Macroeconomic Objectives Flashcards

1
Q

What is microeconomics?

A

The study of the economy on a small scale

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2
Q

What is macroeconomics?

A

The study of the economy world wide

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3
Q

What is a macroeconomic objective?

A

Aims that a government wants to achieve

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4
Q

Name 5 macroeconomic objectives

A
  • Inflation
  • Unemployment
  • Economic growth
  • Protect the environment
  • Balance of payments
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5
Q

Describe the macroeconomic objective inflation

A

To have a stable inflation rate

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6
Q

Describe the macroeconomic objective unemployment

A

To keep unemployment levels low

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7
Q

How can inflation be prevented?

A

By putting caps on prices

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8
Q

Describe the macroeconomic objective economic growth

A

To ensure an increase in national income over time

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9
Q

Describe the macroeconomic objective protect the environment

A

To promote environmentally friendly activities

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10
Q

Describe the macroeconomic objective balance of payments

A

To ensure a positive balance of payments (more exports than imports)

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11
Q

How is balance of payments calculated?

A

Exports - imports

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12
Q

What is balance of payments recorded on?

A

The current account

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13
Q

What is a deficit?

A

Imports > exports

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14
Q

What does GDP stand for?

A

Gross Domestic Product

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15
Q

What is GDP?

A

It measure the total value of goods and services produced in an economy over a period of time

Measures economic growth

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16
Q

What does per capita mean?

A

For each person

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17
Q

Why is growth important? Name 3 reasons

A
  • Improvements in living standards
  • Attracts foreign investments
  • Encourages domestic enterprise
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18
Q

How does growth improve living standards?

A

Incomes can rise and poverty can be reduced = increased income generates tax = the government can invest in public goods and services

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19
Q

Name 5 limitations of GDP

A
  • Population changes
  • Statistics errors
  • Hidden economy
  • GDP and living standards
  • Inflation
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20
Q

Explain why inflation is a limitation of GDP?

A

Increases in prices are not taken into account when using GDP as measurement of economic growth. E.g. If an economy grows by 5% and the prices increase by 5%, the economy has not grown.

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21
Q

Explain why population changes is a limitation of GDP?

A

If population increases faster than growth = there’ll no be real increase in growth. Extra income is shared between more people.

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22
Q

Explain why is statistic errors a limitation of GDP?

A

Gathering data to calculate national income is huge task. Errors are coming e.g. Information can be entered inaccurately or left out

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23
Q

Explain why the hidden economy is a limitation of GDP?

A

Sometimes paid work goes unrecorded e.g. If a friend drives a family for £25, it will not be recorded

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24
Q

Explain why GDP and living standards are a limitation of GDP?

A

If GPD rises, it doesn’t mean living standards have also risen. Income distribution gap could be huge.

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25
Q

What is the economic cycle?

A

It shows the fluctuation of economic growth (through GDP) for an economy over a period of time

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26
Q

What is a boom?

A
  • Peak of the economic cycle
  • Where GDP is growing at its fastest
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27
Q

What is a downturn?

A
  • When rate of economic growth (GDP) is slowing down
  • Period after a boom
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28
Q

What is recession/depression?

A
  • A decline in economic activity, when the GDP growth rate is negative
  • Bottom of the economic cycle
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29
Q

What is recovery?

A
  • Economic activity starts to increase
  • When the economic cycle begins to rise
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30
Q

Draw a economic cycle

A
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31
Q

State how the following are affected during a boom:

  1. GDP
  2. Unemployment
  3. Inflation
  4. Economic growth
  5. Balance of payments
  6. Environmental standards
A
  1. GDP = increase
  2. Unemployment = decrease
  3. Inflation = increase (demand increases)
  4. Economic growth = increase
  5. Balance of payments = positive
  6. Environmental standards = decrease/poor
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32
Q

State how the following are affected during a downturn:

