Macro Flashcards
Marginal propensity to consume
Refers to the proportion of any additional income that is spent and passed around the circular flow of income
Short run and long run growth
Short run- increase in utilisation of unemployed resources
Determinants-AD and SRAS
Long run- increase in potential output of an economy
LRAS
Costs of economic growth
Possibility for higher inflation
Depletion of natural resources
Potential for greater inequality
Increased negative externalities (congestion)
Benefits of economic growth
Higher living standards
Easier to find employment
Imported social indicators for the population such as reduced crime(this link is not definite)
Increased tax revenue
Less need for welfare expenditure
Lower absolute poverty
Greater international status for government
Sustainable economic growth
Growth that does not compromise the economies ability to grow in the future
Economic cycle
The repeated pattern of fluctuations in the short run goeth of an economy and how it differs from their trend rate of growth
Boom
Short run economic growth is above trend rate of growth
Consumer confidence will be high = more consumer spending
Business confidence is higher=more investment
Government finances more likely to move towards a surplus
The current account on the BOP will move into a deficit
Unemployment low but firms may have troubles trying to find skilled labour
Inflation may be rising (overheating economy)
Downturn
The rate of short run growth is falling but still positive
Business confidence is falling
Consumers less likely to borrow to finance their spending and consumer spending growth will slow down
Inflation may be above average but will stop rising due to falling demand
Spending on imports is likely to fall and the BOP current account will move towards a surplus
Unemployment will stop falling but may not rise significantly as firms will hoard labour invade the downturn is short lived
Recession
Short run Growth in the economy will be negative for at least two successive quarters in the year
Business confidence will be low thus so will investment
Consumer spending is likely to fall
Unemployment will rise and may reach high levels due to lack of demand for the output
Inflation should fall
Budget deficit should occur due to increase spending on welfare and lower tax revenue
Current account may move into surplus due to low demand for imports
Recovery
Short term growth will resume and will be positive but is likely to be below trend rate of growth
Confidence amongst business and consumers is likely to return
Inflation is likely to remain low
Unemployment is likely to remain high but will not increase or any increase will be slow
Budget deficit should stop increasing as tax revenue may begin to rise
Balance on the current account is likely to stop moving closer to the surplus
Output gaps
Positive=actual growth is higher than trend growth
Negative=actual growth lower than trend growth
Explanations of economic cycle
Multiplier accelerator model- explanation of the trade cycle where the multiplier and accelerator effects combine to magnify cyclical combinations in economic growth
The inventory cycle- how changes in inventory levels held by businesses may lead to exaggerated increase or decreases in industrial output - contributing to economic growth
Asset price bubbles- where asset prices rise rapidly above what market supply and demand conditions would predict. If the asset is not included in the retail price index as part of monitoring the economies inflation then the bank will not try to stop the bubble from developing. Then people will realise the rapidly rising price does not match normal conditions and they will attempt to sell their asset for profit, causes price to fall as supply increases.
Animal spirits- the collective feelings of business and consumer confidence which can effect economic decisions e.g investment
Herding- consumer and investor behaviour often move in similar directions and at the same time
Excessive growth in credit- households can borrow above their income levels, which increases economic growth however any slight downturn in economic activity can lead to a large decrease in spending due to large proportions of household income being used to pay off debt and interest. Excessive credit levels may lead to sharp rises and sharp falls in consumer spending thus magnifying the economic cycle
Economic shocks
