Macro 2.Govt Objectives Flashcards by Unknown Unknown

Inflation?

A sustained increase in the general price level, decreasing the value of money

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Two types of inflation?

demand-pull and cost-push

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Demand-pull inflation?

Long run

No spare capacity, causes AD to increase

Pulls up the price level

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Cost-push inflation?

Short run

Increase in production costs

Reduces SRAS

Pushes up price to make profit

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Hyperinflation?

Inflation over 50%

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Deflation?

A sustained decrease in the general price level

increases debt and the value of money

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deflationary spiral?

Investor confidence falls
Price Level falls

Consumers delay purchases
Savings rise

AD and price level fall furtherQ

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Two types of deflation?

Benign and malignant

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Benign deflation?

Occurs when AS rises, as firm costs fall

NO Negative effects

Raises economic growth

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Malignant Deflation?

A persistent fall in the general price level, output and employment brought about by a steep fall in and then persistently low levels of aggregate demand.

Causes deflationary spiral

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Nominal income?

Amount actually earned

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Real income?

How much your income is worth in terms of the amount of goods you can purchase

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Basket of goods?

650 most common goods and services in the economy

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How to calculate basket of goods?

Office of national stats living costs and food survey:

find basket of goods
7000 households asked to find % of spending on each of these products

ONS conducts price survey to find avg price of each good

ONS finds the weighted avg of all prices

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Price index pros?

Easier to calculate inflation rates

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CPI vs RPI

RPI includes mortgage payments

Cpi is less accurate

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CPI Cons?

Unusual spending habits aren’t represented

Time lag- only updated annually

Change in quality (e.g. Iphone6 to iPhone X)

Exclusion of mortgages

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What are inventories?

The stocks of raw materials, and finished / semi-finished goods.

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Why do firms have inventories?

To smooth production when there are swings in demand.

They build up large stocks when demand is growing

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Purchasing power parities?

The amount of a currency to purchase a basket of goods, compared to another currency

How to calculate PPPs?

Find basket of goods

Find the price of the same basket in two different countries

PPP = Price of basket in one country divided by the other. (Converted to same currency)

Reasons for PPP?

Exchange rates are volatile and unreliable when comparing two countries.

Different Price Levels- hence impossible to tell the richer country.

What is the Easterlin Paradox?

Initially: An increase in average income, causes an increase in happiness

Then: Marginal happiness begins to DECREASE more and more, per each extra unit of income.

Meaning an increase in income causes a decrease in marginal happiness

Why does an increase in income cause a decrease in marginal happiness?

Because people spend money on things they don’t need.

Hence, their purchases bring less happiness.

What are the 5 main limits when using RGDP to measure living standards?

Population Changes Income Distribution Types of goods & services Underground economies Subsistence Economies

How do changes in population limit RGDP, when measuring living standards?

If the %Change in RGDP < %Change in population: RGDP per capita DECREASES Total RGDP= UNCHANGED On average people will have a worse standard of living than Change in RGDP suggests

How do changes in Income Distribution limit RGDP, when measuring living standards?

RGDP doesn't demonstrate how equal the distribution of wealth is in the economy Rich could have increased income, while the poor remain poor.

How do different types of goods limit RGDP, when measuring living standards?

Producing / exporting goods will have negative externalities Causes a lower standard of living for domestic citizens BUT an increase in RGDP (and Aggregate Demand)

How do Underground Economies limit RGDP, when measuring living standards?

The output of illegal goods / services aren't accounted for when measuring RGDP CAUSSES Inaccurate RGDP data + inaccurately measured living standards

What are subsistence economies?

Economies where consumers / households produce AND consume their own goods & services. E.g. small family farms in rural areas

How Subsistence Economies limit RGDP, when measuring living standards?

There's no record, due to a lack of transactions Not recorded in the national economy's RGDP- causing inaccuracy

What factors cause increases in economic growth?

Increase in SRAS, caused by a decrease in the cost of production Increase in LRAS, caused by an increase in the quantity / productivity of factors of production

How does LRAS affect economic growth, when AD is unchanged?

If LRAS increases, but equilibrium AD is unchanged... Potential max output increases-> Potential growth increases -> productive potential increases. NO Actual Growth occurs (when equilibrium RGDP increases)

What is potential growth?

When the productive potential of the economy increases

What is actual growth?

When equilibrium RGDP increases

How does AD affect economic growth, when AS is unchanged?

If AD increases, but equilibrium AS unchanged... Actual growth increases and RGDP increases BUT NO potential growth occurs

How do AD and AS affect economic growth, simultaneously?

If both equilibrium AD and equilibrium AS increase... Both potential and actual growth occur.

What are PPFs?

Curves that show ALL the possible combinations of two goods we can produce, using all resources efficiently. When using resources inefficiently- point inside the PPF When using resources unsustainably- point outside the PPF

How can increased actual growth be demonstrated on a PPF?

A movement towards the PPF curve Where consumer and capital goods are on each axis.

How can increased potential growth be demonstrated on a PPF?

An outward shift of the PPF curve As quality / productivity of FOPs have increased. Where consumer and capital goods are on each axis.

Imports?

Any good from abroad

Balance of payments?

A record of payments between one country and the world All the money flowing in / out of a country

Two components of the BOP?

Current account Capital and Financial Account

Current Account tracks?

Trade in goods & services Investment income- Invest Current transfers- money sent abroad without gaining items in exchange

Current account?

The difference between a country's inflows and outflows

CFA Tracks?

Investment, into/ out of a country, on financial assets.

CFA Aim?

Always needs to balance out Current account deficit / surplus Surplus CFA harms economy

Factors Current account?

Exchange rates Relative inflation Production costs Quality Income

Macroeconomic objectives

2% Inflation rate Economic growth Full employment Current account equilibrium