Macro Book 3 Flashcards
Economic Growth, Unemployment, Inflation, Balance of Payments, Exchange Rates, Government Macro Policy
What causes shifts in long-run aggregate supply
Changes in the productive capacity of the economy
People are unemployed when…
They do not have a job but are actively seeking work (in the last four weeks)
What two measures are used to measure unemployment
Claimant count
International Labour Force Survey
How do you work out the potential labour force
Employed + Unemployed + Economically Inactive
What is underemployment
When people are employed but don’t work as many hours as they wish to
What reasons could someone have to be unemployed
Frictional
Seasonal
Structural
Technological
Cyclical
Classical
What is geographical immobility of labour
Workers can’t relocate to where their labour is
What is occupational immobility of labour
Workers can’t switch to another job, due to a lack of transferable skills
What is inflation
A sustained increase in the general level of prices
How is inflation normally measured in the UK
Using a “basket of goods” to compare the average change in price for any goods
When is inflation demand-pull
Because of an increase in aggregate demand
When is inflation cost-push
Inflation due to rising costs
What is the difference between Deflation and Disinflation
Deflation - sustained decrease in the general price of goods
Disinflation - a fall in the rate of inflation
What is the wage-price spiral
Worker’s negotiate a pay rise to be able to afford more goods.
Firms have to pay more for labour and thus they raise prices in order to maintain profit margins.
Then a workers standard of living drops further due to inflation.
What can often trigger inflation
Price shocks to important commodities
What is malign deflation
Caused by falling aggregate demand
What is benign deflation
Caused by falling costs
What tells us the value of one currency in terms of another
The exchange rate
When we talk about the British Pound, we use the term?
The pound sterling
What is the current account made up of?
Of imports and exports of goods and services
When does the current account go through a deficit
When the country’s value of imports exceed the value of exports sold
When the value of exports sold exceeds the value of imports brought, the current account is in?
Surplus
Using £1 = $1.50 = €1.20, if 3 of the same item was sold in different currencies; £60,
€75, $95. Which is cheaper?
The pound sterling would be the cheapest
€75 = £62.50
$95 = £63.33
Why do exchange rates change
The demand for a countries currency changes it’s value as there is limited supply avaliable for exchanging
If the pound was previously worth $1.50 but is now worth $1.60, what does this mean
The pound strengthened against the dollar by 6.67%
How can exchange rates and the rate of inflation of a country make it more “attractive” to internationally trade with
Lower inflation may mean that the price of the goods will also be lower (assuming ceteris paribus)
Fiscal Polices are?
The use of taxation/government spending to manage the economy
Monetary polices are?
The use of interest rates and the manipulation of the money supply to manage the economy
What is an output gap on an economic cycle graph
The space between the trend line and the actual GDP
What is the aim of an expanionary policy
To increase aggregate demand
What is the aim of a contractionary policy
To reduce aggregate demand
What can be the reasons for taxation
Pay for the government
Correct market failure
As a macroeconomic policy tool
Redistribute income and wealth
What are the features of a good tax (as regarded by Adam Smith)
An individuals ability to pay
The amount they should pay is clear to everyone
The method/timing of payment is convienient
The cost of collection is low relative to the yield
What is a progressive tax
When it takes a higher proportion of high-earners’ income
What is a regressive tax
When low-earners end up paying a higher proportion of their income
What is a proportionate tax
When tax takes an equal proportion of income, no matter how high/low it is
When is a tax direct?
When it is paid directly by an individual/organisation (e.g. income) and cannot be passed on
When is a tax indirect?
When it is levied on good and services (e.g. V.A.T)
What are the bands of income tax and how much of does each band take of income
Personal Allowance - 0% - up to £12,570
Basic Rate - 20% - up to £50,270
Higher Rate - 40% - up to £125,140
Additional Rate - 45% - £125,140+
What is government debt
A stock variable that has been accumulated over time
What is the budget deficit
The amount that government spending exceeds tax revenue
How is budget deficit funded
Through borrowing
How could a government correct a budget deficit without increasing tax or cutting government spending?
