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Macro Flashcards

1
Q

What are accelerator and multiplier effect caused by

A

Macroeconomic instability as they exacerbate the booms and slumps of the trade cycle: strengthening booms and deepening slumps

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2
Q

What causes an accelerator effect

A

Changes in real GDP

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3
Q

How does the accelerator effect work

A

1.Firms need more capital equipment due to higher consumer demand
2.Increase in investment needed dependent on capital:output ratio
3.Firms invest into capital equipment according to the ratio which therefore shifts AD out further

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4
Q

The multiplier effect will be larger when:

A

Mpc on domestic goods is high
Mpt on extra income is low
Mps is low
Consumer confidence is high
Low competitiveness of foreign goods

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5
Q

What are the problems with the multiplier

A

Difficult to estimate size so can’t predict changes in fiscal policy
Time lags lead to mistakes

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6
Q

When is the accelerator effect at its strongest

A

Rate of change of consumer income and spending is strongly positive
Low spare productive capacity
Large supply of investment funds
High business confidence

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7
Q

Do the multiplier and accelerator interact

A

Yes they work together

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8
Q

How does the multiplier effect work

A

1.Occurs after an injection into circular flow of income
2.This increases AD
3.Initial injection flows through economy
4.This injection is recycled through economy and will increase AD further dependent on size of mpc

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9
Q

What is the formula to work out multiplier effect

A

1/1-mpc

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10
Q

What are the UKs macro economic objectives

A

Growth-steady with trend rate
Inflation-2%
Employment-full
Balance of payments-stable

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11
Q

Benefits of stable economy
eg inflation at 2%

A

High business and consumer confidence-more C and I therefore increase in AD,SRAS,LRAS
Maintain price competitiveness if inflation lower than trading partners
Attracts FDI
Keeps IR low

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12
Q

Cause of macroeconomic instability

A

Multiplier and accelerator-make booms and slumps bigger
Economic shocks eg brexit/oil prices
Financial instability eg crisis 2008
Excessive gov debt-pay 112bn per year in interest

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13
Q

Explain the SR Phillips curve(cost push inflation)

A

Decreased unemployment
Labour becomes more scarce
Higher wages paid to attract workers
Increases business costs
Decreases SRAS
Cost push inflation

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14
Q

Explain SR Phillips curve(demand pull inflation)

A

Decreased unemployment
Increase in disposable income
Increase in consumer demand
Increase in AD
Demand pull inflation
Inverse relationship in SR only

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15
Q

Explain wage price spiral

A

Demand pull inflation
Decrease in real wages
Increase in wage demands
Higher business costs
Decrease in SRAS
Cost push inflation
Repeat

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16
Q

Explain LR Phillips curve draw diagram

A

Increase in AD
Leads to reduced unemployment and increases to RGDP and price level
The increase in price level decreases real wages
Increase in wage demands increases business costs and shifts SRAS left
This increases unemployment and price level at the same time(move back to NRU)

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17
Q

How can the LRPC be shifted

A

Supply side policy to reduce structural unemployment eg HS2

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18
Q

What does monetary policy include

A

Interest rates
Exchange rates
Money supply

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19
Q

What is Fishers equation

A

Money supply x Velocity circulation= Price level x Volume of transactions
(Mv=Pt)

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20
Q

What does mv represent

A

National expenditure

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21
Q

What does pt represent

A

National output

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22
Q

How does fishers equation work

A

Assumes v and t are constant in SR and therefore any increase in money supply will directly lead to inflation

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23
Q

How can Fishers quantity theory of money be challenged

A

During a recession business and consumer confidence is low therefore volume of transactions(t) decrease as people feel they need to save

