Macro Yellow Booklet Flashcards
1
Q
When evaluating which of the components of AD is most important?
A
Consumption- is two thirds of aggregate demand.
2
Q
What does economic performance measure?
A
Economic Performance measures the success or failure in achieving economic policy objectives
3
Q
What are seasonal fluctuations?
A
variations of economic activity resulting from seasonal changes in the economy
4
Q
What is the actual rate of growth from the economic growth diagram?
A
Real GDP/ real output produced by an economy (backed by AD)
5
Q
What the trend rate of economic growth?
A
Underlying rate of growth- potential growth/ output capable by an economy if producing at full capacity.
6
Q
Define positive output gap?
A
the level of actual real output in the economy is greater than the trend output level
7
Q
Define negtaive output gap?
A
the level of actual real output in the economy is lower than the trend output level
8
Q
What happens in the recovery stage of the economic cycle?
A
- economic activity goes up
- Optimism- bussiness + consumer confidence
- Consumer spending goes up
- Firms investment goes up
- Imports rise and people have more income and so want to buy more imported good
9
Q
What happens in the Boom stage of the economic cycle?
A
- economic activity peaks
- growth is high
- firms expanding (investment)
- full employment
- output reaches full capacity
- AD>AS economy overheats
10
Q
What happens in the downturn stage of the economic cycle?
A
- economic activity falls below the trend rate of growth
- firms cutback
- investment falls
- output falls
- employment falls (spare capacity)
- Less imports (BOP improves)
11
Q
What happens in the recession stage of the economic cycle?
A
- employment falls further
- some firms bankrupt
- low AD
- Inflation may fall further could result in deflation
- bank lending falls
- output falls
- investment falls
12
Q
List the causes of changes in the phases of the Economic Cycle
A
- Fluctuations in AD
- Supply side factor
- Role of speculative bubbles
- Political business cycle theory
- External shocks hitting the economy
- Multipler and accelerator interaction
13
Q
Explain how the role of speculative “price” bubbles cause changes in the phases of the economic cycle
A
When people realise that house
prices and/or share prices rise far above the assets real values, asset selling replaces asset buying. This causes the speculative bubble to burst, which in turn destroys consumer and/or business confidence. People stop spending and the economy falls into recession. The resulting cyclical instability is made worse by the excessive growth in credit and levels of debt.
14
Q
Explain how the political business cycle theory causes changes in the phases of the economic cycle
A
In democratic countries, general elections usually have to take place every 4 or 5 years. As an election approaches, the political party in power may attempt to buy votes’ by engineering a pre-election boom. After the election, the party in power deflates aggregate demand to prevent the economy from overheating, but when the next general election approaches, demand is once again expanded.
15
Q
Explain how external shocks hitting the economy cause changes in the phases of the economic cycle
A
Economic shocks, divide into ‘demand shocks’, which affect aggregate demand, and ‘supply shocks’ which impact on aggregate supply In some cases, an outside shock hitting the economy may affect both aggregate demand and aggregate supply.
•A commonly example is the effect on other countries of a war in the Middle East. Not only might the war affect business confidence in a country such as the UK (a demand shock), it may lead to an oil shortage which increases businesses’ costs of production. This would be a supply shock.
16
Q
Explain how multipler and accelerator interaction causes changes in the phases of the economic cycle
A
Business cycles may be caused by the interaction of two dynamic processes: the multiplier process, through which an increase in investment leads to multiple increases in national income; and the accelerator, through which the increase in income induces a change in the level of investment.
Thus the relationship between investment and income is one of mutual interaction; investment affects income (via the investment multiplier), which in turn affects investment demand (via the accelerator process), and in this process income and employment fluctuate in a cyclical manner.
17
Q
How is economic growth measured?
A
economic growth is measured by the annual % change in real GDP.
18
Q
Define short-run economic growth
A
growth of real output resulting from using idle resources, including labour, thereby taking up the slack in the economy.
19
Q
Define long-run economic growth
A
an increase in the economy’s potential level of real output, and an outward shift of the economy’s production possibility frontier.
20
Q
What is the difference between SR and LR growth? How would you show this on a PPF?
A
SR growth is an increase in Real GDP by using spare capacity until the productive potential (capacity) of an economy is reached. Where as LR growth is an increase in productivite capacity/ potential of an economy. It is a outward movement of the PPF cruve or LRAS cruve.
