Macro-Easiest things to forget/mistakes to make

Question 1

4 Features of a good tax

Answer 1

1) cost of collecting tax relatively low to the yield
2) Taxes imposed depending on ability to pay (non-regressive)
3) timing and way of paying should be convenient to the tax payer
4) timing and way of paying explicit to the tax payer

Question 2

Difference between government debt and government deficit

Answer 2

Government debt is an accumulated figure of deficit/ surplus over time
government deficit is the difference between expenditure and revenue at any one time

Question 3

Difference between cyclical budget deficit and structural budget deficit

Answer 3

Cyclical deficit is run on purpose by the government in times of recession to boost the economy
Structural deficit/surplus due to imbalance in tax revenue and government expenditure in the business cycle

Question 4

2 consequences of government debt

Answer 4

• could lead to higher taxes and austerity measures as the national debt increases
• if people lose the confidence in the government to repay their debts they may have to increase interest rates to encourage people to buy bonds
• cost of borrowing money increase as government are doing it increasingly

Question 5

What is expansionary fiscal policy

Answer 5

Fiscal policy that looks at boosting AD. Government runs a budget deficit to increase spending and may cut/ freeze taxes

Question 6

What is deflationary fiscal policy

Answer 6

Decreasing AD by cutting government spending and increasing taxes to lower consumption, improving the budget deficit (austerity)

Question 7

What is the fiscal rule in the UK

Answer 7

Investment to GDP should not exceed 40%

Question 8

what are automatic fiscal stabilisers

Answer 8

policies which offset fluctuations in the economy. These include transfer payments and taxes. They are triggered without government intervention.For example, during periods of high economic growth, governments receive more tax revenue and they spend less on unemployment benefits. During a recession, automatic stabilisers limit the extent of negative economic growth. Consumers pay less tax since they are earning less income and the government has to spend more on unemployment benefits.

Question 9

Whats a nominal exchange rate

Answer 9

The weight of a currency against another without being adjusted for inflation (the basic values)

Question 10

whats a real exchange rate

Answer 10

value of one currency against another when adjusted for inflation

Question 11

Whats a floating exchange rate

Answer 11

Where the exchange rate is determined by the supplying demand of the currency

Question 12

Whats a pegged/fixed exchange rate

Answer 12

where the government determines a value for the currency against another (can be changed by the government though)

Question 13

Whats a bilateral exchange rate

Answer 13

the value of one currency expressed as another currency

Question 14

Whats an effective exchange rate

Answer 14

The effective exchange rate describes the strength of one currency to a basket of other currencies using an index.

Question 15

whats the difference between devaluation and depreciation of an exchange rate

Answer 15

Devaluation= when the government officially lower a fixed exchange rate
Depreciation= when the value of a currency falls against another currency because of supply and demand

Question 16

Whats the Marshall Lerner condition

Answer 16

The Marshall-Lerner condition states that a devaluation in a currency only improves the balance of trade if the absolute sum of long run export and import demand elasticities is greater than or equal to 1.

Question 17

What is purchasing power parity

Answer 17

This is a theory that estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent, according to each currency’s purchasing power.

Question 18

Explain two ways in which a fixed exchange rate, such as Latvia’s peg to the euro, might be maintained when it comes under pressure to devalue

Answer 18

purchasing the currency on the FOREX market to increase the demand/ limit the supply of currency
-increase interests rates to attract hot money flows/ investors

Question 19

what is the hecksher Ohlin theory??

Answer 19

suggests that countries produce and export goods which need abundant resources, and import goods which need resources in short supply.

Question 20

What are unit Labour costs??

Answer 20

average cost of labour per unit of output

Question 21

2 advantages of a European country adopting the euro

Answer 21

• reduces currency transaction costs, which makes trade -with other countries cheaper, allowing them to reduce price levels to increase exports
• exchange stability ensured- no risk that exchange rate changes will decrease competitiveness against other countries, increasing trade
• increased price transparency, price of goods easier to compare, purchasing power parity is equal across countries, harder for firms to engage in price competition which could lead to lower prices

Question 22

How is inflation measured in the UK and what is this process

Answer 22

CPI/ consumer price index-survey of households about what they spend their income on, basket of goods created with each good given a weight depending on the proportion of household income spent on the good. Measures average price change of goods and is Updated annually

Question 23

How does RPI differ to CPI??

