Macro Economics Flashcards
What are macro-economics and their forecasts are used by governments for?
Governments use maro-economics and their forecasts to assist the development and evaluation of economic policy.
What are key to designing policies to stabilise economies?
Forecasts of key components of macro -economic models are key to designing policies to stabilise economies
Who uses macro economics to help plan future decisions regarding work, spending, saving and investment?
Both businesses and consumers use macro economics to help plan future decisions regarding work, spending, saving and investment. While changes to government spending and taxation policies will be developed and understood context of within macro-economic model.
What are financial crisis usually associated with?
Sudden falls in the prices of overvalued assets, eg stock market crashes, which can lead to problems for individuals and institutions. May be associated with liquidity issues as debt cannot be serviced or repaid.
What roots may these behaviours have in aspects of economic agents?
Herding effects, lax regulatory environment, and incentives totake onexcessive risk eg bonus arrangements
What are the fundamental long terra economic trends influencing advanced economies?
Ageing populations, their impact on public finances and consequent increase in govt spending as percentage of national output
What issues are important on wider global front?
The issues of climate change and sustainable development are important for emerging and developed countries
What type of variables have an impact on the market?
Wide range of economic and financial variables are followed by investment analysts and managers
What kind of indicator is the stock market?
Stock market price index is a leading indicator. Many indicators followed byanalysts around the world refer to US data releases
What should be appreciated about the importance of main countries regions in global output?
Their contribution to would trade, major differences in private sector credit, savings and investment.
What do economic cycles refer to?
Economic cycles refer to regular economy wide fluctuations in economic activity that occur at intervals ranging from 3 to 60 years.
How can overall economic activity be measured?
Value of expenditure by firms on inputs, value of purchases by consumers and value of output by firms. Known as national income accounting.
What is gross domestic product (GDP)?
GDP is value of output produced by factors of production located within domestic economy.
What is gross national product (GNP)?
GNP is GDP plus ownership of foreign based factor less foreign ownership of UK based factors.
What are final goods?
Goods purchased by an ultimate user, including capital goods.
What are intermediate goods?
Intermediate goods are inputs in another production process.
How can economic activity be measured?
By summing the vale added by each producing, avoids double-counting.
What does GDP at factor costs do?
Deducts indirect taxes from value of output and adds back in subsidies.
How can a simple system of national accounts be constructed?
Linking GDP, household consumption, savings, investment expenditure, government and foreign sectors.
What is national income or net national product?
GNP at factor cost less capital depreciation.
What does total spending in an economy comprise of?
Household consumption, firms investment spending,government and net foreign expenditure
What is the consumption function?
The relationship between consumption and personal disposable income
What is aggregate demand?
Total planned expenditure. Equilibrium occurs where this equals total output.
When may changes in aggregate demand occur?
As consumer or firm sentiments change.
What is the multiplier?
Ratio of the change in equilibrium output as aggregate demand changes and is always greater than unity.
What does aggregate demand also include in more complicated models?
Government expenditure and exports less imports.
What is the classical school of thought?
Wages and prices are fully flexible and changes in the nominal money supply lead to equal %changes in wages and prices but no change in output, employment,real wages or interest rates. Output is fixed at the full employment level.
What is the difference in Keynesian model?
Does not have fully flexible wages and prices.
What is the monetarist school of thought?
Follows the classical ideas of flexible wages and prices with a focus on the supply of money as the determinant of inflation.
What does the Austrian school emphasise.
The role of individual or group actions for indeedinactions) to understand economic phenomena.
What is fiscal policy?
Governments decisions about spending and taxation. Equal increase in both is known as a balanced budget.
Since country’s budget surplus or deficit changes over the business cycle what is a useful way to measure fiscal stance?
To calculate the surplus that would occur at full employment. Fiscal policy can help automatically stabilise the aggregate output lead of the economy.
What is monetary policy?
Is the attempt by government or central bank to influence the price and quantity and credit of money
What is narrow money?
M0 and M1 which include notes and coins in circulation and cash equivalents.
