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Economics Y1 > Macro L4, 5, 6 > Flashcards

Macro L4, 5, 6 Flashcards

1
Q

What is short run defined as and what assumption does it make?

A
  • When money wage rates and prices of all other factor inputs in economy are fixed
  • Firms aim for profit maximisation
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2
Q

How is SRAS curve relatively price elastic?

A
  • Firms tend to work their existing labour force more intensively to increase output, rather than sacking or hiring more workers
  • Incentives are required for this so overtime pay rate increases, which increases earnings for workers and puts up average and marginal costs per unit of output (rise in prices)
  • Given constant prices for factor inputs, increase in costs are likely to be fairly small
    Therefore it is price elastic
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3
Q

What are the determinants of SRAS?

A
  • Wage rates
  • Raw material prices
  • Taxation
  • Exchange rate
  • Productivity
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4
Q

What is exchange rate?

A

The rate at which one currency will be exchanges for another

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5
Q

How does SRAS shift when wage rates increase?

A
  • Increased costs of production
  • Left
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6
Q

How does SRAS shift when raw material prices increase and why?

A
  • Higher industrial costs
  • Left
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7
Q

How does SRAS shift when tax burden increases and why?

A
  • Costs are increased
  • Left
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8
Q

How does SRAS shift when exchange rate increases and why?

A
  • Price of imported goods is likely to decrease
  • Right
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9
Q

How does SRAS shift when productivity increases and why?

A
  • Costs of production reduced
  • Right
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10
Q

What is a supply-side shock?

A

When there is a large change in taxation, raw material prices or wage rates

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11
Q

What does LRAS curve look like and why?

A
  • Vertical line
  • The curve is fixed as whatever the price level, there is a given level of real output
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12
Q

Why is given level real output considered to be fixed whatever the price level?

A
  • There is a limit to how much firms can increase their supply due to capacity constraints
  • Labour productivity has been maximised due to fixed capital equipment and max labourers hired
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13
Q

What is an output gap and how is this returned to normal?

A
  • When output is below or above the trend level
  • Economic forces act to bring it back
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14
Q

What are the determinants of the LRAS curve?

A
  • Technological advances
  • Efficiency: Change in relative productivity to competing economies
  • Labour: Changes in education and skills, demographic changes and migration eg. increase in workforce leads to increased LRAS
  • Changes in gov regulations eg. making it simpler to set up a company leads to increased LRAS, competition policy
  • Enterprise and risk-taking –> increased LRAS if encouraged
  • Factor mobility –> increased LRAS
  • Economic incentives –> increased LRAS
  • Institutional structure of economy –> reference to political, education + banking system, laws and framework of morality
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15
Q

How would a change in the relative productivity to competing economies affect LRAS?

A
  • An increase in the UK productivity of one good relative to other world economies will encourage production in the UK
  • If there is increased specialisation between economies, the LRAS of world economy will increase
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16
Q

Why can competition both be negative and positive for LRAS?

A
  • Firms are forced to be more productive and find ways of producing new goods and services, increasing LRAS
  • However, sometimes less competition can be beneficial as it encourages free innovation
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17
Q

What does shift in LRAS curve right show?

A

There has been economic growth

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18
Q

Why is it that LRAS shows the economy to be operating at full capacity?

A
  • In the long-run product markets and factor markets will be in equilibrium, which means no unemployed resources
  • Therefore economy is operating at full capacity
  • Even when markets are pushed into disequilibrium by some shock, they tend to fix themselves fairly quickly, returning to equilibrium
19
Q

What do Keynesian economists point out and out of what period was it developed from?

A
  • There have been times where markets have failed to clear for long periods of time
  • Developed out of experience of Great Depression of 1930s where large scale unemployment lasted for over a decade
20
Q

What is long-run equilibrium and what else passes through this point on the graph

A
  • Intersection of AD + LRAS curve
  • SRAS passes through
21
Q

Because the economy is operating at full capacity in LRAS, what does this mean for employment?

