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Economics Y1 > Macro L7 + 8 > Flashcards

Macro L7 + 8 Flashcards

1
Q

Multiplier Effect (who originated it?)

A
  • Initial change in the injection/withdrawal can have a greater final impact on equilibrium national income
  • Keynesian
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2
Q

Value of multiplier is known as…

A

Multiplier ratio

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3
Q

Calculation for multiplier ratio:

A

Change in injection or withdrawal/Change in income

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4
Q

Calculation for MPS:

A

Change in savings/Change in income

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5
Q

How does an increase in MPS affect national income and why?

A
  • Multiplier ratio decreases
  • Savings increase, which is a withdrawal
  • Withdrawals increase
  • Less spending
  • Lower National income
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6
Q

Calculation for MPC:

A

Change in consumption/Change in income

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7
Q

What do MPS and MPC sum to?

A

1 (as they are oppositional processes)

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8
Q

Calculation for MPT:

A

Change in taxation/Change in income

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9
Q

Calculation for MPM:

A

Change in import spending/Change in income

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10
Q

Calculation for MPW:

A

MPS + MPM + MPT

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11
Q

All equations learnt in multiplier effect topic: (6)

A

1/1-MPC = multiplier
1/MPS = multiplier
1/MPS + MPM + MPT = multiplier
1/ MPW =multiplier
MPC + MPS = 1
MPanything = change in ……./change in income

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12
Q

How is inflation calculated using CPI?

A
  • Every yr, couple thousand household asked to record their expenditure for one month to create avg basket of around 700 goods
  • Prices of these goods are tracked and averaged through the Living Costs & Food Survey
  • Calculate avg inflation rate w/ weighting of each item
  • Index number is given
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13
Q

When prices are tracked how is it ensured that this is fair?

A

They are tracked in different areas of the country and different types of retail outlets

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14
Q

Why are goods weighted?

A

A larger proportion of income are spent on some goods than other so this must be considered

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15
Q

How is RPI value different to CPI value, why is this the case and therefore conclude whether CPI or RPI is more accurate?

A
  • Tends to be above CPI
  • Uses Carli index (arithmetic mean) to average diff prices
  • ONS said CPI is more accurate as the use of the Carli index meant inflation was consistently overstated
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16
Q

To solve the issue of RPI, what was created, by who and how is this different to RPI?

A
  • ONS produced RPIJ measure
  • Use same data but w/ Jevons index (type of geometric mean)
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17
Q

In what other ways do RPI and CPI differ?

A
  • CPI excludes a number of items eg. housing, council tax whereas RPI doesn’t (another reason for apparent lower CPI levels)
  • RPI excludes top 4% of income earners and low income pensioners (not typical households), whereas CPI covers everyone
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18
Q

What are redistribution effects and what is it caused by?

A
  • Redistribution effects are when certain groups lose some purchasing power and become worse off, whereas others gain purchasing power and become better off
  • Inflation
19
Q

What two factors can cause inflation?

A
  • Too much demand
  • Rising costs
20
Q

In what situation is demand-pull inflation likely to occur and what is caused by?

A
  • If AD rises w/ no increase AS
  • Excess demand
21
Q

Reasons for excessive increases in AD:

A
  • Excessive consumer spending
  • Low interest rates (lots of borrowing)
  • Rising consumer confidence (due to rising house prices)
  • Increased gov spending
  • World demand for UK exports (due to boom in world economy)
  • Growth of money supply
  • Cutting taxes
22
Q

How does money supply grow and how does it cause inflation?

A
  • If banks increase lending, this happens
  • As a result, consumption and AD increases
  • Causing inflation
23
Q

Wage-price spiral

A

Workers continue to demand high wages

24
Q

What inflation may occur as a result of rising costs?

A

Cost-push inflation

25
Q

5 major sources of rising costs:

A
  • Increase in wages increase costs of production (wages account for about 50% of NI)
  • Boom in world economy mean higher import prices for UK
  • Producers raise price to improve profit margins
  • Raise indirect taxes
  • Increase subsidies
26
Q

In a stable, growing economy what is inflation likely caused by?

A

Mix of rising costs and excess demand

27
Q

Groups who lose from inflation:

A
  • People who receive fixed incomes/wages
  • People who receive incomes/wages that increase at a slower rate than rate of inflation
  • Holders of cash
  • Savers
  • Lenders
28
Q

Why do people who receive fixed incomes/wages lose from inflation?

A

As the general price level increases, people become worse off

29
Q

Give examples of people who receive fixed incomes/wages

A
  • Wage contracts
  • Fixed pensions
  • Fixed rental income
  • Fixed welfare payments
30
Q

Why do people who receive incomes/wages that increase at a slower rate than rate of inflation lose out and which groups of people does this usually include?

A
  • Causes a fall in real incomes
  • Includes all groups above w/ fixed incomes/wages & any kind of income receiver
31
Q

Why do holders of cash lose out from inflation?

A

Real value of cash falls as general price level increases

32
Q

In order to maintain the real value of savings, what must be equal for savers and why is this?

A
  • Savers must receive a rate of interest equal to the rate of inflation
  • Purchasing power lost through inflation is regained through interest
33
Q

Why do some savers lose out from inflation?

A

If the rate of interest is lower than the rate of inflation, the real value of savings would fall

34
Q

Groups who gain from inflation:

A
  • Borrowers
  • Payers of fixed incomes/wages
  • Payers of incomes/wages that increase at a slower rate than that of inflation
35
Q

How do borrowersq gain from inflation?

A

If they borrow at a lower interest rate than the rate of inflation, the real value of money that has been given back falls

36
Q

Why do some lenders lose out from inflation?

A

They lend at an interest rate lower than inflation, which means they receive less.

37
Q

How do payers of fixed incomes/wages gain from inflation?

A

Real value of payments fall so they do not have to give as much money

38
Q

How do payers of incomes/wages increase at a slower rate than inflation gain?

A

They benefit due to falling real value of payments

39
Q

How does uncertainty affect economic growth?

A
  • Firms become more cautious as they are unable to make accurate forecasts of costs and revenues
  • Leads to fewer investments
  • Lower economic growth
40
Q

How are menu costs affected by inflation?

A
  • Higher rate of inflation
  • More often firms have to change their prices
  • Higher menu costs
41
Q

How does money illusion have negative consequences?

A
  • When nominal incomes increases, people feel better off even when their purchasing power has not changed
  • Leads to wrong spending decisions
42
Q

How does international competitiveness create problems?

A
  • As inflation occurs more rapidly compared to other trading countries, exports become more expensive, whereas imports become cheaper
  • International competitiveness of country is reduced
  • Difficulties for country’s balance of payments
43
Q

What is an appropriate rate for inflation and why is this preferred rather than zero inflation?

A
  • 2 to 3%
  • Zero is dangerously close to deflation, which can create serious issues

Economics Y1 (12 decks)

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