate of economic growth will cause a correspondingly larger increase in the level of investment b) investments become an endogenous variable when an economy moves to full capacity

Answer 7

Total market value of all the finished goods/services . produced in a country within a specific period of 4 time (usually one year) Formula: GDP=PA ×QA +PB ×QB +...

Answer 8

workers contribute to the economy they work in and only includes items that are sold legally

Answer 9

Output method: GDP = sum of all goods/services - using gross value added with value added = firms revenue - cost of purchases Income method: GDP = sum of all incomes earned by individuals and businesses Expenditure method: GDP = sum of all expenditures on goods/services = C + I + G + NX expenditure is most common

Answer 10

unadjusted gdp formula: sum ( quantity of each product ) x ( current year price of each product )

Answer 11

inflation adjusted gdp fomrula: sum ( quantity of each product ) x ( base year price of each product ) most accurate

Answer 12

GDP / population

Answer 13

unrecorded economic activities ( informal sector ) non monetary productive activites ( partenting ) subsistence farming ( farming for self consumption ) corruption & overvaluation (. artificially high contract prices )

Answer 14

Use as socio-economic performance indicator National Income does not equal Welfare Wellbeing encompasses more than material consumption

Answer 15

GNI = Total amount of money earned by a nations people and businesses ( Measure of a nations wealth GNI = GDP + net income from abroad net income from abroad = income from abroad - income sent abroad

Answer 16

NNI = gross national income accounted for depreciation of fixed capital assets NNI = GNI - depretation

Answer 17

NDP = GDP accounted for depreciation of fixed capital assets NDP = GDP - depreciation

Answer 18

Inflation = Sustained increase in the general price level of goods/services in an economy over a period of time Inflation rate: CPI y2 - CPI 1 / CPI 1

Answer 19

Price-push inflation Cost-push inflation Demand-pull inflation

Answer 20

clarification for economic growth sources ( change in production vs change in price levels ) policy informed decision making ( guide policy makers ) accurate comparisions over time accurate international comparisions

Answer 21

overall measure of the price level in the economy ( how much prices changed from the base year to the current year )

Answer 22

GDP deflator = nominal gdp / real gdp volume x price / volume = price Interpretation: Increase; inflation No change; no inflation decrease; deflation

Answer 23

Measure of the average change in prices paid by urban consumers for a basekt of goods/services over time

Answer 24

cost of basket current year / cost of basket base year interpretation: increase; inflation no change; no inflation decrease; deflation

Answer 25

GDP Deflator and Consumer Price Index can differ due to differences in scope, coverage, methodology, and more. For instance, higher oil prices have different impacts because oil is weighted heavier in CPI than in GDP Deflator.

Answer 26

Purchasing Power Parity = PPP = Comparative measure of currency strength to reflect the relative purchasing power of different currencies

Answer 27

Keynesian cross: = 45 Theory = Model that focuses on the relationship between Aggregate Expenditure (demand) and Real GDP (income) objectives: -determination of the equilibrium -determination of inflationary and deflationary gaps ( to adjust monetary and fiscal policy ) visualisation: slide 68

Answer 28

Relation between demand and supply: aggregate expenditure ( demand ) > output of dull employment consequence: upward pressure on prices --> potentional inflation Combat measures: -decrease in gov spending ( lower G ) -Increase in tax ( higher t --> lower c ) visulation: slide 68

Answer 29

Relation between demand and supply: Aggregate Expenditure (demand) < Output at Full Employment (supply) consequences: Downward pressure on prices --> potentional deflation combat measures: - increase in gov spending ( lower g ) - decrease in taxes ( higher t --> lower c ) visualasation: slide 68

Answer 30

Full employment: Everyone who wants to work either has a job or is transitioning between jobs Aggregate Demand of Labour = Aggregate Supply of Labour

Answer 31

Unemployment: Difference between aggregate demand of labour and aggregate supply of labour Aggregate Demand of Labour < Aggregate Supply of Labour

