Macro Flashcards
1
Q
define macro
A
concerned with the behavior of the aggregate (whole) economy
determinates the annual levels of rates of change of economy - output, consumption, investment, exports and imports
2
Q
Objectives of ta government
A
maintaining full emploiment
balance exports and imports
achieved economic growth
achieving price stability
3
Q
Define full employment
A
when all those able and willing to work are in paid employment at the current wage rate
when the economy is using all of its workforce - could bring inflation
4
Q
economic growth
A
is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another - is measured by GDP
5
Q
Gross Domestic Product (GDP)
A
the total value of goods and services produced in the country in a year
6
Q
price stability
A
means that an economy would not experience inflation or deflation
7
Q
budget deficit
A
a status of financial health in which expenditures exceed revenue - refer to government spending rather than business or industrial spending
8
Q
interest rate
A
the reward for saving and the cost of borrowing money - expressed as a % of total borrowing
9
Q
y
A
income
10
Q
c
A
consumption
11
Q
s
A
saving
12
Q
i
A
investment
13
Q
g
A
government spending
14
Q
t
A
taxes
15
Q
x
A
exports
16
Q
m
A
imports
17
Q
circular flow model - four parts
A
- Household: receive (y) through wages and salaries from their jobs and (I) and they (C) of goods and services supplied by firms
- Business: hire land, labour and capital inputs when making products, for which pays wages and rent. firms receive revenue and profits
- Government: collect (T) to found spending on public services
- External Sector: The UK buys (M)form other countries. consumers buy UK products (X)
18
Q
of what is composed injection and leakages
A
Injection: I, X, G
Leakages: S, M, T
19
Q
what is the formula of injection and leakages? what happen when is =, >,
A
S+T+M = I+G+X
= : national income is in equilibrium, tendency to neither rise of fail
> : leakages grater than injections causes equilibrium of national income fall
20
Q
AD
A
total level of planned real expenditure on the goods and services produce within a country
21
Q
Components of AD
A
household spending (C) Value of change in stocks (Inventories) (G) - public services (X) (M)
22
Q
formula AD
A
AD = C+I+G+ (X-M)
23
Q
what causes a fall or increase in AD?
A
Fall:
- fall in exports
- cut in government spending
- higher interest spending
- decline in household wealth
Increase:
- depreciation of the exchange rate
- cuts in direct and indirect taxes
- increase in house prices
- expansion of supply of credit
- lower interest rates
24
Q
consumption price index (CPI)
A
a measured of price level on the prices of a collection of goods and services that are designed to reflect the consumption basket of the average consumer - taking into account inflation
25
disposable income
after i have said my tax - is what i have left
26
FTSE-100 index
tracks the share-price of the 100 larges companies listed on the London Stock Change
27
Savings ratio
ratio of personal saving to household disposable income (when people decide to postpone their consumption- disposable income that is not spent)
28
Unemployment
when workers who are able and willing to work are unable to find employment at the current wage rate
29
Value Added Tax (VAT)
a tax on consumption, which is paid to the tax authorities by the seller on behalf of the consumer
30
Gross Investment spending
is total spending on new capital - includes and estimate value of capital depreciation
if gross investment is higher than depreciation, then net investment is positive and the size of the capital stock will grow.
gross investment - capital depreciation = net investment
31
animal spirits
emphasise the confidence of business men on the future business prospects
32
AS
the quantity of goods and services that producers in an economy are willing and able to supply at a given level of price
33
Short Run AS
shows how much output the economy can generate in the short-term at each price level
34
Long Run AS
The ability of an economy to produce goods and services to meet demand is based on state of production technology, and the ability and quality of factor inputs
35
productivity
measures the efficiency of the production process
| formula: factors + factor productivity = output
36
reasons of a fall or increase in AS
fall:
- brain drain - an outwards migration of skilled workers
- steep decline in business capital investment spending
- higher production costs from higher commodity prices
- effects of a mayor natural disaster/political conflict
increase:
- cause higer inflation
- reduce real GDP growth
- leads to lower profits, (I) and employment
- may worsen the trade balance
37
economic cycle
flactuations observed in real GDP growth over time in economies
- growth , boom, recession, slump, recovery
38
employment
when all those willing and able to work are in paid employment at the current wage rate
39
types of unemployment
6
1. voluntary: people choose not to work
2. Seasonal: depends on different terms -agriculture, construction, turism
3. frictional: working leaving one job and/or looking for an other (between jobs)
4. structural: structure of the industry change causing unemployment
5. Technological: technology start to replace what humans do
6. Cyclical: a fall in the AD in an economy - output decreases - reduce peoples earnings - less profits
40
consequences of unemployment
- frictional: from one to another type - accounted to teacher
- wasted resources: if everyone was employed we could produce more
- lower living standards: unemployments: lower incomes - less demand - more unemployment
- budget deficit: unemployment not pay tax - government is loosing revenue
- social problems
- regional problems
41
inflation
is a sustained rise in the general price level over time
42
types of inflation:
- cost-push inflation: persistently rising prize levels caused by increasing production cost
- demand-pull inflation: a persistent increase in the general level of prices resulting from a continued excess of demand over supply