What is M2?
M2 includes notes and coins in circulation and cash equivalents and adds short term time deposits.
What is M3?
M3 includes notes and coins in circulation and cash equivalents, short term time deposits and longer- term deposits and money market funds.
What is M4?
M4 includes notes and coins in circulation and cash equivalents, short term time deposits and longer- term deposits and money market funds plus securities with maturities of less than 5 years held by non-bank private sector.
Why is money held?
Transaction needs, precautionary reasons or as an asset. Quantity of money held generally inversely related oft restate
What is aggregate supply?
Quantity of output that firms wish to supply at different values the overall price level. Labour supply rise as real wage rise.
What is the natural rate of unemployment?
Is that proportion of the labour force that is unemployed when the labour market is in equilibrium.
What are the concepts of employment?
Frictional, structural, classical, kanesian, voluntary and involuntary.
What is the short term Phillips curve?
Inverse relationship between unemployment and inflation.
What shape is the long term Phillips curve?
Vertical at the natural rate of unemployment.
How is inflation distinguished?
Between unanticipated and anticipated inflation.
What does BOE do?
Acts as banker to commercial banks and government and uses open market operations and the discount rate to influence the quantity and price of money.
What functions do major international central banks perform?
Supervising commercial banks, government funding, bank note printing and pursuing an independent monetary policy.
Which global banks have autonomy in setting interest rates?
BOE, ECB, bank of Japan and FED.
What is the fed not responsible for?
Deposit protection is operated by federal deposit insurance corporation and US treasury is responsible for managing government debt.
What does quantitative easing refer to?
Purchase of financial assets bycentral banks in an effort to stimulate economic activity by exchanging money for financial assets. This occurs when policy interest rates are very low.
Why would liquidity and capital requirements for banks be varied?
To influence monetary policy.
What are the two main ways of organising foreign exchange markets?
Floating and fixed. With the latter requiring foreign exchange market intervention by the government.
What will affect the market price on exchange rate for currency?
Increases in demand or supply of a currency relative to another will affect the market price.
What is visible trade?
Is the trade in goods.
What is invisible trade?
Invisible trade is in services.
What is the trade balance?
Trade balance is exports less imports of goods and services.
What is the current account?
Cross border flow of goods, services, and other set income from abroad.
What is the capital account?
Involves flow of transactions in financial assets.
What is surplus on the current account accompanied with?
Equal deficit on the capital account and vice verse.
What is the purchasing power parity exchange rate?
Rate which equalises the cost of goods in each currency.
Under fixed exchange rates what may a balan it payments surplus lead to?
Arise in the money supply unless sterilisation takes place
When is monetary policy ineffective?
With a fed exchange rate with perfectly mobile capital though fiscal policy is effective.
Under floating rates what is useful in the short term?
Monetary policy is useful but fiscal policy is less effective.
What does exchange risk refer to?
Uncertainty that arises about future returns on an investment which is denominated in a foreign currency.
Where is currency traded?
Foreign exchange market known as forex market.
What is the spot exchange rate?
Price of one currency in terms of another for immediate exchange
What is the forward exchange rate?
Price of one currency in terms of another forexchange at some pre-specified time in the future.
What does interest rate parity do?
Links the forward rate and the interest rates in the two countries.
What does international Fischer effect do?
Links interest rates and expected inflation.
What are are determinants of an exchange rate between two currencies?
According to economic theory relative inflation and interest rates are key determinants of an exchange rate between two currencies.
What is an optimal currency area?
Optimal currency area is a geographic region created in order to maximise its economic efficiency by using a common currencies.
What is benefit of using a common currency?
Inter-country trade should benefit reduced transaction costs and economies of scale in production
What is considered essential for a currency area to be successful?
That labour and capital are fully mobile between countries.
What is important that countries in a currency area have?
Synchronised business cycle. If not then a single common interest rate is not appropriate for all countries.
How are cross-country comparisons of economic activity made?
Using per capita GDP, GNP or national income.
