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Economic A Level > Macro Economics 2 > Flashcards

Macro Economics 2 Flashcards

1
Q

What is the circular flow of income diagram

A

It is a model of what happens in a basic economy

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2
Q

What are the two boxes in the diagram

A

Households
Firms

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3
Q

What are the two movements from firms to households

A

Income
Output (goods and services)

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4
Q

What are the two movements from households to firms

A

Factors of production
Expenditure

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5
Q

What are firms

A

Companies who pay wages to workers and produce output

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6
Q

What are households

A

Individuals who consume goods and services and receive wages from firms

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7
Q

What is national output

A

The total value of output produced by firms

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8
Q

What is national income

A

This is the total income recieved by people in the economy

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9
Q

What is national expenditure

A

The total amount spent on goods and services

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10
Q

What are the injections

A

Investment (I) - Capital spending by firms
Government spending (G) - money spent by the government
Exports (X) - Money spent by foreigners on UK G+S

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11
Q

What are the withdrawals

A

Taxes - Money paid to the government to fund its spending
Imports - Money that flows out the UK for foreign G+S
Savings - Any income that is not spent by households

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12
Q

What is the equation for Aggregate Demand

A

C + I + G + (X-M)

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13
Q

What is consumption

A

Spending by households on consumer goods

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14
Q

What is aggregate demand

A

It refers to the total value of expenditure on goods and services in the economy at any particular price level

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15
Q

What are the main spending groups in an economy

A

Consumers - consumption
Firms - investment
The public sector - government spending
Foreign consumers - Net Exports

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16
Q

What are the axis for an AD curve

A

Y axis - Price level
X axis - Real GDP

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17
Q

What happens when there is a change in price level

A

It causes a movement along the AD
A rise in price level - contraction in output
A fall in price level - Extension in output

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18
Q

Why is the AD negatively sloped

A

The real income effect
The interest rate effect
The international trade effect

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19
Q

What is the real income effect

A

A rise in price level reduces the real income of spenders so they can buy less G+S

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20
Q

What is real income

A

Money income adjusted to remove the impact of rising prices

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21
Q

What is the interest rate effect

A

When prices rise it reduces the value of money owed
To combat this, banks increase interest rates during inflation
This reduces AD

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22
Q

What is the international trade effect

A

Rising prices means that exports decrease and imports increase
This decreases AD

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23
Q

What causes AD to move outwards and inwards

A

AD rises
AD falls

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24
Q

What factors affect AD

A

Changes to monetary policy
Changes to fiscal policy
Changes to income and wealth levels
Changes in foreign income - Exports
Changes in expectations - Consumer confidence

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25
Q

What are changes to monetary policy

A

Changes in interest rates
Changes in exchange rates - effects Imports and Exports
Changes in money supply

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26
Q

What are changes in fiscal policy

A

Changes to government spending
Changes in taxation
Government borrowing

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27
Q

What are changes in income and wealth levels

A

Real disposable income
Assests

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28
Q

What is aggregate supply

A

It is a measure of total volume of goods and services produced within the economy at a given average price level

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29
Q

What are the two types of AS

A

Short run aggregate supply
Long run AS

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30
Q

What determines SRAS

A

Price level
Cost of production

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31
Q

What affects LRAS

A

Quantity of resources
State of technology
Quality of resources
The incentives by the factors of production

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32
Q

What affects the cost of production

A

Labour costs
Commodity prices
Exchange rates
Taxes and subsidies
Price of imports

33
Q

What are the macro objectives

A

Sustainable economic growth
High employment
Low and stable inflation
Broad balance on Balance of trades
Sustainable use of environmental resources
Fair distribution of income

34
Q

What are fiscal policies

A

Government spending
Taxation
Government borrowing

35
Q

What are monetary policies

A

Interest rates
The money suply
Exchange rates

36
Q

What are supply side policies

A

Policies aiming to improve the efficiency or productivity of resources

37
Q

What is macroeconomic equilibrium

A

AD = AS
Injections = withdrawals

38
Q

What is inflationary growth

A

Growth caused by increase in AD and causes a rise in price level

39
Q

What is non inflationary growth

A

Increase in AS
Price level decreases

40
Q

What is stagflation

A

Decrease in output
Increase in Price level

41
Q

What affects consumer spending

A

Disposable Income
Changes in Wealth
Changes in consumer confidence
Changes in interest rates
Availability of credit
Price level