  1. GDP
  2. Unemployment
  3. Inflation
  4. Economic growth
  5. Balance of payments
  6. Environmental standards
A
  1. GDP = start to decrease
  2. Unemployment = start to increase
  3. Inflation = increase but slowly
  4. Economic decline (slowly)
  5. Balance of payments = slowly lean towards negative
  6. Environmental standards = may slightly increase
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33
Q

State how the following are affected during a recession:

  1. GDP
  2. Unemployment
  3. Inflation
  4. Economic growth
  5. Balance of payments
  6. Environmental standards
A
  1. GDP = decrease a lot
  2. Unemployment = rises sharply
  3. Inflation = remain the same or slightly decrease
  4. Economic decline will occur
  5. Balance of payments = negative
  6. Environmental standards = will increase
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34
Q

State how the following are affected during a recovery:

  1. GDP
  2. Unemployment
  3. Inflation
  4. Economic growth
  5. Balance of payments
  6. Environmental standards
A
  1. GDP = start to rise
  2. Unemployment = start to decrease
  3. Inflation = may begin to rise
  4. Economic growth = begin to increase
  5. Balance of payments = positive
  6. Environmental standards = decrease
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35
Q

What are the benefits of economic growth (name & explain 4 briefly)?

A
  • Increased income
    • Increases in GDP means on average more people will have more income
  • More leisure time
    • As economy grows, it’s possible to spend less time working = because of significant improvements in efficiency
  • Greater life expectancy
    • People can live longer = advances in medical technology
  • Better public services
    • Government can collect more tax revenue (linked to increased income and spending) = spend more on health care education, transport, etc
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36
Q

What are the problems with economic growth? Name 5

A
  • Increase in the income distribution gap
  • Unsustainable growth = lack of resources
  • Inflation = prices will rise
  • Environmental damage = more goods are produced
  • Rapid economic growth = recession
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37
Q

What is economic growth?

A

The increase in national income over time

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38
Q

What is national income?

A

The income of an nation over a period time

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39
Q

What is an income distribution gap?

A

The difference between high income earners and low income earners

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40
Q

What does it mean to if a person is unemployed?

A

They are without a job but are seeking work but cannot find it

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41
Q

How is unemployment measured? Name 2 method and briefly explain them

A
  • International Labour Organisation (ILO) survey
    • Involves asking people whether or not they are in work
  • Claimant count
    • Counts people who claim the unemployment benefit
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42
Q

Define off-peak season

A

A time during the year when demand is low

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43
Q

Define economically inactive

A

People who are out of work but don’t meet criteria of unemployment

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44
Q

Define redundant

A

To be let go from work

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45
Q

Name the 5 types of unemployment

A
  • Cyclical unemployment
  • Structural unemployment
  • Frictional unemployment
  • Seasonal unemployment
  • Voluntary unemployment
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46
Q

What is cyclical unemployment?

A

Linked to economic cycle - during downturn = business activity slows & worker laid off

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47
Q

What is structural unemployment?

A

Over time, structure of economy changes = workers to slow to switch from one job or region to another

48
Q

Why may structural unemployment persist?

A

May persist if labour mobility is poor

49
Q

Define labour mobility

A

The ability of workers to move from one job to another

50
Q

Name the 3 types of structural unemployment

A
  • Sectoral
  • Technological
  • Regional
51
Q

What is sectoral unemployment?

A

When a particular industry declines

52
Q

What is technological unemployment?

A

When machinery is used instead of labour

53
Q

What is regional unemployment?

A

When a geographical area declines

54
Q

What is frictional unemployment?

A

Short-term unemployment that occurs when people move between jobs

55
Q

How long is someone considered frictionally unemployed?

A

Periods up to eight weeks

56
Q

What is seasonal unemployment?

A

Unemployment at particular times of the year

57
Q

What is voluntary unemployment?

