macro flashcards (bulk
What are three ways money can be injected from the economy?
Investment, Government spending and exports
What is skimpflation?
Skimpflation is when companies lower quality to cut costs while keeping prices the same, reducing value for consumers.
What are three ways money can be withdrawed from the economy?
Saving , Taxation, Imports.
What is hotmoney?
Money that is used to be invested and borrowed.
What is shrinkflation?
Shrinkflation is when companies reduce product size/quantity but maintain the price.
What is exchange rate?
The value of one currency in terms of another.
What is corporation tax?
Tax that companies pay on their profits.
Describe the basic model of the circular flow of income
Households –> Firms : factors for production ( land, labour, capital, enterprise) and Consumer expenditure.
Firms –> Households : Goods and services and wages, rent, dividends.
What is interest?
Cost for borrowing / reward for saving/lending
What is the formula for the macroeconomic consumption function?
AD = C + I + G + (X-M)
What is Ceretus Parabus?
All the other things stay the same
Define aggregate demand
Total spending on goods and services in an economy.
What is national debt?
The accumalation of all of the previous deficits.
What is the macro economic consumption function
AD = C+I+G +(X-M)
What are the 6 government economic objectives in a mixed economy?q
- Encouraging price stability (low inflation)
*Ensuring the working population is productive (full employment/minimise unemployment)
*Maintaining a favourable balance of payments on the current account (international trade)
*promoting steady economic growth (2.25%)
*Redistributing income and wealth more equitably (fairly)
*Reducing the government budget deficit and the national debt.
What is quantitative easing.
When the government sells the money borrowed back into an account digitably whilst keeping the physical money
What is quantitative easing?
When the government sells the money borrowed back into an account digitable whilst keeping the physical money.
How do governments reduce deficits.
Borrow
Sell govt assets
Use surpluses form previous years
Print money - BAD IDEA
How do governments reduce deficits?
Borrow
Sell government assets
Use surpluses from previous years
print money
What is a bond
Certificate to show that money has been borrowed
What is a trade off?
When there is an increase in something that is bad for the economy (inflation) but there is an increase in something good (increased employment)
What are bonds?
Certificates to show that money has been borrowed
What are examples of input costs
Wage costs per unit of output
Labour productivity (higher efficiency lowers unit costs)
Raw material and component prices
Interest rates, business rents, fuel, energy costs.
What are shifts in Short run aggregate supply
-Input costs
-Business taxes, subsidies and imported costs
-Supply shocks
What are the factors affecting government spending.
Stage of the economic cycle
Unemployment levels
Government priority
Population growth
Tax revenue
What are the factors affecting exports
The stage of the economic cycle overseas
International competitiveness of UK goods and services
Exchange rates
Tariffs used by countries
What are examples of business taxes, subsidies and imported costs
VAT, employment taxes
Scale and size of government subsidies
Business rates, costs of meeting business regulation
Costs of imported components ( affected by exchange rate + fluctuations in the world commodity prices).
What are the factors affecting consumer spending.
Income tax
Stage of the economic cycle
Interest rates
Consumer confidence
What are the factors affecting imports
The stage of the economic cycle in the UK
International competitiveness of good and services.
What is the formula for AD
AD = C+I+G +(X-M)
What are the factors affecting business spending
Interest rates
Spare capacity in the economy
Profit levels
Corporation tax
What is aggregate demand?
The total spending on goods and services in an economy.
What is the definition of unemployed
Anyone who is able, available and actively seeking employment
What are the main UK measures of unemployment
Claimant count
Labour force survey
What are the 5 policies for cutting unemployment?
Targeted macro stimulus policies to boost growth
Expansion of apprenticeship schemes
Improving geographical immobility of labour
Measure to stimulate business start-ups
Active regional development policies.
What is real wage?
When a rise in real wages above a market-clearing level causes a contraction in labour demand and lower unemployment.
What is hidden unemployment
Unemployment which is known to exist but is not included in the official government figures. Also can refer to a persons skills being unemployed rather than the person being unemployed.
What are the economic costs of high unemployment.
Lost output (waste of revenue)
Lower GDP growth
What is structural unemployment
When there is a mis-match between the skills of those unemployed and the skills that new jobs require. Happens when there is a change in the structure of the economy.
What is a hysterisis
A prolonged recession where the unemployment rates still do not get back to where they were before the recession
What is occupational immobility?
Skills that unemployed people have is different to the skills demanded.
What is frictional unemployment
Unemployment related to the process of changing jobs, which may involve a period out of work
What is cyclical unemployment.
The category of unemployed whose number varies according to the business or economic cycle.
What are the Fiscal costs of high unemployment.
Less tax revenue (less income tax, VAT,
Higher welfare spending (opportunity costs of the benefits)
What is opportunity cost.
The next best alternative forgone.
Why do people remain structurally unemployed
Geographical immobility
Occupational immobility
Why does high unemployment matter?
Economic costs
Fiscal costs
What is geographical immobility
People cant work because of where they live e.g. housing costs, family ties.
What is the wealth effect?
Access to additional borrowing because assets have increased in value. Therefore increased wealth for consumers.
What does WPIDEC stand for?
Weak pound: imports dearer exports cheaper
What does SPICED stand for?
Strong pound: imports cheaper, exports dearer
What do businesses do that leads to demand-pull inflation?
Respond to high demand by raising prices to increase their profit margins.
When does demand-pull inflation occur?
