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economics multi > Macro > Flashcards

Macro Flashcards

1
Q

Economic growth/cycle - Limitations of GDP as a measure of living standards

A

Difficult to calculate GDP because statistics will ignore the underground economy
negative externalities, such as, pollution
does not take into account how hard people work
ignores distribution of income
depends what the economy produces
cannot get a true comparison because there will be a different purchasing power in different countries

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2
Q

Economic growth/cycle - Costs of growth

A

Inflation
Boom and bust economic cycles
deficit on the current account

Environmental costs
Inequality

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3
Q

Economic growth/cycle - Benefits of growth

A

Higher average incomes
Lower unemployment
Lower government borrowing

Improved public services
Money can be spent on protecting the environment
Investment

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4
Q

recessions - Causes of recessions

A 
Higher interest rates
Credit crunch and fall in bank lending
Global recession
Stronger exchange rate
Fall in house prices
Tightening of fiscal policy
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5
Q

Inflation - Costs of Inflation

A

Cost of reducing inflation
International competitiveness
Confusion and Uncertainty

Menu Costs
Shoe leather costs
Income redistribution
Boom and bust economic cycles

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6
Q

Inflation - Causes of inflation - Cost push inflation

A

pass this on to consumers:
Wage Push Inflation
Import prices
Raw Material Prices

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7
Q

Inflation - Evaluation of Inflation targeting

A

The Monetary Policy Committee (MPC) was made independent in 1997
Between 1997 and 2007
Other problems were ignored

couldn’t have reduced inflation without causing a deeper recession
quantitative easing

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8
Q

Deflation - Problems of Deflation

A

Lower spending If prices are falling
Liquidity trap
Real wage unemployment
Real value of debt will increase

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9
Q

Fiscal policy - Evaluation of Fiscal Policy

A

Disincentives to work
Reduced public services
Poor information

Time Lags
Increase in budget deficit
Depends upon other components of AD

Monetarist Critique
Depends on size of the multiplier

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10
Q

fiscal policy - government borrowing - Economic Effects of Government Borrowing

A

Increased aggregate demand (AD)
Higher taxes and lower spending
Loss of Confidence

Higher debt interest payments
Crowding out

Increased Interest rates
Inflation

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11
Q

fiscal policy - government borrowing - Advantages of Govt Borrowing

A

Recession

Investment
Bailout key industries

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12
Q

fiscal policy - Policies to reduce a budget deficit

A

Cut government spending
Tax increases
Economic growth

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13
Q

Monetary Policy - Tight Monetary Policy

A 
increasing interest rates to reduce AD:
borrowing more expensive
cost of mortgages payments increase
Saving money in a bank is more attractive
appreciation in the exchange rate
reduce demand for buying houses
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14
Q

Monetary Policy - Evaluation of monetary policy in reducing Inflation

A

depends upon the position of the economy and the slope of the AS curve
depends upon other variables affecting AD
Higher interest rates will cause an appreciation in the exchange rate
It is difficult to solve both cost-push inflation and lower output through the use of interest rates

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15
Q

Monetary Policy - Benefits of the MPC setting Monetary Policy

A

successful in keeping inflation close to its target
stable and continuous growth
govt could always change the target if there was a shock
political considerations

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16
Q

Monetary Policy - Criticisms of The MPC approach

A

An inflation target is not enough
shocks to the economy such as higher oil prices may increase inflation (harder to keep to target)
Fine control of monetary policy is not possible
Low inflation between 1997-07
asset bubble and resulting credit crunch in 2007-2009
Monetary policy alone may not be enough. Keynesians

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17
Q

Unemployment - The Natural Rate of Unemployment

A

equilibrium
difference between those who
frictional and structural unemployment

Monetarists
NAIRU
full employment level of unemployment

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18
Q

Unemployment - Explaining Changing Natural Rates of Unemployment (fall in the uk)

A 
Fall since the 1980s:
Increased labour market flexibilities
Privatisation has helped increased the competitiveness
Better education and training
changes to benefits
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19
Q

Unemployment - Explaining Changing Natural Rates of Unemployment (rise in rest of EU)

A 
Rise since 1990s:
Rigidity in EU labour markets
Restrictions on closing factories and mandatory severance pay
unionisation resulting in wage rigidity
Generous benefits which lessen the pain of unemployment
Hysteresis effects
Growing competition from Asian countries
Also due to below trend economic growth
20
Q

Unemployment - Consequences of Unemployment

A

Loss of income
Negative multiplier effects
Fiscal costs

Loss of national output (hysteresis effect)
Social costs

21
Q

Balance Of Payments - Reasons for a current account deficit

A 
Overvalued exchange rate
Declining competitiveness
Growth in consumer spending
Low savings ratio
Large inflows of foreign capital
22
Q