Answer 23

Retail price index deemed to be ‘more accurate’ CPI because its more reflective of living costs, it includes council tax and mortgage repayments. Therefore it gives a higher value than CPI; it is unique to the UK however whereas CPI can be compared to other countries

Question 24

what are the consequences of inflation on households

Answer 24

• Those on fixed wages hit hardest because their real wages fall as they don’t see a wage increase as prices increase, which is regressive and makes them worse off
• Loan repayments are cheaper for people when the price rises because the real price of repayment is cheaper as the loan doesn’t change with inflation

Question 25

What are the impacts on firms of inflation

Answer 25

• cost push inflation means higher costs from increased price of factors of production
• May see workers demand higher wages which could increase costs
• Higher inflation likely to lead to higher interest rate which disincentives investment

Question 26

What are the impacts of inflation on governments?

Answer 26

Inflation disincentives people to spend which could lead to a fall in tax receipts
-National debt decreases

Question 27

What are the consequences of deflation??

Answer 27

• A sign of bad economic growth, which reduces consumer and business confidence sometimes
• ## if people slow down their spending because they anticipate further price falls, this could lead to a recession and rising unemployment as deflation quickly spirals out of control

Question 28

How do you measure real GDP per capita

Answer 28

Real GDP / population

Question 29

What is the accelerator??

Answer 29

during a boom, an increase in national income leads to a proportionally bigger increase in business investment

Question 30

Why does the accelerator happen??

Answer 30

Businesses invest more into capital and expansion because the demand for the goods that they are producing is increasing; the demand for consumer goods drives the demand for capital goods

Question 31

What is the multiplier, how do you work it out and how does it work??

Answer 31

• The multiplier is a theory that an injection into the economy will lead to a proportionally bigger increase in real GDP.
• Multiplier is worked out by 1/MPW or 1/1-MPC.
• if the multiplier Is 2, an injection of £10mn into the economy will lead to an increase of £20mn in real GDP

Question 32

What determines the extent to which investment increases real GDP??

Answer 32

The higher the MPC ie more that increased income is spent on consumption, the higher the multiplier and therefore higher the increase in real GDP

Question 33

what is the accelerator good for explaining??

Answer 33

The business cycle- during booms, business confidence is high and increased national income leads to a proportionally bigger increase in investment
-the level of net investment is determine by the level of net national growth

Question 34

What is the definition of an output gap??

Answer 34

The difference between actual GDP and potential GDP

Question 35

What are the different stages of an economic cycle??

Answer 35

Boom, recession, slump, recovery

Question 36

What are the benefits of economic growth??

Answer 36

• Higher GDP increases standards of living among those with rising real wages
• Lower unemployment
• Better infrastructure
• higher tax revenue gained

Question 37

What are the costs of economic growth??

Answer 37

• Higher prices (demand pull inflation) which lead to higher interest rates, disincentivises long term investment (worst for people on fixed wages)
• negative externalities due to a lack of sustainability ie non renewable factors of production used up at a faster rate
• More pollution
• higher inequality as wealthier people get more wealth ie from higher interest rates

Question 38

What causes economic growth in the short term??

Answer 38

ANYTHING THAT INCREASES AD

• more consumption ie from higher wages/ increased MPC
• higher business investment (accelerator)
• more government spending (capital spending, multiplier)
• higher exports/ lower imports (devaluation of currency making us more competitive)

Question 39

What causes economic growth in the long term??

Answer 39

ANYTHING THAT SHIFTS LRAS TO THE RIGHT

• Improved quantity/ farming of factors of production
• more motivated work force
• better health and education
• deregulation of the labour market
• cutting red tape

Question 40

What are the benefits of full employment??

Answer 40

• higher GDP due to more people contributing to consumption as more people have jobs
• Increases the long run potential of the economy due to a higher availability of labour
• higher wages
• decreases likelihood of poverty

Question 41

What are the drawbacks of full employment??

Answer 41

• A country at full capacity could see price level wage without any increase in GDP, demand pull inflation
• Higher amounts of people claiming for higher wages may increase business costs, leading to further cost push inflation

Question 42

What is deflation, disinflation and hyper inflation

Answer 42

• Deflation= when the price level of goods falls
• Disinflation- when price levels are still rising but by a smaller amount
• hyperinflation- a severe level of inflation where price levels rise rapidly

Question 43

‘evaluate the causes of inflation’??

