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Economics > Macro Book 3 > Flashcards

Macro Book 3 Flashcards

Economic Growth, Unemployment, Inflation, Balance of Payments, Exchange Rates, Government Macro Policy

1
Q

What causes shifts in long-run aggregate supply

A

Changes in the productive capacity of the economy

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2
Q

People are unemployed when…

A

They do not have a job but are actively seeking work (in the last four weeks)

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3
Q

What two measures are used to measure unemployment

A

Claimant count
International Labour Force Survey

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4
Q

How do you work out the potential labour force

A

Employed + Unemployed + Economically Inactive

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5
Q

What is underemployment

A

When people are employed but don’t work as many hours as they wish to

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6
Q

What reasons could someone have to be unemployed

A

Frictional
Seasonal
Structural
Technological
Cyclical
Classical

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7
Q

What is geographical immobility of labour

A

Workers can’t relocate to where their labour is

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8
Q

What is occupational immobility of labour

A

Workers can’t switch to another job, due to a lack of transferable skills

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9
Q

What is inflation

A

A sustained increase in the general level of prices

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10
Q

How is inflation normally measured in the UK

A

Using a “basket of goods” to compare the average change in price for any goods

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11
Q

When is inflation demand-pull

A

Because of an increase in aggregate demand

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12
Q

When is inflation cost-push

A

Inflation due to rising costs

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13
Q

What is the difference between Deflation and Disinflation

A

Deflation - sustained decrease in the general price of goods
Disinflation - a fall in the rate of inflation

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14
Q

What is the wage-price spiral

A

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.

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15
Q

What can often trigger inflation

A

Price shocks to important commodities

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16
Q

What is malign deflation

A

Caused by falling aggregate demand

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17
Q

What is benign deflation

A

Caused by falling costs

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18
Q

What tells us the value of one currency in terms of another

A

The exchange rate

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19
Q

When we talk about the British Pound, we use the term?

A

The pound sterling

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20
Q

What is the current account made up of?

A

Of imports and exports of goods and services

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21
Q

When does the current account go through a deficit

A

When the country’s value of imports exceed the value of exports sold

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22
Q

When the value of exports sold exceeds the value of imports brought, the current account is in?

A

Surplus

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23
Q

Using £1 = $1.50 = €1.20, if 3 of the same item was sold in different currencies; £60,
€75, $95. Which is cheaper?

A

The pound sterling would be the cheapest
€75 = £62.50
$95 = £63.33

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24
Q

Why do exchange rates change

A

The demand for a countries currency changes it’s value as there is limited supply avaliable for exchanging

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25
Q

If the pound was previously worth $1.50 but is now worth $1.60, what does this mean

A

The pound strengthened against the dollar by 6.67%

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26
Q

How can exchange rates and the rate of inflation of a country make it more “attractive” to internationally trade with

A

Lower inflation may mean that the price of the goods will also be lower (assuming ceteris paribus)

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27
Q

Fiscal Polices are?

A

The use of taxation/government spending to manage the economy

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28
Q

Monetary polices are?

A

The use of interest rates and the manipulation of the money supply to manage the economy

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29
Q

What is an output gap on an economic cycle graph

A

The space between the trend line and the actual GDP

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30
Q

What is the aim of an expanionary policy

A

To increase aggregate demand

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31
Q

What is the aim of a contractionary policy

A

To reduce aggregate demand

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32
Q

What can be the reasons for taxation

A

Pay for the government
Correct market failure
As a macroeconomic policy tool
Redistribute income and wealth

33
Q

What are the features of a good tax (as regarded by Adam Smith)

A

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

34
Q

What is a progressive tax

A

When it takes a higher proportion of high-earners’ income

35
Q

What is a regressive tax

A

When low-earners end up paying a higher proportion of their income

36
Q

What is a proportionate tax

A

When tax takes an equal proportion of income, no matter how high/low it is

37
Q

When is a tax direct?