Balance of payments - Potential problems of current account deficit

A

financed through borrowing
long-term investment
depreciation in the exchange rate

loss of confidence
fundamental weaknesses

23
Q

Balance of payments - However a current account deficit is not necessarily harmful

A

A current account deficit can be used to finance investment
Inward investment can be beneficial for the economy
floating exchange rate
depends on the size of the deficit as a % of GDP

24
Q

International Trade - Benefits of Free Trade

A

trade creation

Economies of Scale
Increased competition

Increased exports
Trade is an engine of growth
Make use of surplus raw materials

25
Q

International Trade - Arguments for Restricting Trade

A

Infant industry argument
The senile industry argument
Protection against dumping

Need to diversify the economy
Environmental

26
Q

globalisation - Causes of globalisation

A

Growth of free trade
Multinational companies
Technology

Transport
WTO / Trading Blocks
Opening up of China and Eastern Block

27
Q

globalisation - Benefits (impact) of globalisation

A

Global trade cycles
Competition
Economies of scale

28
Q

globalisation - Costs of Globalisation

A

Domestic firms uncompetitive
Impact on developing world
Environmental costs
Dominance of global brands

29
Q

types of Trading Blocks

A 
Free Trade Areas
Customs Union
Single Market
Economic Union
Monetary Union
30
Q

Exchange Rates - Causes of Appreciation in Exchange Rate

A

Relatively higher interest rates
Relatively lower inflation rate
Current account surplus
Speculation

31
Q

Exchange Rates - Advantages of Fixed Exchange Rates

A

Provide greater stability for firms involved in trade
Can help reduce inflation
reduce speculation

32
Q

Exchange Rates - Disadvantages of Fixed Exchange Rates

A

exchange rate being overvalued
to maintain may require high interest rates
UK forced out of ERM in 1992

33
Q

Euro / Monetary Union - Advantages of Joining the Euro

A

Lower transaction costs
Eliminate exchange rate fluctuations
Increased inward investment

Greater Price Transparency
The UK financial sector would benefit
Lower Inflation

34
Q

Euro / Monetary Union - Disadvantages of Joining the Euro

A

Lack of exchange rate flexibility
Low inflation may conflict with other objectives

The UK will lose ability to set interest rates
Loss of independence over fiscal policy

Lack of convergence in the UK
Bond yields

35
Q

Measures to Increase Competitiveness / Supply side policies

A

Education and Training
Investment in infrastructure
Privatisation and deregulation

Devaluation in exchange rate
Limiting wage growth

36
Q

Taxation - Impact of Increasing Rate of Income Tax

A

increase tax revenues - gov can spend more
May encourage tax evasion
May reduce incentives to work
redistribute income

37
Q

Taxation - An increase in government spending as a % of GDP could imply

A

Government Spending as a % of GDP shows
Investment in education and infrastructure
In a recession, government spending may be effective in stimulating the economy.

Redistribution
a consequence of the recession

38
Q

Taxation - Evaluation

A

disincentives to work
Inefficiency of government spending
Vested interests of public sector

Crowding out
It depends on what the government is spending the money
public-private partnerships

39
Q

Taxation - Taxation principles

A 
Adequacy
Broad Basing
Convenience
Restricted exemptions
Predictability and regularity
Earmarking
Efficiency
Equity
Neutrality
Simplicity
40
Q

Supply side policies - Supply side policies examples

A

Privatisation
Deregulation
Reducing Income Taxes
Increased education and training

Reducing the power of Trades Unions
Reducing State Welfare Benefits
Providing better information about jobs
Lower Tariff
Subsides
41
Q

Supply side policies - Supply side policies benefits

A

cost push inflation
reduce the natural rate of unemployment
increase the sustainable rate of economic growth
Improved trade and Balance of Payments

42
Q

Supply side policies - Supply side policies costs

A

can take a long time to work its way through the economy
very costly to implement
equity (negative impact on distribution)
Resisted by various interest groups

43
Q

Comparative advantage - Criticisms

A

overstate the benefits of specialisation by ignoring a number of costs
assumes that markets are perfectly competitive

might create structural unemployment
Comparative advantage is not a static concept - it may change over time

44
Q

European union - Benefits of EU (single market)

A

Economies of scale
Dynamic efficiency

reduction in export bureaucracy
UK citizens have the right to…

45
Q

European union - Costs of EU (single market)

A

firms can’t compete with new entrants
It’s a work in progress

service sector
Delays in other areas

economics multi (2 decks)

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