Answer 43

• Increased employment- more people have jobs, when unemployment is very low, people demand higher wages
• depreciation of the pound- raises the price of consumer goods and business commodities that are imported (cost push and demand pull)
• increase in consumption (demand pull)
• depends on marginal propensity to consumer (low income people have higher MPC so spend more, raising prices more)

Question 44

‘evaluate the cause of deflation’

Answer 44

• Fall in the components of AD
• fall in business and consumer confidence
• inverse of the accelerator- decrease in national income leads to a proportionally bigger fall in business investment
• higher unemployment
• extent depends on position of AD line
• high level of spare capacity
• increase in technology or productivity (anything that increases LRAS)

Question 45

‘evaluate the consequences of deflation’

Answer 45

Bad

• Lower consumption as consumers expect prices to fall further so hold back on spending
• debts increase as real value of debts increase as money becomes worth more
• real cost of borrowing increases, knocks business and consumer confidence (if interest rates don’t fall aligned with price level)
• rising cyclical unemployment

Good- exports may become more competitive in the long run, but at the expense of short run unemployment

Question 46

‘explain why achieving a sustainable balance of payments is an important economic objective’

Answer 46

HIGH CA DEFICIT

• running a high CA deficit means profits of MNCs setting up in the UK end up leaving the country
• import driven economy means lower AD
• Import driven countries also mean no incentive to reduce the price of exports and increase competitiveness, further worsening the balance of payments
• foreigners have an increases claim your assets which can be withdrawn at any time, affecting business confidence

HIGH CA SURPLUS

• suggest your an export driven country, depreciation of currency leads to higher price of imports which lowers the standards of living.
• Suggests Low domestic demand for goods lowers AD

Sustainable would be where you don’t run a huge surplus or deficit. A small deficit is beneficial because it can be influenced by exchange rate changes. UK exports lots of services like education and finance but imports lots of consumer goods. These imports are necessary for domestic production and improved standards of living, so may be fine

Question 47

Facts about the income inequality and wealth distribution in the world??

Answer 47

• in 2009 18% of people in the UK were below the relative poverty line of 2/5 of the medium income
• £11trillion in UK wealth with £5trillion being owned by the top 10%
• Between 2012-2014, the top 10% of households saw a 21% increase in wealth whilst the bottom 50% saw a 7% increase

Question 48

What does economic growth and economic development measure??

Answer 48

economic growth- quantitative figure of how GDP changes as a %

economic development- more qualitative measure, incorporates economic growth into quality of life, life expectancy, literacy rates. HDI rankings as well

Question 49

What is sustainable development??

Answer 49

development that meets the needs of the present without compromising the ability of the future to meet its own needs

Question 50

How does economic growth affect sustainable development

Answer 50

often a drain on natural resources ie factors of production

-higher carbon emissions and the depletion of non renewable sources

Question 51

what are the causes of inequality??

Answer 51

• Differing levels and availability of education
• Employment- high demand industries eg technology specialists In Silicon Valley lead to higher wages
• Fixed wages against inflation
• Unemployment, welfare benefits lower than what people could be earning
• inheritance
• Ownership of assets

Question 52

How does the gini-coefficient measure inequality???

Answer 52

On a scale from 0-1, 0 where everyone earns the exact same to one where one person has all the wealth. South Africa has the worst with

Question 53

What are the consequences of inequality??

Answer 53

Bad

• Potentially lower AD from low income earners stuck in low wage cycles, therefore contributing less to consumption
• Low income workers have high marginal propensity to import, which worsens the balance of payments
• Less competitive exports in the short term as workers feel demotivated from low wages, therefore productivity falls
• Lower standards of living among low income earners

Good

• May help to reduce demand pull inflation as there is not a massive demand for goods relative to supply
• High inequality may serve as a motivator for lower wage earners to work harder and create new businesses or improve their position in a business, which could drive economic growth

Question 54

How does the laffer curve explain the link between tax revenue and tax rates??

Answer 54

Tax revenue on y axis, tax rate on x axis

There is a optimum tax rate at which tax revenue is maximised, and increasing the tax rate further will lead to a fall in tax revenue

Question 55

How will tax revenue fall after the optimum level??