21
Q
What are the causes of economic growth in demand
A
An increase in any of the determinants of AD will incentivise firms to produce more so increasing real GDP in the short run. External shocks also effect deamnd side determinants.
The effect on the price level depends on the slope of the AD curve.
22
Q
What are the causes of economic growth in the short run SRAS- supply side?
A
•Political Stability can provide a postive shock to growth
•Decrease wage rates
Short term growth takes account of the spare capacity/ slack in the economy. This will increase output in the SR but is not sustainable in the LR.
23
Q
What are the causes of economic growth in the long term LRAS- supply side?
A
•Increase in labour participation (quantity of labour)
•Increase quality of labour to raise productivity (education, apprenticeships, training)
•Increase Investment on capital (expansion, replacement, newer technology)
Long term growth actually increases the productive capacity of the whole economy. Increase productivity= reduced unit costs as efficiency rises
24
Q
Will economic growth increase or reduce income and wealth inequality?
A
It will depend upon how the income is redistributed and where the economic growth occurs. If the income of the rich rises more than the income of the poor then wealth inequality will increase.
25
Why may inequality be negative for an economy?
* It reduces productivity as human resoruces are depleted. (poorer people may also lose aspirations)
* More money is spent on benefits and looking after these people.
26
How may the pursuit of economic growth be harmful for the environment?
* uses up finite resources
* more pollution and environmental degradation
* urbanisation and spread of cities reduces agricultural land
27
What impact may pollution caused by SR growth have on LT economic growth?
Land degradation and depletion of natural respruces means the economy cannot grow in the LR as these rescoures are fintie.
28
What are the benefits of economic growth?
* Increases standard of living
* Increases life expectancy and reduces diseases
* Route out of poverty- creates jobs
* Taxes pay for better public and merit goods
* Postive multiplier- more bussiness confidence leads to investment and even more growth
* Access to training and education increases
29
What are the costs of economic growth?
* uses up finite resources
* more pollution and environmental degradation
* raises commodity prices
* destroys local cultures and communities
* widens inequality gap with income and wealth
* raises inflation
* encourages population growth which means more mouths to feed
* worsens BOP- trade deficit (more money so we import more)
30
Define unemployment
The number of people willing and able to work at the market wage rates but unable to find jobs.
31
Why is there a difference between the claimant count and the labour force survey?
* those ineligible for benefits due to higher savings of a high earning parnter
* some people do not want the stigma of claiming benifits so will not be included
* LFS includes 16 & 17 year olds
32
What are the main UK measures of unemployment?
* claimant count
| * labour force survey
33
What are the 5 types of unemployment?
* frictional.
* cyclical.
* seasonal.
* structural.
* classical
34
Define frictional unemployment
unemployment that is usually short term and occurs when a worker switches between jobs.
(The search theory of unemployment)
35
Define structural unemployment
long term unemployment occurring when some industries are declining, even though other industries may be growing.
36
What factors may cause structural unemployment?
* occupational and geographical immobility of labour.
| * Automation (robots replace labour) reduces the demand for labour
37
Define cyclical unemployment
unemployment caused by a lack
| of AD in the economy and occurs when the economy goes into a recession or a depression.
38
Define involuntary unemployment
when workers are willing to work at current market wage rates but there are no jobs available
39
Define voluntary unemployment
occurs when workers choose to remain unemployed and refuse job offers at current market wage rates
40
What is the keynesian argument for cyclical unemployment?
•If low AD is persistant it can lead to mass unemployment or a higher accepted level of unemployment unless there is intervention
-long term and involuntary
41
What is the free market critique for cyclical unemployment?
•It is short-term, self correcting as long as prices and wages are flexible
-Markets will return to equilibrium without intervention.
42
Define seasonal unemployment
unemployment arising in different seasons of the year, caused by factors such as the weather and the end of the Christmas shopping period
43
What is real wage unemployment?
a type of disequilibrium unemployment caused by real wage rates being too high to clear the labour market, resulting in excess supply of labour.
44
What are real wages?