A

When it is paid directly by an individual/organisation (e.g. income) and cannot be passed on

38
Q

When is a tax indirect?

A

When it is levied on good and services (e.g. V.A.T)

39
Q

What are the bands of income tax and how much of does each band take of income

A

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+

40
Q

What is government debt

A

A stock variable that has been accumulated over time

41
Q

What is the budget deficit

A

The amount that government spending exceeds tax revenue

42
Q

How is budget deficit funded

A

Through borrowing

43
Q

How could a government correct a budget deficit without increasing tax or cutting government spending?

A

By pushing for a period of GDP growth

44
Q

How are fixed and variable interest rates different

A

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

45
Q

What do supply side policies aim to do

A

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

46
Q

What is Frictional unemployment

A

People are between jobs either because they just left one and haven’t found another one or have just become economically active

47
Q

What is Seasonal unemployment

A

The demand for certain types of labour only exists at certain times of the year

48
Q

What is Structural unemployment

A

Caused by a change in the structure of the economy, making demand for that type of labour no longer exist

49
Q

What is Technological unemployment

A

Workers are replaced with machinery (arguably subsection of structural)

50
Q

What is Cyclical unemployment

A

Caused by a lack of aggregate demand and falls during recovery/growth

51
Q

What is Classical unemployment

A

Caused by wages being too high for the labour market to clear

52
Q

Which graph is used to show cost-push inflation?

A

Only on a short-run supply graph

53
Q

What is the difference between internal and external price shocks?

A

Internal shocks occur within the same country
External shocks occur from abroad

54
Q

Are there any benefits to inflation?

A

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

55
Q

A Strengthening Pound makes…?

A

Imports Cheaper and Exports Dearer

56
Q

A Weakening Pound makes…?

A

Imports Dearer and Exports Cheaper

57
Q

How does strengthening a currency affect the current account

A

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

58
Q

What is the Personal Allowance band’s size and Tax rate

A

£12,570 and Tax-free

59
Q

What is the Basic Rate band’s size and Tax rate

A

£37,700 and 20%

60
Q

What is the Higher Rate band’s size and Tax rate

A

£74,870 and 40%

61
Q

What is the Additional Rate band’s size and Tax rate

A

There is no maximum size over £150,000 and 45%. Furthermore, the household no longer gets a personal allowance

62
Q

What is National Insurance

A

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

63
Q

What is Corporation Tax

A

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

64
Q

What is V.A.T (value added tax)

A

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%

65
Q

When does a budget surplus happen

A

When there is an excess of government revenue

66
Q

How does inter-generational equity argue against government debt

A

When the current generation spends money and reaps the rewards, future generations will be stuck with the repayments plus interest

67
Q

What is the automatic stabiliser

A

A factor that changes in such a way as to automatically stabilise aggregate demand and the economic cycle

68
Q

Example of an automatic stabiliser

A

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

69
Q

Example of an automatic stabiliser

A

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”

70
Q

What is a free-market supply side policy

A

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

71
Q

What is an interventionist supply side policy

A

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

72
Q

How do Tax Cuts increase the productive capacity

A

The firms have lower costs of production
Work is made more rewarding
Firms can invest into capital instead

73
Q

How does Privatisation increase the productive capacity

A

More incentive to invest to keep profit margins lost

74
Q

How does Deregulation increase the productive capacity

A

Firms have more incentive to get permissions to increase their productivity
Incentive to invest more

75
Q

How does Labour market reforms increase the productive capacity

A

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

76
Q

How does Education and Training increase the productive capacity

A

Workers are less likely to fail in labour meaning more goods are produced.
Workers gain transferable skills and lower cost of training

77
Q

How do Subsidies for research and development increase the productive capacity

A

This lowers a firms costs of production so they are more incentivised to invest
Developing new technology can increase quality and quantity

78
Q

How does Interventing in Labour Markets increase the productive capacity

A

Increases in the Minimum Wage may incentive workers to work more
Motivates the economically inactive

Economics (12 decks)

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