Answer 32

slide 70 In the short run there is an inverse relationship between inflation and unemployment workers have low bargaining power in case of high employment due to a surplus of labour a low barganing power leads to lower wages hence low prices, which results in low inflation In case of low unemployment the opposite effects happen

Answer 33

classic view of lras vs keynesian view of lras slide 70

Answer 34

The simple Keynesian model assumes that adjustments to excess or deficient aggregate demand will primarily occur through changes in output and employment, especially when there's spare capacity. In cases of excess demand, there will be some price increases, but the main adjustment occurs in expanding output and employment. In contrast, when an economy is near full employment and capacity, price increases dominate as there is limited capacity to expand output. This can lead to wage and salary inflation, and prices and wages can chase each other.

Answer 35

= Course of action that is intended to influence or control the behaviour of the economy --> Monetary and fiscal policy

Answer 36

= Government decisions on spending, welfare payments and taxation

Answer 37

MEASURES spending: 1) avoid government spending: 2) no money injection into the economy: 3) no Increase in aggregate demand 4) aggregate demand does not exceed aggregate supply 5) mitigation of inflationary gap welfare payments: 1) avoid welfare payments 2) no money injection into the economy 3) no increase in aggregate demand 4) aggregate demand does not exceed aggregate supply 5) mitigation of inflationary gap Taxation: 1) increase in taxation 2) more money withdrawn from the economy 3) decrease in aggregate demand 4) aggregate demand does not exceed aggregate supply 5) mitigation of inflationary gap

Answer 38

MEASURES spending: 1) ( full employment, economy is a max aggreagte supply ) 2) Government spending 3) money injection into the economy 4) increase in aggregate demand 5) aggregate demand exceeds aggregate supply 6) generation of inflationary gap Welfare payments: 1) full employmnet, economy is at max aggregate supply 2) increase in welfare payments 3) money injection into the economy 4) increase in aggregate demand 5) aggregate demand exceeds aggregate supply 6) generation of inflationary gap Taxation: 1) full employment, max aggregate supply 2) reduction in taxation 3) less money withdrawn from the economy 4) increase in aggregate demand 5) aggregate demand exceeds aggregate supply 6) generation of inflationary gap

Answer 39

Spending: 1) avoid government spending 2) no multipplier effect 3) no increase in real output welfare: 1) avoid welfare payments 2) no increase in consumption 3) no increase in real output Taxation: 1) increase in taxation 2) decrease in consumption 3) no increase in real output

Answer 40

spending: 1) Gov spending 2) multiplier effect 3) relatively larger increase in real output welfare: 1) increase welfare payments 2) increase in consumption 3) increase in real output Taxation: 1) decrease in taxation 2) increase in consumption 3) increase in real output

Answer 41

1) lower incomes 2) lower taxation 3) increase in disposable incomes 4) increase in spending

Answer 42

1) higher incomes 2) higher taxation 3) reduction in disposable incomes 4) less inflationary pressure

Answer 43

1) no welfare payments 2) no increasre in disposable income 3) less inflationary pressure

Answer 44

1) increase in welfare payments 2) increse in disposable incomes 3) increase in spending

Answer 45

( new real gdp-old real gdp / old real gdp ) x 100

Answer 46

Ignores Income Distribution: Non-Market Transactions: Quality of Life: Externalities and Sustainability: Economic Activity vs. Economic Welfare:

Answer 47

* Economic growth means increase in output or production. * Economic development means both more output or production and changes in the technical and institutional arrangements by which, factors of production are produced and distributed. economic growth is fundamental for economic development

Answer 48

Increases in output or production has to be sustained over a long period of time. * Changes in economic structure would spread out in the entire economy . * Growth has to be accompanied by an increase in efficiency . * Economic development is shaped not only by economic factors but also by non-economic factors like environmental, social, and cultural conditions of the economy .