Wages that have been adjusted for inflation, a real wage measures the amount of goods and services that can be bought
45
Explain the consequences of unemployment (relating to how it is bad for the economy)
•Unemployment is bad for the economy as a whole, largely through the waste of human capital. When workers are unemployed, not all the economy's productive resources are used to produce output, which, if produced, could add to the material standards of living and economic welfare of the whole population. Instead, the economy produces inside its production possibility frontier and fails to operate to its potential.
•Unemployment is also one of the factors that reduce an economy's international competitiveness. High unemployment can reduce incentives for firms to invest in new state-of-the-art technologies that generally lead to increased export competitiveness.
More compex reason:
•Economies are particularly badly affected by long-term unemployment. A worker may become effectively unemployable the longer the period that he or she is out of work: for example, because of the erosion of job skills and work habits. Long term unemployment is also made worse by the fact that employers, who might otherwise hire and retrain workers who have been economically inactive for several years, perceive that workers with more recent job experience present fewer risks and are more employable. When inactive workers are seen as unemployable, the economy begins to behave as if it is on its production possibility frontier, even though there are plenty of unemployed workers notionally available for work. An increase in aggregate demand can then lead to inflation rather than to an increase in output and jobs.
46
Explain the consequences of unemployment (relating to how it is bad for the buget)
Under-investment can also be caused by the higher business taxes that firms
may have to pay to help finance the welfare benefits paid to unemployed
workers. While it is true that the Jobseeker's Allowance can be claimed only in the first months of unemployment, in the UK the state continues to pay Universal Credit to families in which there is no wage earner, in order to save family members, particularly children, from the effects of absolute poverty.
47
Explain the consequences of unemployment (relating to how it is bad for the unemploymed)
Unemployment is obviously bad for the unemployed themselves and for their families, largely because of the way in which the low incomes that accompany unemployment lead to low standards of living. However, the costs of unemployment for the unemployed go further than this. Unemployment destroys hope in the future. The unemployed become marginalised from normal economic and human activity, and their self-esteem is reduced. Families suffer increased health risks, greater stress, a reduction
in the quality of diet, and an increased risk of marital break-up and social exclusion caused by loss of work and income.
48
Give possible benfeits of unemployment (as a evaluating counter argument)
despite the disadvantages of high unemployment for the economy,
many free-market economists believe a certain amount of unemployment is
necessary to make the economy function better. In particular, by providing downward pressure on wage rates, unemployment can reduce inflation. Unemployment also contributes to a widening of income differentials between better-paid and low-paid workers. Some free-market economists argue that this is a good thing, believing that differences in pay are needed to promote incentives,
which then create the supply-side conditions in which the economy can prosper.
•May also increase self-employment start ups as people do this as an alternative to being unemployed.
49
Explain the government policies to reduce frictional and structural unemployment
Governments can try to reduce frictional unemployment by improving the geographical and occupational mobility of labour, and by reducing workers search periods between jobs. Geographical mobility could be improved by making it easier for families to move house from one region to another, for example by subsidising removal costs.
However, the widening difference in UK house prices between south and north are in fact reducing the geographical mobility of labour. Government spending on rented social housing in areas where there are ongoing labour shortages would perhaps be the most effective way of improving the geographical mobility of labour, though for cost and other reasons, this policy is unlikely to be adopted, at least on a scale sufficient to have a significant effect.
The introduction of the Jobseeker's Allowance JSA) in 1996 was an attempt
to reduce search periods between jobs it can only be claimed for the first few months of unemployment providing the claimant is actively seeking work. The allowance creates an incentive for the newly unemployed to accept lower wage rates and to speed up the search for vacancies that meet their (now reduced) aspirations.
•However, the only really effective way to reduce frictional and structural unemployment is to achieve successful economic growth, which increases firms' demand for new employees.
Governments can improve the occupational mobility of labour by providing retraining schemes.
Government retraining schemes are usually less effective than those run by private sector firms. But a problem is that employers in trades such as plumbing often prefer to avoid spending on training their employees. As a result of this market failure, too few workers may end up being trained.
50
Explain the government supply side policies to reduce unemployment
(This makes no sense) (-like none at all)
Supply-side policies which try to improve the competitiveness and efficiency of markets are now used to reduce frictional and structural unemployment. In the past, deindustrialisation led to large-
scale structural unemployment, concentrated in regions of decline such as coal fields and areas previously dominated by heavy industry.
