Macro 2.Govt Objectives Flashcards
Inflation?
A sustained increase in the general price level, decreasing the value of money
Two types of inflation?
demand-pull and cost-push
Demand-pull inflation?
Long run
No spare capacity, causes AD to increase
Pulls up the price level
Cost-push inflation?
Short run
Increase in production costs
Reduces SRAS
Pushes up price to make profit
Hyperinflation?
Inflation over 50%
Deflation?
A sustained decrease in the general price level
increases debt and the value of money
deflationary spiral?
Investor confidence falls
Price Level falls
Consumers delay purchases
Savings rise
AD and price level fall furtherQ
Two types of deflation?
Benign and malignant
Benign deflation?
Occurs when AS rises, as firm costs fall
NO Negative effects
Raises economic growth
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
Nominal income?
Amount actually earned
Real income?
How much your income is worth in terms of the amount of goods you can purchase
Basket of goods?
650 most common goods and services in the economy
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
Price index pros?
Easier to calculate inflation rates
CPI vs RPI
RPI includes mortgage payments
Cpi is less accurate
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
What are inventories?
The stocks of raw materials, and finished / semi-finished goods.
Why do firms have inventories?
To smooth production when there are swings in demand.
They build up large stocks when demand is growing
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