Answer 55

-possible brain drain effect
-Greater incentive to evade tax
possible disincentive effect on labour market

Question 56

Advantages and disadvantages of foreign trade for developed countries, including ODA (foreign aid))

Answer 56

ADV-

• Access to cheap imported goods which improve the quality of life of consumers
• ODA may provide long term trading partners for developed countries if they can exploit these increases in revenue
• better range of goods for domestic consumers
• new markets for exports
• improvements in technology
• larger labour pools

DIS ADV-

• ODA often seen as money for nothing, no short term return for the developed country
• Outwards FDI- companies setting up in foreign countries but profits end up back in domestic country
• disappearance of large parts of primary and secondary sectors as they are done in cheaper countries
• more competitive foreign countries may lead to a depreciation in domestic exchange rates to increase competitiveness, making imports more expensive (cost push)

Question 57

Advantages and disadvantages of foreign trade for emerging economies including ODA

Answer 57

Adv

• ODA if used effectively and correct training and advice is given could be invested effectively into the economy to improve infrastructure, health and education and therefore quality of life
• Gives access to new goods and services
• MNCs expand into these countries and provide jobs (possible external economies of scale benefit local areas)
• FDI can see improved standards of living

DIS ADV

• ODA without advice/ training is worthless as corruption could play a part, or if resources are misallocated and important sectors of the economy receive too little allocation
• MNCs could exploit workers for low wages, with profits ending up back in the MNCs country
• Inwards FDI but outwards wages and profits from the developing countries
• High levels of natural resources in these countries deplete, non-sustainable

Question 58

Evaluate the usefulness of HDI as a macroeconomic measure??

Answer 58

Useful- more so in emerging economies as it can give an indication of the standard of living of a country. Doesn’t solely rely on GNI values as it includes life expectancy and years of education
-best for drawing broad conclusions about countries that are clearly developed against countries that are less so, does not indicate everything

• Not useful
• Doesnt include inequality, high mean GNI values may be brought up by a small % of very high earners
• Doesnt take into account other factors like political freedom and cultural identity- people argue it should be more human centred

Question 59

What do HDI rankings primarily measure??

Answer 59

• life expectancy
• education levels/ years of schooling
• GDP per capita

Question 60

Why is the J curve the shape that it is??

Answer 60

TIME LAG EFFECT
Marshall Lerner condition states that depreciation of currency value will only improve BOP CA deficit if the PeD for imports and exports if more than 1.
-more likely to be inelastic in the short run, therefore lower valued currency raises price of imports in the short run so imports continued to be bought at higher prices due to inelasticity, worsening BOP in the short run

Question 61

What is meant by the natural rate of unemployment

Answer 61

neo-classical economist theory that policies to reduce unemployment will lead to inflation but won’t change the level of unemployment in the long run.
Unemployment is fixed in the long term at its natural rate

Question 62

Hows the the NRU/ NAIRU work

Answer 62

In the short term, when unemployment falls, workers have more bargaining power and bid up their nominal wages. As wage costs rise, prices are driven up to PL1. Real wages are unchanged due to inflation matching wage increase, so labour supply falls back to NRU

Question 63

What is monetary policy and what are the primary and secondary objectives??

Answer 63

The Bank Of England are in charge of monetary policy and can change the base rate to influence exchange rates
Primary objective is to reach the target of 2% inflation
secondary objective is to support the governments other objectives

Question 64

What are the impacts of protectionism (tariffs/ quotas)

Answer 64

-Tariffs= the world supply plus tariff is a higher perfectly elastic supply that increase the world price. However this increases domestic producer surplus as more domestic suppliers can price their goods below the world supply plus tariff price

• Quotas= kinked supply curve that kinks at PQ and changes to two curves; domestic supply and domestic supply + quota
• quotas raise the price of goods because the world supply that is below PQ is risen to PQ as they can only supply a small amount of goods at this price

Question 65

What is trade creation and where does it occur??

Answer 65

Trade creation- the increase in economic welfare as a result of joining a FTA eg customs union
A reduction in tariff barriers leading to lower prices for domestic consumers, as the expense of domestic producer welfare

Question 66

What is trade diversion and where does it occur??