Many traditional manufacturing industries and the coal industry have now largely disappeared in the UK, so there is less scope for further structural decline in these activities. The supply-side improvements of the 1980s and 1990s also created conditions in which service industries grew to replace manufacturing. As a result, more workers were able to move from declining industries into growing ones. However, as the recent and current financial services crisis shows, service industries such as banking have themselves become vulnerable to structural decline and to overseas location.
51
Define inflation
The continuing rise in the average price leve for all goods and servives in the economy.
52
What are the two baisc causes of inflation?
* excess aggreate demand in the economy
| * a general rise in costs of production
53
Define demand-pull inflation
a rising price level caused by an increase in aggregate demand, shown by a shift of the AD curve to the right. Also known as demand inflation.
54
Explain demand-pull inflation
demand-pull inflation is caused by an increase in aggregate demand. If the economy is initially producing on the economy's SRAS curve, but below the normal capacity level of output, the price level has to rise to persuade
firms to produce more output to meet the extra demand. In part, this is because firms incur higher costs when they produce more goods. For firms to maximise profit, higher prices are needed to reward firms for producing more output. Once the LRAS curve is reached, higher prices can temporarily encourage firms to produce beyond this point, but the increase in output cannot be sustained. Instead, the quantity of goods and services produced falls back to the normal capacity level of output, in this case at y2.
An increase in any of the components of aggregate demand, C, I, G or
(X - M), can lead to demand-pull inflation. (So textbook waffle but basically prices rise to persuade firms to produce more to meet the higher aggregate demand but this cannot be sustained in the long term)
55
Define cost-push inflation
a rising price level caused by an
| increase in the costs of production, shown by a shift of the SRAS curve to the left. Also known as cost inflation.
56
Briefly explain cost-push inflation
The price level rises caused by an increase in production costs. Firms will pass this cost onto consumers by raising their prices.
57
Why may anticipated inflation be better than unanticipated inflation?
If inflation could be anticipated with complete certainty, some economists argue that it would pose few problems. Households and firms would simply build the expected rate of inflation into their economic decisions, which would not be distorted by wrong guesses.
58
Describe how a low, steady rate of inflation may be seen to be beneficial to an economy
•Creeping or low inflation, is associated with growing markets, healthy profits and a general climate of business optimism, greases the wheels of the economy. Viewed in this way, a low rate of inflation may be a necessary side-effect of expansionary policies to reduce unemployment.
•Necessary to make labour markets
function efficiently. (The explanation in the textbook makes no sense)
59
What is the acronym SPICED
Strong Pound Imports Cheaper Exports Deerer
60
What is the acronym WPIDEC
Weak Pound Imports Deerer Exports Cheaper
61
Explain the distribution effects as a cost of inflation
Purchasing power is re-distributed from those and fixed nominal income towards those with variable incomes whose earnings keep pace with inflation.
62
Explain the distortion of normal economic behaviour as a cost of inflation
Inflation can distort consumer
behaviour by causing households to bring forward purchases and hoard goods if they expect the rate of inflation to accelerate. Similarly, firms may divert funds out of productive investment in fixed investment projects into unproductive commodity hoarding and speculation. People are affected by inflationary noise.
This occurs when changes in relative prices (i.e. a rise or fall in the price of one good) is confused with a change in the general price level or inflation.
63
Explain the breakdown in the functions of money as a cost of inflation
money becomes less useful and efficient as a medium of exchange and store of value. (Erodes value of savings)
64
Explain the international uncompetitiveness as a cost of inflation
When inflation is higher than in competitor countries, export demand will fall and imports demand may rise. Lower growth and rising unemployment are likely to result.
65
Explain the shoe leather and menu costs as a cost of inflation
Consumers incur shoe leather costs,
spending time and effort shopping around and checking which prices have or have not risen. By contrast, menu costs are incurred by firms having to adjust price lists and menus more often.
66
Define deflation
A sustained fall in the general average price level
67
What are the two types of deflation?
* Benign
| * Malign/ malevolent
68
Define benign deflation
falls in the price level because of technological advances which bring down the prices of certain goods e.g. computer chips
69
Define malign deflation
falls in the price level as a result in a fall in AD. The multiplier effect works in a downward cycle: a fall in AD reduces employment, reducing spending, reducing AD further and so on.
