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Economics > Macroeconomic objectives > Flashcards

Macroeconomic objectives Flashcards

1
Q

Consequences of economic growth on living standards

A

Positive:

  • increase in real GDP = improvement in ‘material standards of living’
  • improvements in technology = improvements in healthcare and education
  • govts. collect more tax revenue = more public and merit goods

Negative:

  • more stress
  • less leisure time
  • more family breakdowns
  • increased inequality in income distribution
  • more pollution
  • more crime

So, while the ‘standard of living’ might improve, ‘quality of life’ may deteriorate

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2
Q

types of unemployment

A

Frictional:
people who are either in between jobs or have just recently entered the workforce

Seasonal:
some industries (agriculture, tourism, etc.) employ workers on a seasonal basis

Structural:
caused by changes in the “structure” of the labour market (e.g. new technologies, companies relocating overseas where labour is cheaper, labour market rigidities like minimum wage)

Cyclical (“demand-deficient”):
Occurs during recessions. Caused by a fall for G&S in the economy and hence a fall in AD for labour as a result of firms cutting bakc on production.

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3
Q

possible policies to deal with frictional unemployment

A
  • lower unemployment benefits
  • improving flow of information between potential employers and people looking for jobs
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4
Q

possible policies to deal with seasonal unemployment

A
  • encouraging workers to take different jobs on their ‘off season’
  • lower unemployment benefits
  • improving flow of information between potential employers and people looking for jobs
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5
Q

possible policies to deal with structural unemployment

A

Interventionist policies:

  • educational systems that train people to be more occupationally flexible
  • improving occupational mobility by spending on adult retraining programs
  • subsidizing firms that provide training

Market-based policies:

  • reducing unemployment benefits
  • increasing labour market flexibility through labour market deregulation (which will incentivize businesses to take on more workers)
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6
Q

economic consequences of unemployment

A
  • loss of GDP
  • loss of tax revenue
  • increased cost of unemployment benefits
  • loss of income for individuals
  • greater disparities in the distribution of income
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7
Q

possible policies to deal with cyclical unemployment

+disadvantages of said policies

A
  • fiscal policy to increase AD
  • monetary policy to increase AD

However:

  • increased spending entails opportunity cost and would worsen a govt. budget deficit
  • possible ‘crowding out’ of private investors if govt. borrows to finance budget deficit
  • time-lag between implementing policy and seeing unemployment fall
  • could be inflationary
  • in practice, not always easy to identify types of unemployment in order to implement appropriate practices
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8
Q

natural rate of unemployment

A

frictional + seasonal + structural

  • Exists when the labor market is in equilibrium
  • Exists even when economy is at ‘full employment’ on LRAS and producing at full-employment level of output.
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9
Q

personal and social consequences of unemployment

A
  • increased crime rates
  • increased stress rates
  • increased indebtedness
  • homelessness
  • family breakdown
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10
Q

what is the Consumer Price Index (CPI)

A

A weighted index that measures the changes in prices of a ‘basket of goods and services’ consumed by the ‘average household’. Each item in the basket is weighed according to its relative importance as part of an average household’s expenditure.

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11
Q

limitations of the CPI in measuring inflation

A
  • different income earners may experience a different rate of inflation when their pattern of consumption is not accurately reflected by the CPI
  • inflation figures may not accurately reflect changes in consumption patterns and the quality of the products purchased
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12
Q

causes of inflation

A

Demand-pull inflation:
Caused by any increase in AD.
(Neoclassical – because the economy always adjusts itself to reach full employment, increases in AD will always lead to inflation)
(Keynesian – not all increases in AD will cause demand-pull inflation; it will only happen when an economy is already at full-employment).

Cost-push inflation:
Caused by an increase in the cost of FOP, resulting in a decrease in SRAS (only occurs in Neoclassical model – Keynesian is not equipped to deal with short-term fluctuations of AS).