A
  • Economy is at full employment
22
Q

In the Keynesian model, at one point is the economy at full employment and can the economy be in equilibrium at less than full employment? (L6 p15 booklet)

A

-When LRAS curve is vertical (Y4)
- Yes it can (AD3)

23
Q

What is the key point of disagreement between classical and Keynesian economists?

A
  • Extent to which workers react to unemployment by accepting real wage cuts
24
Q

How do classical economists believe workers react to unemployment?

A
  • Rise in unemployment leads to cuts in real wages
  • Increases quantity demanded of labour
  • Decreases quantity supplied, which returns the economy to full employment quickly
25
Q

How do Keynesian economists believe workers react to unemployment?

A
  • They argued that money wages are sticky downwards
  • As a result, labour market will not clear unless over a long period of time (explains horizontal line when there is unemployment + equilibrium point is only reached until closer/at full employment)
26
Q

What does it mean if wages are sticky downwards?

A

Workers refuse to accept wage cuts

27
Q

According to classical economists, what will a rise in AD (shift to right) lead to in LRAS and why?

A
  • Rise in price level but no change in output
  • LRAS is max productive capacity so no amount of extra demand will change output
28
Q

What change does a rise in AD cause for SRAS? (L6 p14 booklet)

A
  • Movement up SRAS curve (B)
  • Economy now in long-run disequilibrium
29
Q

Why does long-run disequilibrium actually mean and what does it cause? (L6 p14 booklet)

A
  • Economy is now operating at over-full employment
  • Firms find it to difficult to supply (eg. raw materials, recruiting labour)
  • Respond by bidding up wages and other costs
  • Shift to left (C) as SRAS curve is based on constant wage rates and other costs, which have now been changed
  • Output falls, eventually also falls to long-run equilibrium, however with higher prices
30
Q

Summarise the classical model effect of AD increase:

A
  • Initially increase in AD increases both price + output
  • Over time, prices continue increasing, but output falls
  • Economy returns to long run equilibrium but with higher prices
  • Effect of increase in AD is purely inflationary
31
Q

In what case would the Keynesian economists agree that increase in AD has a purely inflationary effect?

A
  • At full employment (vertical line of Keynesian model)
32
Q

What effect does an increase in AD have if the economy is in depression (below full employment) according to Keynesians and why? (L6 p15 booklet)

A
  • Increase in output without increasing prices (AD1 + AD@
    2)
  • Because there are unused resources available
33
Q

What effect does an increase in AD have if the economy is a little below full employment, according to Keynesians? (L6 p15 booklet)

A

Increase in both output and price level (AD3)

34
Q

Circular Flow of Income

A

Model of the economy that shows the flow of services, factors of production and their payments around the economy

35
Q

What is a closed economy compared to an open economy?

A

Closed economy has no foreign trade whereas the other does

36
Q

What do households own and what is this?

A
  • Wealth of the nation
  • Stock of land, labour and capital used to produce goods and services
37
Q

What do households do with these factors of production and what do they receive in return in what form? What can they then use this to do?

A
  • Supply them to firms in return for income
  • Incomes come in the form of rents, wages, profits, interest
  • Buy goods and services
38
Q

What are the three ways of measuring the level of economic activity (GDP/National income) and what are each of these?

A
  • National output (O) –> value of flow of goods and services from firms to households
  • National expenditure (E) –> value of spending by households on goods and services
  • National income (Y) –> value of income paid by firms to households in return for land, labour + capital
39
Q

Injection

A

Spending which does not come from households

40
Q

What are the 3 injections?

A
  • Investment (I)
  • Gov spending (G)
  • Exports (X)
41
Q

Withdrawal

A

Spending which does not flow from households to firms

42
Q

What are the 3 withdrawals?

A
  • Savings (S)
  • Taxes (T) –> taken from both households + firms
  • Imports (M)
43
Q

What happens if injections are greater/less than or equal to withdrawals?

A
  • Injections > Withdrawals –> Spending increases, National income (Y) rises
  • Injections < Withdrawals –> Spending falls, National income falls
  • Injections = Withdrawals –> Equilibrium

Economics Y1 (12 decks)

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