70
Explain Benign deflation and it’s consequences
A good or benign deflation, results from improvements in the economy's supply side, which reduces business costs of production. Both the SRAS curve and the LAS curve shift to the right and, the price level falls, but output and employment rise.
•It comes with higher growth as output grows.
•Benign defaltion is usually short term and unanticipated.
71
Explain malevolent deflation and it’s consequences
* Malevolent deflation if bad deflation as it is usually long term and anticipated.
* Anticipated deflation is the worst type if deflation for an economy as consumers delay their spending resulting in a lower AD which lowers consumption and leads to higher unemployment.
* Malign deflation leads to postive real intrest rates this means their will be more saving and less spending further lowering consumption and AD.
* It also increases the real value of debts, as profits and incomes fall it becomes harder for people to pay off debt as debt if a fixed value, consumers and firms become aversed to taking on debt. It is also a big drag to consumer confidence.
* Malign deflation leads to lower growth as lower prices mean reduced revenues and profit margins for firms. Firms then try to reduce the costs by shredding labour causing higher unemployment.
72
What are the evaluative points when discussing defaltion?
* Depends of type (benign/malign) and cause (demand or supply)
* Anticipated is the worst!
* Deflation can make exports more competitive eventually but this has high socio-econmic costs such as higher unemployment in the short term.
73
What are trade goods in the current account?
VISIBLES
•manufactered goods eg.cars
•non-manufactured goods eg.tobbacco
74
Is the UK a importer or exporter in the trade in goods?
UK is a net importer of primary products.
| Used to be a exporter but is not anymore due to structural change
75
What are trade services in the current account?
INVISIBLES
•Tertiary or service sector eg: financial services, transport, intellectual services
•Also outsourcing
76
What is Primary Income in the current account?
•Flow of income (profit) from;
- assests owned abroad by UK companies- injection
- assests owned by foreign companies- withdrawals
77
What is Secondary Income in the current account?
* Payments not in exchange for any product of econmic value flowing in and out of the UK eg. Foregin aid, grants
* Cost of armed forces overseas
78
List the factors that influence a country’s current account on the blance of payments
* Exchange Rate
* Relative inflation rates
* Economic activity in another country
* Productivity
79
What factors may cause an exchange rate to fluctuate?
* Relative Inflation Rates
* Relative Interest Rates
* Speculation
* The current account
* Political Stability
* Productivity Levels
80
What is an exchange rate?
The rate at which one currency exchanges for another
81
Explain how Relative interest rates can affect the exchange rate?
If the UK has higher interest rates than other countries then it will attract hot money therefore increases demand for the £ strengthening the £.
82
Explain how Relative inflation rates can affect the exchange rate?
If the UK has a low inflation rates than its trading partners then its goods will be relatively cheaper. This will increase demand for exports which will increase the demand of the £ strengthening the £.
83
Explain how Speculation can affect the exchange rate?
If traders think the £ will be more valuable in the future they will buy it now so they can sell it at a profit later on.
If they think it will fall they will avoid selling it and making a loss.
84
Explain how the Current Account can affect the exchange rate?
If a country imports more than they export then their will be less demand for their currency causing it to depreciate in value.
85
What are the possible causes for a fall in the value of the pound? WPIDEC
- decrease in interest rates
- decrease in UK exported goods
- decrease in UK competitiveness
- decrease in FDI
- increase in inflation
- increase in demand for imports
- pessimistic speculation
86
What are the possible causes for a rise in the value of the pound? SPICED
- increase in interest rates
- increase in UK competitiveness
- increase in FDI
- increase in demand for UK goods (X)
- decrease in inflation
- decrease in demand for imports
- optimistic speculation
87
What are the costs of FDI?
* FDI can cause interference in domestic investments.
* Foreign investments can be more costly than domestic investments
* Capital-intensive investments can be dangerous in some cases
* Sometimes investments can result in negative values
88
What are the benefits of FDI?
* helps boost the economy of a country.
* aids in the expansion of human capital by subsistence of workforce
* facilitates trade in the global market allowing an increase in exports.
* countries have limited domestic stock in your advanced capital inflow
* builds a competitive share market of global standards
89
What may trigger hot money flows?
* higher interest rates
| * speculation
90
What could be the problems created by large scale hot money flows between countries?
A mass move by investors to buy a currency in anticipation of a rate rise will actually cause a rate rise.