Answer 49

Human Development Index (HDI) World Happiness Report (WHR) Happy Planet Index (HPI) Sustainable Society Index (SSI) Better Life Index Social Progress Index (SPI)

Answer 50

Ex-ante means planned or intended or expected. For example, ex-ante investment means investment planned to be made during the year. Ex-post means actual or realized. For example, ex-post investment means actual.

Answer 51

Aggregate supply is the total supply of goods and services the economy planned to be produced by all production units in the economy as a whole during a given period of time.

Answer 52

Aggregate demand is the total demand for final goods and services that the economy as a whole plan to buy at a given level of income time during a given period of time. Aggregate demand equals total (planned) expenditure for final goods and services (consumption and investment goods).

Answer 53

Private consumption Expenditure ( C) o Private investment Expenditure (I) o Government Expenditure (G) o Net Export i.e Export (X)– Import (M) Aggregate Demand= Aggregate Expenditure= C + I + G + (X – M)

Answer 54

Employment of a factor refers to its use in the process of production. Employment of labour is an important macro-economic variable. The term ‘employment’ has been synonymously treated with employment to of labour or workers. Worker is said to be employed when he is engaged in act of production.

Answer 55

Full employment: Full employment in a very simple sense may mean that the total available supply of labour is completely absorbed in gainful employment. Full-employment may mean absence of involuntary unemployment. Classical economists argued that in the long-run the economy would automatically tend to move towards fullemployment (absence of involuntary unemployment) and unemployment would be voluntary.

Answer 56

The entire economic premise of the classical economists was based on the assumption of full-employment of labour and other economic resources. They concluded that under perfect competition in a free capitalist laissez-faire economy, forces (invisible hand) operate in the economic system which tend to maintain fullemployment in the long run without inflation

Answer 57

Any productive process has generally two effects due to employment of factors of production such as: i. a certain output of goods and services results which is supplied to the market and ii. an income stream is generated on account of payments made by firms to the owners of factors of production and these factors incomes are spent on the goods produced and supplied. Thus according to Say’s law, all income is spent by the community, though there is a ‘leakage’ of saving in circular flow of income expenditure. Yet it argues that such saving is not a real leakage, but a sort of channelization in spending. That is, saving is another form of spending because to save means to intend to spend on producers goods i.e. investment. What ever is saved is automatically invested in productive activities. Thus, according to Say’s law, every additional output creates an additional income which creates an equal amount of extra expenditure. Thus, increase in output = Increase in income = Increase in spending. According to say, as every additional supply creates an additional demand, aggregate supply equals aggregate demand and there can be know general over production and general unemployment.

Answer 58

There is automatic adjustment (built-in stability) when supply creates its own demand. Hence there is no need of government intervention in the functioning of a free-enterprise capitalist economy. o Since supply creates its own demand there is no possibility of any general overproduction or deficiency in aggregate demand. Aggregate supply always equal aggregate demand. o When there is no general over-production, there is no general unemployment and free economy automatically attains equilibrium at full-employment level in the long-run. o Supply creates its demand in real terms. Money is just a veil. Behind the flow of money there is real flow of goods and services. Change in money has no impact on the real economy’s prices of equilibrium at full-employment o Saving-investment equality is brought about by the flexibility of interest-rate. o Wage-flexibility in a competitive labour market tends to bring about full-employment of workers.

Answer 59

Keynesian economics arose from J.M. Keynes’ disagreement with classical economics, which emphasized market forces and automatic adjustments to full employment. In The General Theory of Employment, Interest and Money, Keynes criticized several classical assumptions: Full Employment Equilibrium: Keynes argued that full employment is rare and that equilibrium can exist at underemployment levels. Short-term vs. Long-term Equilibrium: He emphasized short-term equilibrium, stating, “In the long run, we are all dead.” Say’s Law: Keynes challenged Say’s Law, arguing that supply can exceed demand, leading to economic disequilibrium and that there is no automatic self-adjustment in the economy. Saving and Investment: He disagreed with the classical view that saving and investment equilibrate through flexible interest rates, asserting that this balance is achieved through changes in income instead.