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13
Q

costs of a high inflation rate

A
  • Loss of purchasing power: same amount of income can now buy fewer G&S
  • Greater uncertainty: affects investors negatively, causes anxiety for workers and employers
  • Redestributive effects: hits lower income households more than higher income households, benefits borrowers/debtors but harms savers/creditors/lenders
  • Less saving: uncertainty + loss of purchasing power = less likely to save
  • Damage to export competitiveness: local goods become more expensive, so foreigners are more likely to demand the country’s exports
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14
Q

causes of deflation

A

shifts in AD or SRAS

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15
Q

disinflation vs deflation

A

disinflation still entails inflation, but at a slower rate

deflation is negative inflation

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16
Q

costs of deflation

A
  • High levels of cyclical unemployment: lower consumption spending and lower AD = unsold stock = businesses lay off workers
  • Bankruptcies: lots of businesses may shut down due to decreased AD and making huge losses / not being able to pay back their debts = decrteased business confidence and lower investment
  • Effects of debtors homeowners who have mortgages will see the value of their houses fall relative to the value of their debts = decreased consumer confidence
17
Q

relationship between a budget deficit and government (national) debt

A

When a government borrows money, its debt increases. Whenever a government runs a budget deficit, it adds to its long-term debt.

18
Q

costs of a high government (national) debt

A
  • debt servicing costs: As more money is diverted to servicing the debt (i.e. paying the interest to the creditors), there will be less money left for investment in areas that are important for economic growth.
  • low credit ratings: credit ratings present an assessment of a government’s ability to repay its public debt
  • future taxation: Increases in debt will mean increased taxes in the future and less ability for the government to spend on areas such as education and health care, which are important for society.
19
Q

relationship between low unemployment and low inflation

A

When unemployment is low, inflation tends to rise. When unemployment is high, inflation falls. Policymakers and voters prefer low unemployment and low inflation (but not a falling price level). They typically cannot have both and face a trade-off instead.

20
Q

relationship between high economic growth and low inflation

A

Positive:

  • if economic growth is driven by increases in SRAS and/or LRAS, it will exert a downward pressure on the average price level due to expansion of the economy’s productive capacity and potential output

Negative:

  • if economic growth is driven by increases in AD, it may be inflationary if the economy is operating at full employment or close to full employment (demand-pull inflation)
21
Q

relationship between high economic growth and environmental sustainability

A
  • depletion of non-renewable sources
  • increased greenshouse gas emissions
  • increased air/water pollution

However, threat may be diminished if wealthier and more educated citizens start demanding policies and developing technologies that promote sustainability

22
Q

relationship between high economic growth and equity in income distribution

A

Positive:

  • rise in people’s incomes = more tax revenue for govt. = more spending on public goods/merit goods = bridging gap between rich and poor

Negative:

  • sometimes the benefits of growth are only reaped by the rich and higher income households, especially if the govt.’s tax policies favour the rich = worsening of income inequality
23
Q

define inflation

A

sustained/persistent rise in the average price level in an economy over time

24
Q

define deflation

A

persistent fall in the average price level in an economy over time (negative inflation rate)

25
Q

define disinflation

A

a slowing down of inflation (inflation rate is still positive, so prices are still rising but at a slower pace)

26
Q

“good” deflation vs “bad” deflation

A

Good deflation is caused by improvements in technology, more efficient mehtods of production, and increased productivity (increases in SRAS and LRAS).

Bad deflation is caused by falls in AD

27
Q

define economic growth

A

an increase in real GDP over time (so, essentially, it is a growth in the size of the economy and the amount of economic activity)

28
Q

relationship between high economic growth and unemployment

A

Positive:

  • new job opportunities = lower cyclical unemployment

Negative:

  • decline and collapse of certain industries due to improvements in technology or increased trade = structural employment
29
Q

define unemployment

A

people of working age who are willing and able to work, actively seeking work, and unable to find work.

30
Q

difficulties in measuring unemployment

A
  • existence of hidden employment (people who have given up on their job search, part-time worker wanting to work full time, etc.)
  • existence of underemployment
  • it is an average, meaning it ignores regional, ethnic, age, and gender disparities
31
Q

policies to deal with demand-pull inflation

+potential issues with the policies

A
  • deflationary fiscal policy
  • contractionary monetary policy

However:

  • fiscal policy is politically unpopular
  • budget cuts are not always easy due to the govt.’s commitment
  • long time-lags
  • high interest rates will hurt borrowers/debtors
  • may cause higher unemployment and slow down economic growth
32
Q

policies to deal with cost-push inflation

+potential issues with the policies

A
  • supply-side policies to boost productivity of FOP and economy’s productive capacity
  • negotiations to match higher wages with increased productivity and hence control inflationary wage pressures
  • subsidizing inddustries to moderate increases in costs of production
  • revaluation of country’s currency to make exports cheaper

However:

  • the effects of supply-side policies are usually long-term and do not appear in the short-run
  • subsidizing comes with opportunity cost
  • revaluating currency helps export competitivness

Economics (14 decks)

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