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24
Q

What happens if a bond falls in price

A

Increased yield(return)
More expensive for the corporation selling to borrow

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25
What happens if a bond increases in price
Lower yield(return)- cheaper to borrow
26
How do the government take loans
Sell bonds to financial corporations
27
Impact of a reduction in interest rates
Cheaper to spend lower cost of borrowing Less advantage of saving Increase in Cd and I Increase in disposable income Outflow of hot money due to depreciation of £
28
What will occur if increase in AD is greater than increase in AS
Demand pull inflation
29
How does quantitative easing work
1. Bank electronically creates money 2. This is used to buy back government bonds from financial institutions 3.This increases demand for and price of bonds, lowering yield and making it cheaper for firms to borrow 4.Financial institutions use new liquid cash to buy alternative assets such as corporate bonds 5.This increases price of corp bonds and reduces yield making it cheaper for firms to borrow 6.Reduced cost of borrowing encourages spending and investment Which increases AD and AS
30
When is quantitative easing used
To get out of a recession
31
Causes of inflation
AD increases Demand pull inflation(benign) Or SRAS decreases Cost push inflation(malign)
32
Who does inflation benefit
Those with debt/mortgage
33
Who does inflation hinder
People with savings
34
Negatives of inflation
Falling real incomes High interest rates Wage price spiral Reduced international competitiveness Business uncertainty Regressive-worse effect on poorer people
35
Benefits of inflation
Workers can demand high wages-more productive better for morale Increases price for firms Real debt decreases Encourages current consumption
36
Whether inflation is a cause of concern depends upon
Whether it is temporary or persistent Comparison to trading partners How tolerable it is to raise interest rates Whether uncertainty leads to reduced FDI
37
Causes of deflation
Reduction in AD(malign) Demand pull deflation Or Increase in SRAS(benign) Cost push deflation
38
Negatives of deflation
Delayed expenditure-people wait to spend on large items and don’t invest results in deflationary spiral Firms may cut wages Encourages saving over spending Increases value of real debt
39
What does the impact of deflation depend upon
Type of deflation(malign or benign) Ability of central bank and gov to stimulate AD(decrease interest rates)
40
Benefits of deflation
Lower cost of production Economic growth if benign
41
Aims of expansionary monetary policy
Increase inflation Increase economic growth Reduce unemployment
42
Aims of contractionary monetary policy
Reduce inflation Reduce excess debt and promote saving Reduce current account deficit
43
Impact of cut interest rates
Cheaper to borrow C increases Lower saving rates C increases Lower mortgage rates C increases Lower rates on business loans I increases Weaker exchange rate (X-M) increases due to hot money
44
What does expansionary monetary policy do
Increases AD and AS to get out of recession Stimulates economic growth
45
Negatives of expansionary monetary policy
Demand pull inflation Current account deficit- more spent on imports Liquidity trap-further interest rate cuts lose effectiveness Negative impact on savers- no security Time lags
46
What does the effect of expansionary monetary policy depend on
Size of output gap Consumer and business confidence Banks willingness to lend Size of the rate cut
47
What are the key roles of fiscal policy
Financing gov spending Altering distribution of income and wealth Providing welfare state safety net Managing economic cycle Improving competitiveness Tackle market failure
48
How is fiscal policy an automatic stabiliser
In a boom unemployment is low so gov spending on welfare payments decreases Income is also high so tax revenue increases Therefore AD falls And vice versa in a slump
49
What are the principles of taxation efficiency and equity
Cost of collection should be low relative to tax yield Should be convenient and easy to pay Levied according to ability to pay of individual Least loss of economic efficiency/increases Compatible with foreign tax regimes Adjusts in line with inflation
50
What is fiscal drag
After inflation people ask for wage increases, however tax bands are not adjusted for this so people end up worse off
51
What is the laffer curve effect
As tax rates increase, the rate of growth of tax revenue falls because of disincentives of tax Opportunity cost of working less becomes lower Highest earners and smartest minds leave economy
52
What is the aim of the office for budget responsibility
Ensure sustainable economic management by overseeing potential fiscal acts
53
What is crowding out
Budget deficit requires gov to borrow money from financial markets Increases demand for borrowing Increase in interest rates means cost of borrowing increases Private sector investment falls
54
Why is crowding out a negative
Econonomists argue that private sector investment will yield a greater return than gov investment as it is driven by a pure profit incentive and doesn’t suffer from moral hazard/political pressure eg Rwanda
55
What is crowding in
Keynesian theory which suggests an increase in government spending can lead to increase in private investment
56
What is crowding out
Theory which suggests an increase in government spending can lead to a decrease in private investment
57
Explain crowding in
An increase in gov spending increases AD and LRAS which is economic growth, restoring business confidence therefore stemming investment from private sectors This occurs due to higher sales and lower unemployment which increases Cd
58
When is crowding out most likely to happen
In a boom phase of trade cycle where borrowing and spending is high and savings are low due to high consumer confidence
59
When is crowding in most likely to happen
In a slump phase of trade cycle where confidence is low Much more availability for borrowing without increasing interest rates Needs a large negative output gap
60
Why might crowding not happen at all
The government can borrow from world financial markets which have a very minimal effect on world interest rates as the money supply is more elastic
61
What is a cyclical budget surplus
Occurs because gov spending in a boom decreases and tax revenue increases naturally Therefore running a budget surplus
62
What is a cyclical budget deficit
Occurs because gov spending in a slump increases and tax revenue decreases naturally Therefore running a budget deficit
63
Why do cyclical budget deficits and surpluses occur
Due to changes in welfare payments and changes in tax revenue from the changes in unemployment between a boom and a slump
64
What is austerity
Economic policy aimed at reducing a governments debt can be achieved through higher taxation or cuts in gov spending
65
Benefits of SS policies
Economic growth at constant prices Reduce inflationary pressure Reduce structural unemployment
66
Limitations of SS policies
Pollution and waste Ineffective in recession Takes time to work Increase in G increases national debt
67
What are SS policies
Policies that increase the productive capacity of the UK economy Increase LRAS
68
What is a market based SS policy
Government remove their intervention from market
69
What is an interventionist SS policy
Increased government intervention into market
70
Examples of SS policies
Deregulation G spending on infrastructure G spending on education Cut welfare payments Increase min wage Decrease tax Privatisation
71
What policies reduce the nru
Policies that improve efficiency of the labour market by removing labour market imperfections Eg reducing structural unemployment
72
What occurs as a secondary effect of SS policies that require investment
Increase in uk exports and a decrease in imports as UK goods become more desirable
73
When are SS policies deflationary
If increase in AS is greater than increase in AD improves international competitiveness

Economics (4 decks)

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