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IB Economics SL > Macro-Economics > Flashcards

Macro-Economics Flashcards

1
Q

Define commercial banks

A

Anyone can have an account

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2
Q

Define central banks

A

Government banks who print the money

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3
Q

Define withdrawal

A

Money is taken out

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4
Q

What’s another word for withdrawal?

A

Leakage

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5
Q

What does economics describe as land?

A

Every bit of the natural resources

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6
Q

What is the circular flow of income?

A

A model which represents the major exchanges within an economy

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7
Q

Which three sectors inject and withdraw from the circular flow of economy?

A

Banks
Government
Abroad

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8
Q

How do banks inject into the circular flow of economy?

A

Investment (I)

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9
Q

How do governments inject into the circular flow of economy?

A

Government expenditure (G)

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10
Q

How does abroad inject into the circular flow of economy?

A

Export expenditure (X)

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11
Q

Between which two major sectors does the economy flow?

A

Households and firms

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12
Q

What do households provide firms with?

A

Consumption of domestically produced goods and services

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13
Q

What do firms provide households with?

A

Factor payments

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14
Q

What are the factor payments?

A

Wages
Rent
Dividend
Interest

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15
Q

What do households provide banks with?

A

Net savings (S)

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16
Q

What do households provide governments with?

A

Net taxes (T)

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17
Q

What do households provide abroad with?

A

Import expenditure (M)

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18
Q

Expenditure method of calculating GDP

A

GDP = C+I+G+(X-M)

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19
Q

Income method of calculating GDP

A

GDP = wages + rent + dividend + interest

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20
Q

Define physical investment (I)

A

Purchase of a capital good (mainly by firms for the purpose of production) NOT FINANCIAL INVESTMENT

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21
Q

Define GDP

A

Income generated by the production of goods and services within geographical borders of a country, regardless of who owns the factor of production

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22
Q

Define GNP

A

Income produced by the nationals of a country by people in your country as well as outside

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23
Q

What does PPP stand for?

A

Purchasing power parity

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24
Q

Define real GDP

A

Considers inflation

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25
Q

Define nominal GDP

A

Doesn’t consider inflation

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26
Q

What are the 4 major economic issues?

A 
Economic growth
Full employment
Price stability, low inflation rates
External equilibrium, balance of payments
(+ Quality of life)
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27
Q

Define economic growth

A

GDP increases for 2 consecutive quarters

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28
Q

Define recession

A

GDP decreases for 2 consecutive quarters

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29
Q

What do we define as full employment

A

Less than 3-4% unemployment

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30
Q

Define frictional unemployment

A

Occurs from inevitable delay in finding new employment in a free market

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31
Q

Define structural unemployment

A

Occurs due to a permanent shift in the economy

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32
Q

What does (X-M) > 0 mean?

A

An economy has more revenue from exports than expenditures from imports

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33
Q

What does HDI asses?

A

Knowledge
Longevity
Income

34
Q

Gini coefficient

A

Shows the income inequality (close to 0 is more even)

35
Q

Define MPC

A

Marginal propensity to consume is the percentage of income allocated to the consumption of domestically produced goods and services

36
Q

What is the multiplier effect (with reference to mpc)?

A

As money is injected in the economy it is distributed around the circular flow of income. However, households do not spend all of it and it keeps going around like this, becoming multiplied

37
Q

What is the equation to calculate the multiplier?

A

Multiplier (k) = 1/1- MPC

38
Q

Define interest rate

A

Cost of borrowing and the return from savings

39
Q

What was Keynes’ opinion on government spending?

A

It is positive as it injects money into the circular flow of income and causes the multiplier effect

40
Q

What did Keynes believe about savings?

A

That they are a bad idea as often the real income will fall over time

41
Q

What is the paradox of thrift?

A

As interest rates are almost always lower than inflation, saving money makes your real income decrease.

42
Q

What was Hayek’s opinion on government spending?

A

He believed it infringed on civil liberties and that it caused people to feel as though they had more money and thus spend more, putting them in debt

43
Q

What did Hayek believe about savings?