43
The Retail Price Index
Includes an element of housing costs whereas the following items are not included in the CPI
- council tax
- mortgage interest payments
- house depreciation
- buildings insurance
44
inflation rate
the rate at which the general price level rises usually expressed in per centavo changes per annum
45
consumer price index (CPI)
this is how inflation is measured. every day household items for an average family are priced and measured (quantity) and weighted based on importance to an average family
46
monetary inflation:
inflation caused by growth in the economy's money supply
| money supply grows more quickly than the supply of goods and services
47
Stagflation
a condition of slow economic growth and relatively high unemployment - a time of stagflation - accompanied by a rise in prices or inflation
48
deflation
the opposite of inflation, it occurs when there is a persistant tendency for prices in the economy to fall
49
disinflation
is a fall in the rate of inflation, but inflation remains positive
eg. from 5% to 2%. price still rising but at a slower rate
50
Hyperinflation
extremely rapid or out of control inflation. there is no price numerical definition to hyperinflation. Is a situation where the prices increases are so out of control that the concept of inflation is mingles
51
causes of inflation
- demand-pull inflation: inflation caused by excess demand
- cost-push inflation: when cost production rise which causes the price level of goods and services to rise
- wage-price spiral: as price rise workers demand wage increases - this makes the wage spiral worse and inflation to rise even further
52
internal and external causes of inflation
internal:
- a large surge in property prices
- higher wages/ labour cost
- boom in credit/ money supply
- rise in business taxes eg. VAT
External:
- Increases in world oil/gas prices
- inflation in global commodity
- high inflation in other countries
- depreciation of the exchange rate
53
factors of production
resources comprising land (including natural resources), labour, capital, and enterprise
54
GDP per capita
GDP divided by total population, therefore GDP per head
55
Claimant count
Measures unemployment according to the number of people claiming unemployment related benefits such as Job Seekers Allowance
56
Labour Force Survey
A survey of a sample of households, counting people as unemployed of there are actively seeking work but do not have a job in the week of the survey
57
tax
a compulsory payment to government
58
direct tax
a tax on income or wealth
59
indirect tax
a tax on spending, often defined as a tax on goods and services
60
negative externality or external cost
the negative impact of an economic transaction on a party who is not directly involved in the transaction. for example manufacturing causes pollution which has costs of the whole population
61
demerit goods
a good or service whose consumption is considered unhealthy or undesirable due to the bad effects on consumers
62
redistribution of income
a policy to reduce the inequalities of income so that income is more evenly distributed
63
inequalities of income
incomes are distributed unevenly so one people have much higher incomes than others
64
transfer payments
benegits to citizens which are paid out of tax revenues
65
regressive tax
taxes which take a greater proportion of income from lower income, or takes a smaller percentage of a higher income
66
proportional tax
a tax which takes the same proportion of income from all income levels
67
progressive tax
a tax which takes a greater proportion of income from higher incomes or takes a smaller percentage of a lower income
68
market failure
when a market (through demand and supply) fails to allocate resources in the best interest of society
69
fiscal policy
- Controlling aggregate demand is important if inflation is to be controlled. If the government believes that AD is too high, it may choose to ‘tighten fiscal policy’ by reducing its own spending on public and merit goods or welfare payments
- It can choose to raise direct taxes, leading to a reduction in real disposable income
- The consequence may be that demand and output are lower which has a negative effect on jobs and real economic growth in the short-term
70
balance badget
government spending is equal to tax revenue
71
Budget deficit
government spending is greater than tax revenue
72
budget surplus
tax revenue is greater than government spending
73
multiplier effect
when a change in spending produces a subsequent change in output and income greater and more widespread than the initial change in expenditure
74
monetary policy
- A ‘tightening of monetary policy’ involves the central bank introducing a period of higher interest rates to reduce consumer and investment spending
- Higher interest rates may cause the exchange rate to appreciate in value bringing about a fall in the cost of imported goods and services and also a fall in demand for exports (X)
75
interest rate policy
the use of interest rate to ry and achieve governments economic objectives
76
bank rate
the interest rate set by the Bank of England in the UK and the Central European Bank in Europe, which affects all interest rates in the economy
77
supply-side policies
Supply side policies seek to increase productivity, competition and innovation – all of which can maintain lower prices. These are ways of controlling inflation in the medium term
i.A reduction in company taxes to encourage greater investment
ii. A reduction in taxes which increases risk-taking and incentives to work – a cut in income taxes can be considered both a fiscal and a supply-side policy
iii. Policies to open a market to more competition to increase supply and lower prices
Rising productivity will cause an outward shift of aggregate supply
Direct controls - a government might choose to introduce direct controls on some prices and wages
Public sector pay awards – the annual increase in government sector pay might be tightly controlled or even froze (this means a real wage decrease).