Answer 66

Trade diversion- the switch of imports from a low cost country to a high cost country due to tariffs
-concentrates production in a country with higher opportunity cost and lower comparative advantage eg when GB joined the EU and trade went from low cost new Zealand to higher cost EU countries, which was only the cheaper option because of the tariffs imposed on New Zealand goods

Question 67

What is the fisher equation and how does it explain the link between price level and money supply

Answer 67

MV=PT where M=money supply
v= velocity of money (how much it changes hands)
P=Price level
T=transactions

T and V are said to be constants, so P can only increase with M, so when money supply increases, inflation happens as PL rises

Question 68

How can a PPF be used to show economic growth

Answer 68

Outwards shift of a PPF due to increased capacity

Question 69

Evaluate Advantages of EU membership

Answer 69

• Efficiency of single markets increase as resources diverted to areas of comparative advantage
• Trade creation which lowers price
• Higher labour supply
• cheaper factors of production

Question 70

How do you calculate APC and MPC

Answer 70

APC= consumption/ income
MPC= % change in consumption divided by change in income

Question 71

What is the difference between Keynes and Austrian (Hayek) economics??

Answer 71

Keynes=Boost AD by stimulating economy and discouraging saving, government intervention key in guiding markets with fiscal and monetary policy

Austrian= Laissez faire policies, believe intervention will make things worse, saving for interest which will encourage investment

Question 72

What is the basis of neoclassical economics??

Answer 72

Relating the supply and demand of goods to an individuals ability to maximise utility and act rationally- consumers no one goal is to maximise satisfaction and they are fully aware of evaluations of utility

Question 73

How do you calculate real GDP??

Answer 73

Nominal GDP (GDP as a figure of current market prices) minus inflation

Question 74

What is the relationship between economic growth and sustainable development?

Answer 74

Economic growth is the increase in GDP/ national output. Growth can positively or negatively effect sustainable development depending on how the growth is achieved

• Must ensure non renewable sources are used effectively and renewable methods are created to replace them
• everyone needs to share in the increase of GDP and a clean and safe environment (economic growth enhances inequality, so sustainable development might be reduced if all the benefits go to a small % of people)

Question 75

‘explain the impact of the multiplier effect’

Answer 75

The multiplier effect occurs when an injection into the economy by the government leads to a proportionally larger increase in real GDP. This is determined by how much of this new injection is re invested into the economy, through consumption, compared to how much I saved, taken as tax revenue, or spent on imports. the higher the marginal propensity to consume, the more of the injection that is re invested into the economy, and the larger the effect of the multiplier

Question 76

What are the roles of the IMF, WTO and world bank??

Answer 76

IMF- international monetary fund= provides short term loans to countries to stimulate economic growth and help balance of payment problems, as well as providing advice

World bank- provides long term loans to emerging countries to stimulate economic development, by funding sustainable projects or revitalising certain sectors of the economy

WTO- world trade organisation- facilitates rules for world trade for countries that aren’t in free trade areas or agreements

Question 77

‘explain why approaches to macroeconomic thought change eg Keynes and the Great Depression’

Answer 77

Economic tragedy’s like the Great Depression show the extent to which previous thoughts of economic ideas were successful and which ones failed. The GD led to Keynesian economics; a school of thought concerned with the importance of government intervention and that they the free market could not be left completely alone (laissez faire policies) if it was to provide full employment to the economy, which is why there was such great government intervention post 1929

Question 78

What is meant by the Phillips curve??

Answer 78

The Phillips curve shows the relationship between inflation and employment (inflation on the y axis, employment on the x). it suggests there is a trade off between employment and inflation, and so higher employment means higher inflation as workers bid up their nominal wages because of the high job security

Question 79

Give 5 examples of supply side policies

Answer 79

-Reduce business tax
-reduced patents
-cut red tape
-deregulation of labour markets, safety etc
-increased occupational and geographical ability of labour
-stimulate competitiveness and innovation
ALL SHIFT LRAS TO THE LEFT

Question 80

What is the importance of supply side policies

Answer 80

they are key to the sustainable economic growth of a country with low levels of inflation

Question 81

Definition of comparative advantage??

Answer 81

When a country can produce goods at a lower opportunity cost that another country

Question 82

How do you calculate comparative advantage??

Answer 82

ratios- the opportunity cost of one good in terms of the other good, the two which are lowest for each country show which country should provide which good