- self-fulfilling prophecy
- destabilising effects
91
What is a Expenditure-reducing policy?
a government policy which aims to eliminate the deficit by reducing the
demand for imports by reducing the level of AD in an economy
92
What is a Expenditure-switching policy?
a government policy which aims to eliminate a current account deficit by
switching domestic demand away from imports to exports.
93
Explain deflation as an expenditure reducing policy
It is a monetary policy which uses interest rates and exchange rates in aims to reduce aggregate demand.
Not a long term solution because of the negative impact on both (cyclical) employment and growth.
94
Explain Direct Controls as expenditure switching policies
Import controls: quotas, tariffs and regulations
95
Explain Devaluation or currency depreciation as an expenditure switching policy
an exchange rate depreciation can improve the price competitiveness of exports and make imports more expensive when priced in a domestic currency
96
What is the main evaluation point for the expenditure switching policy devaluation of currency depreciation?
The effectiveness of a devaluation or depreciation in a currency on a country's current account deficit will
depend on the PED of exports and imports.
97
How will devaluation on elastic goods affect UK spending on imports?
Spending on UK imports will decrease as a  change in the price of elastic goods will cause a proportionately greater change in demand for imports.
98
How will devaluation on inelastic goods affect UK spending on imports?
It will worsen the balance of payments as the change in demand will not be greater/ as much as than the change in price. (Ineffective in deceasing imports)
99
How will devaluation on inelastic goods affect overseas expenditure on UK exports?
Exports will not increase this is because the change in price will not cause proportionately greater change in demand due to the inelasticity making demand relatively unresponsive, worsening the balance of payments.
(Exports don’t increase that much)
100
How will devaluation on elastic goods affect overseas expenditure on UK exports?
The change in price will cause a proportionately greater change in demand meaning exports increase as they become cheaper and demand is responsive to the change is price.
101
What is the Marshall Lerner Condition?
The Marshall-Lerner condition, states that a currency devaluation will only lead to an improvement in the balance of payments if the demand elasticity for imports and exports is greater than one.
102
J CURVE REVISE
the curve isn’t a J but other than that it’s not overly complicated!
103
What are supply-side policies in relation to reducing the UK Current Account deficit?
Supply side policies aim to allow the economy to become more productive and improve the quality of domestic production.
They are long term solutions mean there’s significant time lag before they actually take effect.
104
Does a current account deficit pose problems for an economy? (Give arguments for both sides)
✅ The deficit may indicate the UK has lost competitiveness due to insufficient investment.
✅Continuous deficits lead to withdrawals from the second floor reducing employment.
✅Loss of manufacturing jobs leads to structural unemployment.
❌There is no problem as long as there is sufficient foreign investment in the UK to finance it.
❌The deficit may be due to imports of new capital machinery that will increase productivity which is potential growth.
105
Does a current account surplus pose problems for an economy? (Give arguments for both sides)
✅A surplus indicates a country suggests a country is globally competitive which is positive.
✅Leads to a higher standard of living for citizens.
❌But unless a spare capacity or growth can be achieved a surplus can lead to inflation.
❌Surpluses mean deficits elsewhere.
106
The UK has run Current Account deficits for the last few years. State 3 reasons why this might be the case
* higher labour costs compared to the rest of the world
* strong exchange rate (exports are more expensive so countries import from elsewhere)
* Inelastic imports due to the demand for luxury goods.
107
What are the government's main macroeconomic objectives?
* Full employment
* Price Stability
* Equilibrium on the balance of payments
* Economic growth
* improve environment
* even distribution of income
108
Explain how the objectives full employment,inflation and growth conflict with trying to maintain satisfactory balance of payments
* When incomes are rising at a rapid rate consumers will tend to buy more imports.
* Fast growing countries may suffer high inflation worsening competitiveness.
* Businesses have to import more raw materials to help expand supply for the increased demand that results from the growth.
109
Explain how achieving low unemployment and controlling inflation will cause conflicts
Higher employment increases aggregate demand as more people have more disposable income to spend this leads to higher prices resulting in inflation.
110
Explain how the macroeconomic objectives of economic growth and controlling inflation may conflict with each other
An overheating economy may suffer accelerating inflation. Stagflation may also occur which is when high inflation is associated with slow growth. (Resolved by effective supply side policies)