The prices of some utilities such as water bills are subject to regulatory control – if the price capping regime changes, this can have a short-term effect on the rate of inflation
78
what are supply-side policies?
education and training, reduction direct taxes, reducing benefits, encouraging enterprise, encouraging new technology and innovation, reducing monopoly power
79
Financial markets
Financial assets or securities are trade
80
Liquidity
The speed of how exchange the assets and in what extent change the value of the asset
Cash is the most liquidity
81
Equity
Wealth (shares are know as equity) can be positive or negative
82
Debt
Money people owe
83
Narrow money
Narrow money is a category of money supply that includes all physical money like coins and currency along with demand deposits and other liquid assets held by the central bank. In the United States, narrow money is classified as M0 in the U.K.
84
Broad money
Broad money is the method of calculating a given country's money supply.
The money supply is the totality of assets that households and businesses can use to make payments or to hold as short-term investments, such as currency, funds in bank accounts and anything of value resembling money.
The formula for calculating money supply varies from country to country. narrow money includes fewer elements in the calculation.
85
Bonds
A certified or financial securities sold by companies or government with are a form of long-term borrowing.
Bonds usually have a maturity date on which they are redeemed, with the borrower usually making a fixed interest payment each year until the bond matures
86
Marginal revenue product
The extra revenue generated by employing one more worker
87
How wage rates are determined
When the demand of labour equals de supply of labour
88
recession
in the UK and other countries is define as 6 months of negative economic growth or decline of real national output
89
quantitative easing (QE)
an unconventional form of monetary policy through which a central bank, such as the bank of England, creates new money electronically which it then uses to buy financial assets such as government bonds, on the country;s financial market.
also known as the Asset Purchase Scheme
90
national debt
the amount of accumulated debt. resulting from past government borrowing, that is owned by the UK government, debt owed by UK residents and financial institutions
91
output gap
the difference between the current level of real GDP and the potential output of the economy
92
Positive output gap
occurs when the current level of real GDP is above the potential output of the economy
93
Negative output gap
occurs when the current level of real GDP is below the potential output of the economy
94
Short-run economic growth
occurs when an increase in AG brings spare capacity into production
95
Long-run economic growth
occurs when the productive capacity of the economy is increasing. it is used to refer to the trend rate growth fo real national output in an economy over time
96
Quantity theory of money
Theory that assumes inflation is caused by prior increase in the money supply
MV=PQ
A rise in money supply would increase V and decrease Q
97
fisher equation of exchange
the stock of money in the economy * the velocity of circulation of money = price level * quantity of output
MV = PQ
A rise in money supply would increase V and decrease Q
98
Phillips curve
is a curve showing the apparent relationship between the rate of inflation (originally the rate of increase in money wages) and the rate of unemployment
99
Credit crunch
A credit crunch is an economic condition in which investment capital is difficult to obtain. Banks and investors become wary of lending funds to corporations, which drives up the price of debt products for borrowers.
100
Gini coefficient
The Gini index is a measurement of the income distribution of a country's residents. This number, which ranges between 0 and 1 and is based on residents' net income, helps define the gap between the rich and the poor, with 0 representing perfect equality and 1 representing perfect inequality. It is typically expressed as a percentage, referred to as the Gini coefficient.
101
Consequences of a fall in real GDP per head
- average longing standards decline
- more workers need an extra work to supplement their incomes
- less consumer demand for goods and services
- lower incomes and low net saving makes many more people really on consumer debt
- government received lower than expected tax revenues- making a lot harder to reduce the fiscal deficit
102
Strength British economy
Falling unemployment and inflation
World class university + flexible labour market
Worlds bets exported fro creative services
103
commodity prices risk
A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type; commodities are most often used as inputs in the production of other goods or services.
Commodity price risk is the threat that a change in the price of a production input will adversely impact a producer who uses that input. Commodity production inputs include raw materials like cotton, corn, wheat, oil, sugar, soybeans, copper, aluminium and steel. Factors that can affect commodity prices include political and regulatory changes, seasonal variations, weather, technology and market conditions. Commodity price risk is often hedged by major consumers.
104
explain 4 characteristics of recession
- stagflation: hight prices and high unemployment
- marginal propensity to save
- high inequalities of income and wealth: lower living standars
- negative output gap: low economic growth
105
dynamic efficiency
is form of efficiency that occurs over time in the sense that a market should meet our changing needs and wants as time progresses.
106
x-efficiency
is the degree of efficiency maintained by individuals and firms under conditions of imperfect competition.
x-efficiency theory asserts that under conditions of less-than-perfect competition, inefficiency may persist.
107
Globalisation- definition
Is the process of growing economic integration of worlds economies, making countries increasingly dependent upon each other
