Macro Blue Booklet Flashcards
1
Q
What is a policy objective?
A
The targets/ goals that a government want to achieve
2
Q
What are policy instruments?
A
The tools that a govt used to try and achieve their policy objectives
3
Q
What are policy indicators?
A
The units of measure used to assess economic performance of the government and measure any changes.
4
Q
What does economic growth mean in an economy?
A
(The % change of good and services produced in an economy) % change in real GDP over a period of time.
5
Q
Define the term price stability
A
Where the average level of prices remains broadly constant over a period of time. (Control inflation)
6
Q
Define the term distribution of income
A
Distribution of income refers to how evenly (or not) incomes are shared across the population.
7
Q
Define the term balance of payments
A
The balance of payments is a record of all currency flows in and out of a country for a specific period of time.
8
Q
Distinguish between macroeconomic objectives and macroeconomic policies
A
A objective is an aim the government wishes to achieve for the macroeconomy. Where as a policy is a tool or instrument which helps the government to achieve it’s objectives for the macroeconomy.
9
Q
Why might economic growth be important to an economy?
A
- *Consumers** are able to get higher paid jobs with more disposable income increasing their economic welfare.
- *Governments** have more money from the increase tax of consumers so they can spend more on improving services and infrastructure.
- *Businesses** have more sales so can charge at more a competitive price meaning more profit and allowing the business to grow.
10
Q
What is Real GDP
A
a measure of all the goods and services produced in an economy, adjusted for inflation
11
Q
What is Nominal GDP
A
GDP measured at the current market prices without removing the effects of inflation.
12
Q
Define the term GDP per capita
A
Total national income in an economy divided by the number of people to give income per person.
13
Q
Define inflation
A
Inflation is a persistent or continuing rise in the average price level
14
Q
Define price level
A
Price Level is the average price of goods and services in an economy.
15
Q
How does the price level affect inflation
A
Changes in the rate of inflation are caused by changes in the price of goods and services (price level)
16
Q
Will a change in the price of a good or service always lead to a change in inflation?
A
No if the price of one time changes because demand for it is high this is not inflation. Inflation occurs when most prices are rising by some degree across the whole economy.
17
Q
How is inflation measured?
A
Inflation is measured by the Consumer Price Index (CPI) and the Retail Price Index (RPI), both methods use index numbers to calculate the rate of inflation.
18
Q
Define Consumer Price Index (CPI)
A
official measure used to calculate the rate of consumer price inflation in the UK. The CPI calculates the average price increase of a basket of 700 different consumer goods and service.
19
Q
How are index numbers are used to calculate inflation? (Hint: CPI)
A
- The CPI is a weighted index. To construct a weighted index you must first select a base year. The
variable being measured is given a value of 100 in the base year and other years are compared to. - In the UK Statisticians seek to find out what people spend their money on
by carrying out a Family Expenditure Survey. This involves sampling more than 6,000 households, who are asked to keep a record of their expenditure. - From the information collected, the statisticians decide what to include in the price index. This is a representative sample of 700 goods and services. It
impractical and unnecessary to monitor the price of every product sold in every single shop. - The components of the index are weighted to reflect the importance of various items in the average shopping basket and the amount we spend in different regions of the country and in
different types of shops. - Expenditure weights are held constant for a year. Then the items in the shopping basket and their weights are reviewed and changed in the light of household spending patterns
- The next stage is to find out how prices of goods and services have been changing in the economy.
Government employees visit a range of outlets throughout the country and gather 100,000 prices for 520 items. - Finally the weights are multiplied by the new price index for each category in order to find a change in the price level for those goods.
20
Q
State the two measures of unemployment used in the UK.
A
- Claimant Count
- Labour Force Survey
21
Q
Define Claimant Count
A
the method of measuring unemployment according to those people who are claiming unemployment related benefits.
22
Q
Define Labour Force Survey
A
Labour Force Survey it’s purpose is to provide information on the UK labour market. The survey seeks information on respondents’ personal circumstances and their labour market status during a period of 1-4 weeks.
23
Q
Explain what is meant by a “weighted basket of goods” as used in the CPI calculation
A
The basket of goods refers to the range of goods that are used when calculating the CPI to measure inflation. It contains a range of goods and services bought by the average household in the UK weighted to represent what different amounts of income are spent on.
24
Q
What are the four sections of the current account?
