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Economics > Macro > Flashcards

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
Q

What happens if a bond increases in price

A

Lower yield(return)- cheaper to borrow

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26
Q

How do the government take loans

A

Sell bonds to financial corporations

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27
Q

Impact of a reduction in interest rates

A

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 £

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28
Q

What will occur if increase in AD is greater than increase in AS

A

Demand pull inflation

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29
Q

How does quantitative easing work

A
  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
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30
Q

When is quantitative easing used

A

To get out of a recession

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31
Q

Causes of inflation

A

AD increases
Demand pull inflation(benign)
Or
SRAS decreases
Cost push inflation(malign)

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32
Q

Who does inflation benefit

A

Those with debt/mortgage

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33
Q

Who does inflation hinder

A

People with savings

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34
Q

Negatives of inflation

A

Falling real incomes
High interest rates
Wage price spiral
Reduced international competitiveness
Business uncertainty
Regressive-worse effect on poorer people

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35
Q

Benefits of inflation

A

Workers can demand high wages-more productive better for morale
Increases price for firms
Real debt decreases
Encourages current consumption

36
Q

Whether inflation is a cause of concern depends upon

A

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
Q

Causes of deflation

A

Reduction in AD(malign)
Demand pull deflation
Or
Increase in SRAS(benign)
Cost push deflation

38
Q

Negatives of deflation

A

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
Q

What does the impact of deflation depend upon

A

Type of deflation(malign or benign)
Ability of central bank and gov to stimulate AD(decrease interest rates)

40
Q

Benefits of deflation

A

Lower cost of production
Economic growth if benign

41
Q

Aims of expansionary monetary policy

A

Increase inflation
Increase economic growth
Reduce unemployment

42
Q

Aims of contractionary monetary policy

A

Reduce inflation
Reduce excess debt and promote saving
Reduce current account deficit

43
Q

Impact of cut interest rates

A

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
Q

What does expansionary monetary policy do

A

Increases AD and AS to get out of recession
Stimulates economic growth

45
Q

Negatives of expansionary monetary policy

A

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
Q

What does the effect of expansionary monetary policy depend on

A

Size of output gap
Consumer and business confidence
Banks willingness to lend
Size of the rate cut

47
Q

What are the key roles of fiscal policy

A

Financing gov spending
Altering distribution of income and wealth
Providing welfare state safety net
Managing economic cycle
Improving competitiveness
Tackle market failure

48
Q

How is fiscal policy an automatic stabiliser

A

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
Q

What are the principles of taxation efficiency and equity

A

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
Q

What is fiscal drag

A

After inflation people ask for wage increases, however tax bands are not adjusted for this so people end up worse off

51
Q

What is the laffer curve effect

A

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
Q

What is the aim of the office for budget responsibility

A

Ensure sustainable economic management by overseeing potential fiscal acts

53
Q

What is crowding out

A

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
Q

Why is crowding out a negative

A

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
Q

What is crowding in

A

Keynesian theory which suggests an increase in government spending can lead to increase in private investment

56
Q

What is crowding out

A

Theory which suggests an increase in government spending can lead to a decrease in private investment

57
Q

Explain crowding in

A

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
Q

When is crowding out most likely to happen

A

In a boom phase of trade cycle where borrowing and spending is high and savings are low due to high consumer confidence

59
Q

When is crowding in most likely to happen

A

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
Q

Why might crowding not happen at all

A

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
Q

What is a cyclical budget surplus

A

Occurs because gov spending in a boom decreases and tax revenue increases naturally
Therefore running a budget surplus

62
Q

What is a cyclical budget deficit

A

Occurs because gov spending in a slump increases and tax revenue decreases naturally
Therefore running a budget deficit

63
Q

Why do cyclical budget deficits and surpluses occur

A

Due to changes in welfare payments and changes in tax revenue from the changes in unemployment between a boom and a slump

64
Q

What is austerity

A

Economic policy aimed at reducing a governments debt can be achieved through higher taxation or cuts in gov spending

65
Q

Benefits of SS policies

A

Economic growth at constant prices
Reduce inflationary pressure
Reduce structural unemployment

66
Q

Limitations of SS policies

A

Pollution and waste
Ineffective in recession
Takes time to work
Increase in G increases national debt

67
Q

What are SS policies

A

Policies that increase the productive capacity of the UK economy
Increase LRAS

68
Q

What is a market based SS policy

A

Government remove their intervention from market

69
Q

What is an interventionist SS policy

A

Increased government intervention into market

70
Q

Examples of SS policies

A

Deregulation
G spending on infrastructure
G spending on education
Cut welfare payments
Increase min wage
Decrease tax
Privatisation

71
Q

What policies reduce the nru

A

Policies that improve efficiency of the labour market by removing labour market imperfections
Eg reducing structural unemployment

72
Q

What occurs as a secondary effect of SS policies that require investment

A

Increase in uk exports and a decrease in imports as UK goods become more desirable

73
Q

When are SS policies deflationary

A

If increase in AS is greater than increase in AD
improves international competitiveness

74
Q

What is systemic risk

A

Occurs due to the profit incentive for banks to make higher risk/higher return loans when economic prospects are good. This leads to bad debt and banks collapsing or requiring a bail out when the economy starts to falter. Due to the banks interconnectedness one bank failure can have a domino effect leading to a widespread collapse of the financial system.

75
Q

What is moral hazard

A

Financial institutions expecting regulatory authorities to bail them out due to systemic risk. There is a presumption that some banks were too big to fail, therefore meaning they would take more risks and not bear the full costs.

76
Q

Example of a negative externally in consumption in the financial markets

A

Pensions underconsumed
Regulated by gov using default choice as people are automatically opted into work place pension

77
Q

What is an example of a negative externality in consumption in financial markets

A

Pay day loans such as Klarna
These firms are regulated with more scrutiny as one in 10 people using klarna already had debt arrears elsewhere

78
Q

Who regulates the financial markets

A

Prudent regulation authority(BofE)
Financial Policy Committee(BofE)
Financial Conduct Authority(treasury)

79
Q

Prudent regulation Authority overview

A

Micro-potential
Regulate specific financial markets and their solvency
Eg insurance providers, buy to let mortgages, credit unions, investment banks

80
Q

Financial policy committee

A

Macro-potential
Identify, monitor and take action to remove or reduce systemic risks
Publish financial stability report- identifying threats
Power to construct commercial banks to alter capital reserve

81
Q

Financial Conduct Authority overview

A

Reports to treasury
Funded entirely by firms it regulates
Secure an appropriate degree of protection eg banning miss selling of PPI
Protect and enhance integrity of financial system
Promote effective competition in banking

82
Q

What is globalisation

A

The process in which national economies have become increasingly integrated and interdependent

83
Q

What are the causes of globalisation

A

Trade liberalisation
Trading blocks
Growth of MNCs
Technological advancement
Mobility of labour and capital

84
Q

What are the causes of globalisation

A

Trade liberalisation
Trading blocks
Growth of MNCs
Technological advancement
Mobility of labour and capital

85
Q

What are the benefits of globalisation

A

Lower prices- increases international competition
Benefits of trade-trade blocs,WTO
Greater employment-increased size of firms
Large economies of scale
Free movement of labour and capital-FDI
Technological transfers and innovations

86
Q

What are the costs of globalisation

A

Growing inequality
Higher structural unemployment
Environmental costs- lack of sustainability
Trade imbalances on current account
Greater risk of external shocks-domino effect
Less cultural diversity

Economics (2 decks)

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