A

That it was paramount as a tool for individuals to be independent of the main government

44
Q

Define aggregate demand

A

Total spending on a country’s over a period of time at a specific level of prices

45
Q

How do we calculate aggregate demand?

A

Use the expenditure method of GDP

AD= C+I+G-(X-M)

46
Q

Define fiscal policy

A

Government spending and taxation

47
Q

What are the two types of consumable goods?

A

Durable

Non durable

48
Q

What are durable goods?

A

Goods that do not require constant consumption for example cars.

49
Q

What are non durable goods?

A

Goods that require constant consumption, such as food.

50
Q

Describe an aggregate demand curve

A

The x axis is Real GDP and changes are represented by the letter ‘y’. The y axis is Price level and changes are represented by the letter ‘p’.
Aggregate demand curve is downwards sloping

51
Q

What do we call a movement right down the aggregate demand curve?

A

An extension of AD

52
Q

What do we call a movement left up the aggregate demand curve?

A

A Contraction of AD

53
Q

What 3 effects affect AD?

A

Wealth effect
Trade effect
Interest rate effect

54
Q

Describe the wealth effect

A

As price level decreases, purchasing power increases

55
Q

Describe the trade effect

A

If exports become more competitive, imports become less competitive and vice versa

56
Q

Describe the interest rate effect

A

If interest rates rise, aggregate demand begins to fall as borrowing is essentially becoming more expensive. This can happen due to increases in price

57
Q

How do banks prevent inflation when prices are high?

A

Increase interest rates

58
Q

When does the AD shift left or right?

A

When there is a change to a component other than price

59
Q

What does it mean for the consumption of durable goods if the consumer confidence is low?

A

It is also low

60
Q

Which factor is most likely to shift an aggregate demand graph?

A

Consumption

61
Q

How can the government effect the consumption of durable goods?

A

Investment

Taxes

62
Q

What factor directly effects investment?

A

Interest

63
Q

What does it mean for investment is interest falls?

A

Investment becomes cheaper and the AD shifts right

64
Q

Describe the effect on AD if tax decreases

A

Shifts right

65
Q

Describe the effect on AD if tax increases

A

Shifts left

66
Q

Describe the effect on AD if government spending decreases

A

Shifts left

67
Q

Describe the effect on AD if government spending increases

A

Shifts right

68
Q

Define the long run in macroeconomics

A

A period of time during which no price of any factor of production is fixed

69
Q

What level of taxation occurs in a government with no intervention?

A

Low taxation

70
Q

What level of taxation occurs in a government with high intervention?

A

High taxation

71
Q

What do neoclassical economists believe?

A

No government intervention as the market forces will ensure the economy stabilises itself

72
Q

What do Keynesian economists believe?

A

Government intervention is necessary as the economy moves in peaks and troughs and government intervention is necessary to prevent these from harming the overall economy

73
Q

Give an example of a neoclassical economist

A

Friedrich Hayek

74
Q

Give an example of a Keynesian economist

A

John Maynard Keynes

75
Q

What does a neoclassical LRSA graph look like?

A

The LRSA is perpendicular to GDP

76
Q

What does a Keynesian LRSA graph look like?

A

The LRSA begins parallel to GDP and then curves upwards, however, if the economy moves into the vertical section they will be in hyperinflation

77
Q

What are policies that can be imposed to reduce expenditure?

A

Contractionary monetary policy (Increase IR)
Contractionary fiscal policy (decrease government spending, increase in tax)

78
Q

What are policies that can switch expenditure (protectionist policies)?

A

Tariffs
Quotas
Embargoes
Domestic subsidies
Non-tariff barriers

79
Q

What policies can strengthen weak exchange rates?

A

Increase interest rates
Decrease money supply
Sell domestic currency reserves

80
Q

What are some supply side policies to boost international competitivness?

A

Government spending on industries
Decreased taxation
Decreased benefits

81
Q

Define competitive advantage?

A

A condition that puts a country or firm in a more favourable position that others

IB Economics SL (5 decks)

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