42
Q

What is consumer spending

A

Spending by individuals or households on goods and services to gain utility

43
Q

What is autonomous consumption

A

Consumption that happens when income is 0
This is done by borrowing or dis-saving

44
Q

What is induced consumption

A

When consumption rises because of a rise in income

45
Q

What happens near the end of the consumption function

A

Consumption slows down as income reaches a certain level

46
Q

What is the marginal propensity to consume equation

A

= Change in Consumption/Change in income

47
Q

What is saving

A

It is part of disposable income that is not spent
Income can either be spent or saved

48
Q

What effects saving

A

Disposable income
Interest rates
Consumer confidence
Tax rate charged on interest
Saving targets
Expectations of future price levels

49
Q

What does the saving function look like

A

Negative saving at 0 income - Dis saving
Saving then increases as income increases

50
Q

What is the propensity to save

A

Change in saving/ Change in disposable income

MPC + MPS = 1

51
Q

What is the relationship between interest rates and saving

A

Postive

52
Q

What is the Paradox of Thrift

A

People saving to prepare for difficult times can cause negative outcomes for the economy and make it worse

53
Q

What are the forms of govt spending

A

Current spending - e.g. wages for NHS workers
Capital spending - e.g. building roads
Transfer payments - e.g. Child benefits

54
Q

What are the 3 main parts of govt spending

A

Social protection
Healthcare
Education

55
Q

What is the role of govt spending

A

Provide public goods
Increase output of merit goods
Redistribute wealth and income
Manage AD and AS

56
Q

What is taxation

A

Any compulsory transfer of money from the private sector to the public sector

57
Q

What are the types of tax

A

Indirect - levied on expenditure
Direct - Income, Wealth, Profit

58
Q

What are the 3 biggest taxes

A

Income
National Insurance
VAT

59
Q

What are the main principles of taxes or Canons

A

Economy - cheap to collect
Equity - Fair
Efficiency - Hard to avoid
Flexibility - Easy to change
Convenience - Easy to pay
Certainty - Know how they are taxed

60
Q

What is the laffer curve

A

Line which shows the relationship between tax collected and tax rate

Line increases positively until the optimal point and then tax collected decreases from there

This is because people are more willing to avoid or evade taxes, work less and leave the country - brain drain

61
Q

What is the amount of money of income not taxed

A

Personal allowance

62
Q

What is average rate of tax

A

How much tax they are paying on average

Total tax paid / Total income earned x100

63
Q

What is marginal rate of tax

A

The percentage of tax on the highest income band of a persons income

64
Q

What is investment

A

It is spending on capital goods as well as spending to improve the human capital workforce through education

65
Q

What is infrastructure

A

Spending on new sewers or roads for example

66
Q

What is gross investment

A

The total amount spent on new capital

67
Q

What is depreciation

A

Value of capital decreasing from use

68
Q

What is net investment

A

The overall change in capital including gross investment and depreciation

69
Q

What does investment affect

A

The AD and AS
It affects the AD first

Long term it moves the PPF out but short term there is a shift to a less productive point below the PPF

70
Q

What are the 3 C’s of investment

A

It causes
Increased capacity
Increase in productivity which causes a decrease in costs
More able to compete with lower prices

71
Q

What factors affect investment

A

Interest rates
Expected profits from investment
Corporation taxes
Tech change and degree of market competition
Business confidence
The rate of growth of consumer demand

72
Q

What is a progressive tax

A

It is one in which the proportion of income paid in tax rises as income rises

73
Q

What is a proportional tax

A

It is one in which the proportion of income paid in tax remains the same as income rises. This is because the tax paid on the last pound earned is the same as the tax paid on the average pound

74
Q

What is a regressive tax

A

It is one in which the proportion of income paid in tax falls as income rises. This is because the tax paid on the last pound earned is lower the tax paid on average pound

75
Q

What are examples of direct taxes

A

Income
Corporation
Capital gains
Inheritance
National insurance
Council
Business

76
Q

What are examples of indirect taxes

A

VAT
Excise

77
Q

What is the multiplier

A

It is the process by which an initial change in AD leads to a greater final impact on national income
Developed by Keynes in the 1930s

78
Q

How does the multiplier work

A

That spending by one individual creates an income for another individual who can then spend it and create more income

Economic A Level (22 decks)

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