A
- Trade in Goods
- Trade in Services
- Primary Income
- Secondary Income
25
What is current account of the balance of payments?
Current Account of the Balance of Payments measures **all of the currency flows into and out of a country in a particular time period** _payment for exports and imports, together with income and transfer flows_ (primary income and secondary income flows).
26
Define Balance of Trade Deficit
the money value of a country's imports exceeds the money value of its exports
27
Define Balance of Trade Surplus
The money value of a country's exports exceeds the money value of its imports
28
Why does National Income= National Output= National Product?
National output measures the actual goods and services produced by an economy.
National income measures the income received by labour and other factors of production when producing
goods and services.
National Expenditure measures spending of individuals incomes in goods and services.
(All to do with goods and services)
29
In the circular flow of income model, what is the equation?
Income= Output = Expenditure
30
Define Withdrawals in the circular flow diagram
a leakage of spending power out of the circular flow of income into savings, taxation or imports.
31
Go revise the circular flow of income diagrams!
Open and closed (it’s honestly not hard)
32
Define Injections in the circular flow diagram
Injection spending entering the
circular flow of income as a
result of government spending,
investment and exports
33
What are the 3 withdrawals in the circular flow of income?
•Saving
•Taxation
•Imports
(S+T+M)
34
What are the 3 injections in the circular flow of income?
•Investment
•Government spending
•Exports
(G+ I + X)
35
Define saving
Income which is not spent
36
Define Investment
total planned spending by firms on capital goods produced within an economy.
37
What happens when Injections \> Withdrawals?
Results in net injection of spending into the economy causes output and incomes to rise
38
What happens when Injections \< Withdrawals?
Results in net leakage of spending from circular flow causes output and income to fall.
39
When is their equilibrium in the circular flow of income?
The level of income at which withdrawals equals injections.
| (Alternatively the level of real output at which AD=AS)
40
Show national income equilibrium using symbols
S + T + M = G + I + X
41
Define Aggregate Demand
The total planned spending on real output produced within an economy
42
What are the components of aggregate demand
* Consumption
* Investment
* Government expenditure
* net export (X-M)
43
Give the formula for aggregate demand
AD = C + I + G + (X-M)
44
Define aggregate supply
The level of real output that producers are prepared to supply at different average price levels
45
What are the causes for shifts in AD?
•an increase/ decrease in one or more of the components of AD
(CONTROLLED CHANGE)
•an economic shock
(UNEXPECTED CHANGE)
46
Define consumption
is the total planned spending by households on consumer goods and services produced within an economy
47
Define saving
Income which is not spent
on consumption or investment
saving is not restricted to households; firms and governments may also save.
48
What will be the relationship between consumption and saving?
If consumption decreases savings rise. If savings decrease then consumption will rise. (Inverse relationship)
49
What are the three types of investment?
* Gross I
* Replacement I
* Net I
50
What is Net Investment?
Net investment is new investment which will increase the capital stock, facilitating LR economic growth
51
What is Replacement Investment?
Replacement I is necessary when machinery wears out or depreciates (known as capital consumption)
52
How can we calculate gross investment
Gross I = Replacement I + Net I
53
What are the two ways firms investment?
- Investment in fixed capital such as new factories or plants
- Inventory investment ›Stocks of raw materials, semi-finished goods and finished goods
54
List the determinants of consumption and saving
* Interest rate
* Level of income
* Expected future income
* Wealth
* Consumer confidence
* The availability of credit
* Distribution of income
* Level of saving
* The expectations of future inflation
55
Explain how the determinant interest rates impact on consumption and saving
Interest rates are the cost of borrowing or the reward for saving as a %. If IR were to rise, this means the cost of borrowing rises so consumers will spend less as buying on credit or with loans now costs more. Therefore C falls. Also the reward for saving rises, so S rises as consumers can earn more on savings in their bank accounts now. As C falls, AD falls too because C is a component of AD and AD shifts left to AD1 as in fig 1.
56
Explain how level of income impact on consumption and saving
The main, determinant of both consumption and saving is the level of income consumption increases as income rises but not by as much as the increase in their income. Therein lies the cause of recessions, according to Keynes: too much saving and too little spending.
