Macro-Economics Flashcards
Define commercial banks
Anyone can have an account
Define central banks
Government banks who print the money
Define withdrawal
Money is taken out
What’s another word for withdrawal?
Leakage
What does economics describe as land?
Every bit of the natural resources
What is the circular flow of income?
A model which represents the major exchanges within an economy
Which three sectors inject and withdraw from the circular flow of economy?
Banks
Government
Abroad
How do banks inject into the circular flow of economy?
Investment (I)
How do governments inject into the circular flow of economy?
Government expenditure (G)
How does abroad inject into the circular flow of economy?
Export expenditure (X)
Between which two major sectors does the economy flow?
Households and firms
What do households provide firms with?
Consumption of domestically produced goods and services
What do firms provide households with?
Factor payments
What are the factor payments?
Wages
Rent
Dividend
Interest
What do households provide banks with?
Net savings (S)
What do households provide governments with?
Net taxes (T)
What do households provide abroad with?
Import expenditure (M)
Expenditure method of calculating GDP
GDP = C+I+G+(X-M)
Income method of calculating GDP
GDP = wages + rent + dividend + interest
Define physical investment (I)
Purchase of a capital good (mainly by firms for the purpose of production) NOT FINANCIAL INVESTMENT
Define GDP
Income generated by the production of goods and services within geographical borders of a country, regardless of who owns the factor of production
Define GNP
Income produced by the nationals of a country by people in your country as well as outside
What does PPP stand for?
Purchasing power parity
Define real GDP
Considers inflation
Define nominal GDP
Doesn’t consider inflation
What are the 4 major economic issues?
Economic growth Full employment Price stability, low inflation rates External equilibrium, balance of payments (+ Quality of life)
Define economic growth
GDP increases for 2 consecutive quarters
Define recession
GDP decreases for 2 consecutive quarters
What do we define as full employment
Less than 3-4% unemployment
Define frictional unemployment
Occurs from inevitable delay in finding new employment in a free market
Define structural unemployment
Occurs due to a permanent shift in the economy
What does (X-M) > 0 mean?
An economy has more revenue from exports than expenditures from imports
What does HDI asses?
Knowledge
Longevity
Income
Gini coefficient
Shows the income inequality (close to 0 is more even)
Define MPC
Marginal propensity to consume is the percentage of income allocated to the consumption of domestically produced goods and services
What is the multiplier effect (with reference to mpc)?
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
What is the equation to calculate the multiplier?
Multiplier (k) = 1/1- MPC
Define interest rate
Cost of borrowing and the return from savings
What was Keynes’ opinion on government spending?
It is positive as it injects money into the circular flow of income and causes the multiplier effect
What did Keynes believe about savings?
That they are a bad idea as often the real income will fall over time
What is the paradox of thrift?
As interest rates are almost always lower than inflation, saving money makes your real income decrease.
What was Hayek’s opinion on government spending?
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
What did Hayek believe about savings?
That it was paramount as a tool for individuals to be independent of the main government
Define aggregate demand
Total spending on a country’s over a period of time at a specific level of prices
How do we calculate aggregate demand?
Use the expenditure method of GDP
AD= C+I+G-(X-M)
Define fiscal policy
Government spending and taxation
What are the two types of consumable goods?
Durable
Non durable
What are durable goods?
Goods that do not require constant consumption for example cars.
What are non durable goods?
Goods that require constant consumption, such as food.
Describe an aggregate demand curve
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
What do we call a movement right down the aggregate demand curve?
An extension of AD
What do we call a movement left up the aggregate demand curve?
A Contraction of AD
What 3 effects affect AD?
Wealth effect
Trade effect
Interest rate effect
Describe the wealth effect
As price level decreases, purchasing power increases
Describe the trade effect
If exports become more competitive, imports become less competitive and vice versa
Describe the interest rate effect
If interest rates rise, aggregate demand begins to fall as borrowing is essentially becoming more expensive. This can happen due to increases in price
How do banks prevent inflation when prices are high?
Increase interest rates
When does the AD shift left or right?
When there is a change to a component other than price
What does it mean for the consumption of durable goods if the consumer confidence is low?
It is also low
Which factor is most likely to shift an aggregate demand graph?
Consumption
How can the government effect the consumption of durable goods?
Investment
Taxes
What factor directly effects investment?
Interest
What does it mean for investment is interest falls?
Investment becomes cheaper and the AD shifts right
Describe the effect on AD if tax decreases
Shifts right
Describe the effect on AD if tax increases
Shifts left
Describe the effect on AD if government spending decreases
Shifts left
Describe the effect on AD if government spending increases
Shifts right
Define the long run in macroeconomics
A period of time during which no price of any factor of production is fixed
What level of taxation occurs in a government with no intervention?
Low taxation
What level of taxation occurs in a government with high intervention?
High taxation
What do neoclassical economists believe?
No government intervention as the market forces will ensure the economy stabilises itself
What do Keynesian economists believe?
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
Give an example of a neoclassical economist
Friedrich Hayek
Give an example of a Keynesian economist
John Maynard Keynes
What does a neoclassical LRSA graph look like?
The LRSA is perpendicular to GDP
What does a Keynesian LRSA graph look like?
The LRSA begins parallel to GDP and then curves upwards, however, if the economy moves into the vertical section they will be in hyperinflation
What are policies that can be imposed to reduce expenditure?
Contractionary monetary policy (Increase IR)
Contractionary fiscal policy (decrease government spending, increase in tax)
What are policies that can switch expenditure (protectionist policies)?
Tariffs
Quotas
Embargoes
Domestic subsidies
Non-tariff barriers
What policies can strengthen weak exchange rates?
Increase interest rates
Decrease money supply
Sell domestic currency reserves
What are some supply side policies to boost international competitivness?
Government spending on industries
Decreased taxation
Decreased benefits
Define competitive advantage?
A condition that puts a country or firm in a more favourable position that others