Occurs when there is an excess in AD i.e. occurs when there is a positive output gap (actual GDP > potential GDP)
What happens when there is low inflation in the UK?
Increased competition in markets
Success of bank of england in controlling AD
Strong exchange rate has kept import prices low
Effects of globalisation -cheaper imports
Rising productivity and new technology
A fall in workers expectations of inflation
What is demand pull inflation associated with?
The boom phase of the cycle ( when SRAS becomes inelastic)
What are the main causes of demand pull inflation
A depreciation in the exchange rate increases the price of imports and reduces the foreign price of UK exports.
A reduction in direct or indirect taxes - more disposable income
Rapid growth of the money supply as a consequence of increased bank and building society borrowing
Rising consumer confidence and an increase in the rate of growth of house prices <– wealth effect
Faster rates of eeconomic growth in other countries - providing a growth to UK exports overseas
What is an index?
An index is a system that measures changes in a set of variables, each of which moves in different directions in different amounts. The index gives us the average movement.
When does cost-push inflation occur?
Occurs when the cost of production increases
What are the causes of cost-push inflation?
External shocks (commodity price fluxuations)
A depretiation in the exchange rates
Acceleration in wages
What is investment?
When firms spend money on capital goods to increase productive capacity
What is the definition of inflation?
A general increase in the average price level from one year to the next
A fall in the value of money
Describe the process of cost-push inflation?
Inward shift of the SRAS curve
firms raise prices to protect their profit margins - better able to do this when market demand is price elastic - ‘wages often follow prices’
A rise in inflation can lead to rising inflationary expectations
What is self fullfilling prophecy?
If we expect prices to fall, they do.
What does demand pull inflation look like
What are the main causes of demand pull inflation?
Very fast growth of demand for credit/borrowing
high levels of consumer spending
What does long-run mean?
When all of the factors of production are employed. There is no spare capacity in the economy
What does short-run mean?
When not all of our factors of production are employed. There is spare capacity in the economy
What are the main objectives of government macroeconomic policy?
- economic growth
*price stability - minimising unemployment
*stable balance of payments on current account
What is GDP and what is GDP per capita?
- GDP is the value of total output in one year
- GDP per capita is GDP/Population
expenditure method of measuring national income
- Consumer spending
- Government spending
- Investment spending
- Net exports
What is another name for total expenditure?
aggregate demand
What is the trend rate of growth
The most optimal rate of growth to sustain a healthy economy - the target is 2.25 per annum
Output method of measuring national income
- Primary ( agrigulture, mining etc)
- Secondary ( manufacturing)
- Tertiary (Services)
- Quartenary (information)
What are the signs of an economic downturn?
- Rising unemployment - depends on size of change
- falling aggregate demand - interest rates may be changed
- reduced output - maybe not all sectors
- falling tax revenues - change in tax rates
- increased government spending on benefits
- order books of firms get emptier
- stock market falls
*reduced consumer confidence and spending.
What 3 variables do we use to measure the economy and how are they related?
total expenditure = total output = total income
Income method of measuring national income
- wages
- rent
- interest
- profits/dividends
What is another name for total income?
National income
What is the demand for labour derived from?
The demand for labour is derived from the demand for the goods and services that labour provides.
What are the stages of the economic cycle?
Downturn –> Peak –> Recession –> Recovery
What is nominal economic growth?
The percentage increase in GDP for one year to the next year.
What is Real economic growth
Nominal economic growth - inflation
What is negative output gap and positive output gap
- negative output gap occurs when the actual level of output is less than the trend rate of growth ( potential level of output )
- positive output gap occurs when the actual level of output is more than the trend rate of growth
What is the definition of a recession?
A recession is two consecutive quarters of negative growth.
What is the X and Y axis on the economic cycle graph
X axis = Time
Y axis = Employment/Income/Spending/Output/GDP
What does higher productivity mean that we can do?
Produce goods at a lower cost per unit
Increase total output from our scarce factor recources
An improvement in productivity helps to bring out economic growth for a country in the longer term
What 5 factors explain the productivity gap?
Relatively low rates of capital investment
Low rates of spending on research and development
Skills of the labour force
Not enough spending on healthcare
not enough spending on infrastructure
What is the definition of productivity
Productivity is a measure of the efficiency of factors of production in the production process
What is the productivity gap?
Difference in output per worker in different countries
What are the economic benefits of higher productivity?
Lower average costs –> economies of scales
Improved competitiveness in international markets
How can labour productivity be measured?
Calculating output per worker or output per hour worked
How is Improved competitiveness in international markets a benefit of higher productivity
Gives a competitive advantage where there is an intense price and non-price competition from overseas suppliers
What is the budget deficit?
Money that the govt needed to borrow through hot money
What happens in contractionary monetary policy?
Higher interest rates on loans and savings
tightening of credit supply
appretiation of the exchange rate
What happens in expansionary monetary policy?
fall in nominal and real interest rates
measures to expand supply of credit
depreciation of the exchange rate
What 5 things are controlled by the bank of england in the context of monetary policy
Market interest rates
Bank lending
Currency markets
Inflation targets
Quantitative easing
What does monetary policy involve?
Changes in interest rates, the supply of money and credit and exchange rates to influence the economy
What is the base rate/repo rate?
The interest rate at which the central bank of a country lends money to commercial banks
What does expansionary monetary policy intend to do?
To stimulate AD