57
Explain how the determinant wealth impact on consumption and saving
A _increase in house prices_ usually **causes homeowners to consume more and to save less** because the **wealth increase does their saving for them.**
_Rising house prices_ also **increase the amount of borrowing** taking place in an economy, through **house buyers taking out large mortgages to secure a house purchase.** The increase borrowing _finances extra consumption,_ not only on the houses themselves but _on items such as furniture_ and new bathrooms and kitchens.
•Also, rising house prices induce a _'_**feel-good' factor among property owners,** which leads to a consumer **spending spree in the shops.**
Conversely, **falling house prices** have the _opposite effect,_ **increasing uncertainty and precautionary saving** via a '_feel-bad' factor._
58
Explain how the determinant consumer confidence impact on consumption and saving
When consumer optimism increases, households generally spend more and save less, whereas a fall in optimism (or a growth in pessimism) has the opposite effect.
Governments try to boost consumer (and business) optimism to ward off the fear of a collapse in confidence by talking the economy up' and by trying to enhance the credibility of government economic policy. If the government is optimistic about the future, and people believe there are good grounds for this optimism, then the general public will be optimistic and confident about the future. However, if people believe the government is pursuing the wrong policies, or if an adverse economic shock hits the economy in a way that the government can't control, confidence can quickly dissipate.
59
Explain how the determinant the availability of credit impact on consumption and saving
If credit is available easily and cheaply
consumption increases as people supplement current income by borrowing on credit created by the banking system. Conversely, a tight monetary policy reduces consumption.
60
Explain how the determinant distribution of income impact on consumption and saving
Consumption and saving are also influenced by the distribution of income within an economy. Rich people save a greater proportion of their income than poor people; redistribution of income from rich to poor therefore increases consumption and reduces saving.
61
Explain how the determinant the expectations of future inflation impact on consumption and saving
Uncertainty caused by fears of rising inflation increases precautionary saving and reduces consumption. It may also, however, have the opposite effect. Households may decide to bring forward consumption decisions by spending now on consumer durables such as cars or television sets, thereby avoiding expected future price increases.
62
What is availability of credit?
funds available for households and
firms to borrow.
63
Define X as a component of AD
Expenditure by overseas consumers and firms on UK produced goods and services
64
Define M as a component of AD
Expenditure by UK consumers and firms on overseas producers goods and services
65
Describe the shift in the AD curve when there’s a rise in exchange rates
Exports cost more and imports are cheaper so we import more causing net exports to fall causing a shift to the left on the AD curve.
66
Describe the shift in the AD curve when there’s a fall in exchange rates
Exports increase as it’s cheaper to buy from the UK. Imports fall as good from abroad are more expensive so net exports rise leading to an increase in consumption so AD increase causing a shift to the right.
67
Define the term accelerator theory
When an increase in the rate of national income (GDP) results in a proportionately larger rise in investment
68
Define multiplier
the relationship between a change in aggregate demand and the resulting usually larger change in national income.
69
What is the multiplier formula?
1/ 1- MPC or 1/ MPW (s+t+i)
70
Define SRAS
short-run aggregate supply aggregate supply= when the level of capital is fixed, though the utilisation of existing factors of production can be altered so as to change the level of real output.
71
Define LRAS
aggregate supply when the economy is producing at its production potential. If more factors of production become available or productivity rises, the LRAS curve shifts to the right.
72
Revise diagrms in particular SRAS and LRAS diagrams
Do all them theres so many‼️ LIKE RIGHT NOW (easy marks😎)
73
Why is the SRAS upward sloping?
The upward-slope of the SRAS curve is explained by two microeconomic
assumptions about the nature of firms. These are:
•all firms aim to maximise profits
•in the short run, the cost of producing extra units of output increases as firms produce more output
74
Explain how the price level affects movement along the SRAS cruve
•To persuade the firms it is in their interest to produce the larger output of y2, the price level must rise.
This is because higher prices are needed to create the higher sales revenues needed to offset the higher production costs that firms incur as they increase output, so that profits do not fall.
•On the SRAS diagram, the average price level has to rise to P2 in order to create conditions in which profit maximising firms are willing and able to supply more output. If prices don't rise, it is not profitable to increase supply. Without a higher price level, profit-maximising firms, taken in aggregate, will not temporarily increase the supply of real output.
75
What are the factors that will cause a rightward shift of the SRAS curve?