By pushing for a period of GDP growth
How are fixed and variable interest rates different
For fixed, the amount paid is set at the start and doesn’t change
For variable, the amount paid will change with the BoE base rate
What do supply side policies aim to do
They aim to increade the productive capacity of an economy, either by reducing the governments role and promotes incentive to work or by increasing the role of the government to support an industry
What is Frictional unemployment
People are between jobs either because they just left one and haven’t found another one or have just become economically active
What is Seasonal unemployment
The demand for certain types of labour only exists at certain times of the year
What is Structural unemployment
Caused by a change in the structure of the economy, making demand for that type of labour no longer exist
What is Technological unemployment
Workers are replaced with machinery (arguably subsection of structural)
What is Cyclical unemployment
Caused by a lack of aggregate demand and falls during recovery/growth
What is Classical unemployment
Caused by wages being too high for the labour market to clear
Which graph is used to show cost-push inflation?
Only on a short-run supply graph
What is the difference between internal and external price shocks?
Internal shocks occur within the same country
External shocks occur from abroad
Are there any benefits to inflation?
Allowing some inflation means relative prices can adjust
Difficulties in accurately measuring inflation may mean targeting 0% inflation could mean deflation is occuring
Inflation may mean firms can overcome problems if prices are being sticky downwards
A Strengthening Pound makes…?
Imports Cheaper and Exports Dearer
A Weakening Pound makes…?
Imports Dearer and Exports Cheaper
How does strengthening a currency affect the current account
The countries imports are cheaper and exports are more expensive -
- as foreigners will have to give up more of their own currency to buy a countries exports resulting in less exports provided
Firms within the country will have more incentive to use imports in production
This worsens the countries current account position
What is the Personal Allowance band’s size and Tax rate
£12,570 and Tax-free
What is the Basic Rate band’s size and Tax rate
£37,700 and 20%
What is the Higher Rate band’s size and Tax rate
£74,870 and 40%
What is the Additional Rate band’s size and Tax rate
There is no maximum size over £150,000 and 45%. Furthermore, the household no longer gets a personal allowance
What is National Insurance
Similar to income tax in the way that it is based on income and is collected via Pay As You Earn.
Most employees contribute 12% per week between £242 and £967 and 2% more on anything over £967 per week.
Can be used to fund pensions and some benefits such as contributions-based JSA.
Emploers also contribute to this up to 13.8% as well as collecting employee contributions
What is Corporation Tax
Firms pat tax on their profits, levied at 25% for all businesses earning over £250,000 and at 19% for firms earning under £50,000 annually
Deductions can be made for investments in machinery, equipment and vechicles
What is V.A.T (value added tax)
A tax applies to goods and services other than basic foodstuffs.
The standard rate is 20%
Domestic gas and electricity is charged at a reduced rate of 5%
When does a budget surplus happen
When there is an excess of government revenue
How does inter-generational equity argue against government debt
When the current generation spends money and reaps the rewards, future generations will be stuck with the repayments plus interest
What is the automatic stabiliser
A factor that changes in such a way as to automatically stabilise aggregate demand and the economic cycle
Example of an automatic stabiliser
If an economy falls into recession, more people will claim Jobseeker’s Allowance
This prevents their income from falling below a certain threshold
Increasing their ability to consume helping aggregate demand from falling even further
Example of an automatic stabiliser
A progressive system of income tax will take a higher proportion of high-earners’ income.
This prevents their spending power from rising too quickly and reduces the risk of the economy “overheating”
What is a free-market supply side policy
The intention to increase productive capacity of the economy by reducing the role of the government.
Usually to promote stronger incentives by making work and enterprise more rewarding
What is an interventionist supply side policy
The intention to increase the productive capacity of the economy by increasing the role of the government.
Often by increasing government spending
to support a particular industry
How do Tax Cuts increase the productive capacity
The firms have lower costs of production
Work is made more rewarding
Firms can invest into capital instead
How does Privatisation increase the productive capacity
More incentive to invest to keep profit margins lost
How does Deregulation increase the productive capacity
Firms have more incentive to get permissions to increase their productivity
Incentive to invest more
How does Labour market reforms increase the productive capacity
Less strikes results in less profit lost so firms can go longer without changing
It becomes harder to oppose changes and make it easier to boost productivity
How does Education and Training increase the productive capacity
Workers are less likely to fail in labour meaning more goods are produced.
Workers gain transferable skills and lower cost of training
How do Subsidies for research and development increase the productive capacity
This lowers a firms costs of production so they are more incentivised to invest
Developing new technology can increase quality and quantity
How does Interventing in Labour Markets increase the productive capacity
Increases in the Minimum Wage may incentive workers to work more
Motivates the economically inactive
