Macro economics Flashcards
What can international competitiveness be affected by?(2)
exchange rate, inflation
Central bank function? (3)
implementation of monetary policy, lender to other banks, banker for the government
factors which shift LRAS? (6)
Infrastructure, investment, productivity, immigration, new materials discovered, technology
Factors which shift SRAS?(6)
wages, raw material prices, import price, business taxes, oil price, productivity
Short run phillips curve analysis?
Unemployment falls, fewer workers available so workers have more bargaining power for wages negotiations as firms have to compete with each other, leads to higher wages therefore firms increase prices so they can still make profit
Crowding out effect?
government borrows money for spending project, pushes up interest rates leading to higher costs for firms so fall in investment
What does expansionary fiscal policy do to the economy?
It causes AD to shift rightwards causing an increase in real GDP and economic growth
Ad valorem tax?
% of the price of a good
What is monetary policy?
Any policy relating to interest rates money supply or exchange rates.
Multiplier effect?
initial injection into the economy leads to a greater than proportional rise in real GDP.
Accelerator effect?
A rise in real GDP leads to a greater than proportional rise in investment from firms
Quota definition?
Strict limit on quantity of imported goods
Factors influencing exchange rates?
Imports and exports, speculation, relative interest rates, relative inflation rates, FDI and quantitative easing
Leakages into the economy?(3)
cyclical unemployment?
When there is a downturn in the economy and less goods are demanded due to lower incomes causing employment to fall
6 Macroeconomic objectives?
full employment, price stability, more equitable distribution of income and wealth, economic growth, stable balance of payments on current account and reduce size of national debt
Frictional unemployment?
When workers move from one job to another. (short term)
Structural unemployment?
Workers not having the skills to meet employers demand
What is demand pull inflation?
When AD shifts rightwards causing excess demand for goods and shortage in supply leading to a higher price of goods.
What is cost push inflation?
When SRAS shifts to the left due to an increase in costs of production therefore price of goods go up as firms pass on the cost to consumers
Definition of unemployment?
the process of actively seeking for a job and in the working age.
Ways to measure unemployment?(2)
Claimant count and the labour force survey.
4 main macroeconomic indicators?
rate of inflation, level of unemployment, rate of economic growth,state of balance of payments.
Inflation definiton?
Inflation is the rise in the average price of goods over a period of time.
2 ways to measure inflation?
RPI and CPI
Supply side policies definition?
Any policy to increase aggregate supply
Economic growth?
Increase in real GDP caused by an increase in AD or LRAS
Meaning of unemployment for an economy?
Economy isn’t operating at full capacity therefore there is wasted labour which isn’t being used
Benefits for economic growth?(4)
Increased profits for firms, increased tax revenue, higher disposable income, higher employment
Costs for economic growth?(4)
Inflation, income inequality, environmental cost, current account deficit
4 functions of money?
store of value, measure of value, standard deferred payment and medium of exchange
Capital expenditure?
Government spending on long term assets (hospitals, schools)
5 characteristics of globalisation?
increased trade, international movement of labour, movement of financial capital, increased specialisation, increased trade-GDP ratio
Marshall-Lerner condition?
Ped x+Ped M>1 as seen on the J curve when current account starts improving
4 causes of globalisation?
containerisation, improvements in IT, improvements in transport and trade liberalisation
4 factors influencing patterns of trade?
comparative advantage, emerging economies, trading blocs and exchange rates
arguments against free trade?(4)
raise revenue for the government, infant industry argument (protects new firm just becoming established hence protecting jobs),senile industry argument and improve the balance of payments deficit
Arguments for free trade?
Lower prices for goods as firms will compete on efficiency and price (perfect competition) and
Difference between expenditure switching and reducing policies?
Expenditure reducing- contractionary fiscal and monetary policy. Expenditure switching- Trade barriers to reduce spending on imports and increase exports (quotas, tariffs, domestic subsidies)
Factors influencing the exchange rate?(5)
speculation, FDI, relative interest rates, relative inflation rates, imports and exports
Evaluation of Strong pound shifting AD inwards resulting in less growth and employment?
Leads to lower costs of imports for firms so SRAS shifts rightwards leading to increased growth and employment
3 types of money markets?
money, capital and foreign exchange market
Liquidity meaning?
How much cash a bank has
Banks have a trade off between?
Liquidity and profit
Liquidity ratio formula?
liquid assets/deposits
Advantages of fixed exchange rates?(3)
Speculation is reduced, certainty increased so more FDI flows, competitive pressure on firms keeping costs down
Advantages of floating exchange rates?(3)
Reduces need for foreign currency reserves and intervention, helps reduce BOP deficit, government can use monetary policy for other objectives
Disadvantages of floating ER?(3)
Falls in ER can cause competitiveness issues and inflationary pressures, encourage speculation and can fluctuate
Disadvantages of fixed ER?(2)
Difficult to maintain as intervention current, interest rates need to be used for ER not other objectives
Explanation of competitive devaluation?
Lower exchange rate makes exports more competitive and infant industries can compete, this results in more profit which can then be reinvested into capital lowering AC in the future and increasing SRAS resulting in growth
Factors affecting international competitiveness?(4)
exchange rates, wage factors, non wage factors and supply side policies
