Macro Economics 2 Flashcards
What is the circular flow of income diagram
It is a model of what happens in a basic economy
What are the two boxes in the diagram
Households
Firms
What are the two movements from firms to households
Income
Output (goods and services)
What are the two movements from households to firms
Factors of production
Expenditure
What are firms
Companies who pay wages to workers and produce output
What are households
Individuals who consume goods and services and receive wages from firms
What is national output
The total value of output produced by firms
What is national income
This is the total income recieved by people in the economy
What is national expenditure
The total amount spent on goods and services
What are the injections
Investment (I) - Capital spending by firms
Government spending (G) - money spent by the government
Exports (X) - Money spent by foreigners on UK G+S
What are the withdrawals
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
What is the equation for Aggregate Demand
C + I + G + (X-M)
What is consumption
Spending by households on consumer goods
What is aggregate demand
It refers to the total value of expenditure on goods and services in the economy at any particular price level
What are the main spending groups in an economy
Consumers - consumption
Firms - investment
The public sector - government spending
Foreign consumers - Net Exports
What are the axis for an AD curve
Y axis - Price level
X axis - Real GDP
What happens when there is a change in price level
It causes a movement along the AD
A rise in price level - contraction in output
A fall in price level - Extension in output
Why is the AD negatively sloped
The real income effect
The interest rate effect
The international trade effect
What is the real income effect
A rise in price level reduces the real income of spenders so they can buy less G+S
What is real income
Money income adjusted to remove the impact of rising prices
What is the interest rate effect
When prices rise it reduces the value of money owed
To combat this, banks increase interest rates during inflation
This reduces AD
What is the international trade effect
Rising prices means that exports decrease and imports increase
This decreases AD
What causes AD to move outwards and inwards
AD rises
AD falls
What factors affect AD
Changes to monetary policy
Changes to fiscal policy
Changes to income and wealth levels
Changes in foreign income - Exports
Changes in expectations - Consumer confidence
What are changes to monetary policy
Changes in interest rates
Changes in exchange rates - effects Imports and Exports
Changes in money supply
What are changes in fiscal policy
Changes to government spending
Changes in taxation
Government borrowing
What are changes in income and wealth levels
Real disposable income
Assests
What is aggregate supply
It is a measure of total volume of goods and services produced within the economy at a given average price level
What are the two types of AS
Short run aggregate supply
Long run AS
What determines SRAS
Price level
Cost of production
What affects LRAS
Quantity of resources
State of technology
Quality of resources
The incentives by the factors of production
What affects the cost of production
Labour costs
Commodity prices
Exchange rates
Taxes and subsidies
Price of imports
What are the macro objectives
Sustainable economic growth
High employment
Low and stable inflation
Broad balance on Balance of trades
Sustainable use of environmental resources
Fair distribution of income
What are fiscal policies
Government spending
Taxation
Government borrowing
What are monetary policies
Interest rates
The money suply
Exchange rates
What are supply side policies
Policies aiming to improve the efficiency or productivity of resources
What is macroeconomic equilibrium
AD = AS
Injections = withdrawals
What is inflationary growth
Growth caused by increase in AD and causes a rise in price level
What is non inflationary growth
Increase in AS
Price level decreases
What is stagflation
Decrease in output
Increase in Price level
What affects consumer spending
Disposable Income
Changes in Wealth
Changes in consumer confidence
Changes in interest rates
Availability of credit
Price level
What is consumer spending
Spending by individuals or households on goods and services to gain utility
What is autonomous consumption
Consumption that happens when income is 0
This is done by borrowing or dis-saving
What is induced consumption
When consumption rises because of a rise in income
What happens near the end of the consumption function
Consumption slows down as income reaches a certain level
What is the marginal propensity to consume equation
= Change in Consumption/Change in income
What is saving
It is part of disposable income that is not spent
Income can either be spent or saved
What effects saving
Disposable income
Interest rates
Consumer confidence
Tax rate charged on interest
Saving targets
Expectations of future price levels
What does the saving function look like
Negative saving at 0 income - Dis saving
Saving then increases as income increases
What is the propensity to save
Change in saving/ Change in disposable income
MPC + MPS = 1
What is the relationship between interest rates and saving
Postive
What is the Paradox of Thrift
People saving to prepare for difficult times can cause negative outcomes for the economy and make it worse
What are the forms of govt spending
Current spending - e.g. wages for NHS workers
Capital spending - e.g. building roads
Transfer payments - e.g. Child benefits
What are the 3 main parts of govt spending
Social protection
Healthcare
Education
What is the role of govt spending
Provide public goods
Increase output of merit goods
Redistribute wealth and income
Manage AD and AS
What is taxation
Any compulsory transfer of money from the private sector to the public sector
What are the types of tax
Indirect - levied on expenditure
Direct - Income, Wealth, Profit
What are the 3 biggest taxes
Income
National Insurance
VAT
What are the main principles of taxes or Canons
Economy - cheap to collect
Equity - Fair
Efficiency - Hard to avoid
Flexibility - Easy to change
Convenience - Easy to pay
Certainty - Know how they are taxed
What is the laffer curve
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
What is the amount of money of income not taxed
Personal allowance
What is average rate of tax
How much tax they are paying on average
Total tax paid / Total income earned x100
What is marginal rate of tax
The percentage of tax on the highest income band of a persons income
What is investment
It is spending on capital goods as well as spending to improve the human capital workforce through education
What is infrastructure
Spending on new sewers or roads for example
What is gross investment
The total amount spent on new capital
What is depreciation
Value of capital decreasing from use
What is net investment
The overall change in capital including gross investment and depreciation
What does investment affect
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
What are the 3 C’s of investment
It causes
Increased capacity
Increase in productivity which causes a decrease in costs
More able to compete with lower prices
What factors affect investment
Interest rates
Expected profits from investment
Corporation taxes
Tech change and degree of market competition
Business confidence
The rate of growth of consumer demand
What is a progressive tax
It is one in which the proportion of income paid in tax rises as income rises
What is a proportional tax
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
What is a regressive tax
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
What are examples of direct taxes
Income
Corporation
Capital gains
Inheritance
National insurance
Council
Business
What are examples of indirect taxes
VAT
Excise
What is the multiplier
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
How does the multiplier work
That spending by one individual creates an income for another individual who can then spend it and create more income