• a fall in businesses costs of production; these include the costs of imposed raw materials and energy
• a fall in wage costs or an increase
in labour productivity, the latter possibly caused by better labour training
•a reduction in indirect taxes such as VAT imposed on firms by the government
• an increase in subsidies granted to firms by the government
• technical progress which improves the quality and productivity of capital
goods
76
Will a rise in wages cause a increase or decrease in aggregate supply
Decrease
77
What does a shift to the right on the LRAS cruve mean?
An increase in the economies productive capacity (potential)
78
What does a shift to the left on the LRAS cruve mean?
An decrease in the economies productive capacity
79
And increase in SRAS is caused when …. increases. LRAS increases when …… increase.
And increase in SRAS is caused when aggregate demand increases.
LRAS increases when the 4 factors of production increase.
80
Describe the line in a LRAS diagram
Vertical
81
List the determinants of LRAS
* State of technical progress
* The quantities of capital, labour, enterpise and land
* Mobility of factors of production (particularly labour)
* Productivity of factors of production (particularly labour)
* Individual’s attitudes to hard work
* Personal Enterprise
* Appropriate economic incentives
* Institutional structure of the economy \> Factors such as the rule of law and the efficiency of the banking
82
What are causes of leftward shifts in LRAS?
* Natural disaster
* War
* Political/ financial instability
* oil shortages
* destruction of infrastructure
* decrease in labour mobility
* lack fo free trade
83
LRAS diagram
The Keynesian AS cruve dude‼️
84
The Key Points you need to know about the Keynesian AS cruve
•Keynes's believed the primary objective of government would be to ensure that there was full
employment in the economy
•Based on an explanation put forward by Keynes during the Great Depression of the 1930s
•A depressed economy can settle into a state of under full employment
•Market forces would fail to automatically adjust
•Government intervention would be required at point A, to jolt the economy out of its depression (The New Deal - Roosevelt, Obama Stimulus 2008)
•Existence of spare capacity avoids the conflict between growth and inflation when AD increases
85
What is economic activity?
Production and consumption of goods and services in the economy, together with the employment of the labour, capital and other inputs that produce output
86
What are the factors affecting investment decisions?
* rate of interest
* expectations/ confidence
* the relative price of capital and labour
* the nature of technical progress
* the level of retained progress
* The adequacy of financial institutions in the supply of investment funds
* The impact of government policy and activities on investment by the private sector
87
Explain how the rate of interest affects investment decisions
When intrest rates are high the cost of borrowing money increases this means frims are less likely to borrow money to spend on investment thus investment decreases.
However is intrest rates are low this incentivises firms to borrow money encouraging them to spend more on investment.
88
Explain how expectations/ confidence affect investment decisions
- Expected future sales revenue attributed to the investment project
- Expected future costs of production, both from the rate of interest and maintenance costs
- The future profit the investment is expected to yield \> Future Sales - Future costs
89
Explain how the relative price of capital and labour affect investment decisions
When the price of capital rises in the long run firms adopt more labour-intensive methods of production, substituting labour for capital. A decrease in the relative prices of capital goods has the opposite effect.
If the price of capital goods or interest rates falls, firms switch to capital-intensive methods of production, so investment increases.
90
Explain how the nature of technical progress affect investment decisions
•Technical progress can make machinery out of date.
When this happens, a machine's business life becomes shorter than its technical life: that is, the number of years before the machine wears out.
•A sudden burst of technical progress may cause firms to replace capital goods early, long before the end of the equipment's technical life.
91
Explain how the adequacy of financial institutions in the supply of investment affect investment decisions
Banks have been criticised for favouring short-term investments and being reluctant to provide the finance for long-term investments.
92
Explain how the impact of goverment policy and activities on investment by the private sector affect investment decisions
Governments also provide funds for firms to borrow to finance investment projects, though at the same time they tax firms, for example by levying corporation tax. In the past, UK
governments have sometimes provided investment funds to rescue jobs in loss-making. Government ministers and their civil servants may
make bad investment decisions because, unlike entrepreneurs, they don't face the risk of being bankrupted as a result of poor decision making.
93
What is the link between emplyment and aggregate demand?
When real output increases, firms generally have to employ more workers to produce the additional goods and services that the output increase involves. Conversely, when real output falls, less labour is required to produce the smaller amount of goods and services now being produced.
94
What are the MEOs?
* maintaining full employment
* ensuring price stability
* achieving economic growth
* having a balance of payments