A

People who choose not to work

58
Q

Define unemployment

A

The amount of people don’t have job but actively seeking one

59
Q

Name 5 effects of unemployment

A
  • Increased government expenditure on social welfare
  • Lowers the standard of living
  • Less AD = lowers GDP
  • Increase in hidden market jobs
  • Reduced tax revenue
  • Less foreign investors
  • Increase in crime rate
  • Lower national income due to less people earning income
  • Government may to increase its borrowing
60
Q

Define an open economy

A

An economy that trade with other countries

61
Q

Define imports

A

Goods and services brought from overseas

62
Q

Define exports

A

Goods and services sold overseas

63
Q

Define visible trade

A

Trade of physical goods

64
Q

Define invisible trade

A

Trade of services

65
Q

Define balance of payments

A

Record of all transactions relating to international trade

66
Q

Define the current account

A

Shows the value of all imports and exports over a period of time

67
Q

Define the capital account

A

Records flows of money between countries that result from transactions relating to savings, investments and speculation (included in balance of payments)

68
Q

Define current account deficit

A

Imports > Exports

69
Q

Define current account surplus

A

Exports > Imports

70
Q

Name 4 effects of a current account deficit

A
  • Higher external debt
  • Declining industries (due to overseas competition)
  • Rising imports and unemployment
  • Falling exchange rate
71
Q

Name 4 effects of a current account surplus

A
  • Rising exports, employment & growth
  • Higher currency reserves
  • Rising exchange rates
  • Shortages of domestic goods
72
Q

Name 5 method of protecting the environment

A
  • Taxation
  • Subsides
  • Compensation
  • Recycling
  • International Targets
  • Road Pricing and Charging
  • Environmental Agencies
  • Government Regulation
  • Pollution Permits
73
Q

Explain how pollution permits can protect the environment

A

Allow firms to release a limited amount of emissions into atmosphere

74
Q

Explain how taxation can protect the environment

A

Governments tax on those that damage environment

75
Q

Explain how subsides can protect the environment

A

Government offers grants, allowances to forms as an incentive to reduce activities that damage the environment

76
Q

Explain how compensation can protect the environment

A

Those who cause environmental damage are forced by law to pay compensation to victims

77
Q

Explain how recycling can protect the environment

A

Involves collecting waste materials and producing a new raw material from that waste

78
Q

Explain how international targets can protect the environment

A

Have been set to reduce global warming

79
Q

Explain how road pricing and charging can protect the environment

A

Charge road users for causing congestion and pollution

80
Q

Explain how environmental agencies can protect the environment

A

Take action against those who break law or give advice to firms about protecting the environment

81
Q

Explain how government regulation can protect the environment

A

Legislation and regulation designed to protect the environment

82
Q

What is the definition of inflation?

A

The general persistent rise in prices over a given period of time

83
Q

What is the affect of inflation on the value of money?

A

It decreases the value of money - “Inflation means that your money won’t buy as much today as it could yesterday”

84
Q

What does inflation mean for the cost of living?

A

An increase in the cost of living.

85
Q

What is deflation?

A

The general fall in price levels in an economy (opposite of inflation)

86
Q

What is hyperinflation?

A

A situation where inflation rates are very high

87
Q

How is inflation measured? Name 2 methods

A
  • Consumer price index (CPI)
  • Retail price index (RPI)
88
Q

What does both CPI and RPI measure?

A

The general change in prices - changes in the cost of living

89
Q

How is CPI and RPI measured?

A
  • Every month the government records the prices of about 600 goods and services purchased by over several thousand families.
  • Then an average price change is calculated & converted into index number.
90
Q

What are causes of inflation? Name 3

A
  • Demand Pull Inflation
  • Cost Push Inflation
  • Increase in Money Supply
91
Q

What is aggregate demand?

A

The total demand in the economy

92
Q

What is aggregate supply?

A

The total supply in the whole economy

93
Q

What is demand pull inflation?

A

When aggregate demand is more than aggregate supply in the economy i.e. too much aggregate demand

94
Q

Give 4 causes of demand pull inflation?

A
  • Rising consumer’s disposable incomes
  • Increase in government spending
  • Increase in demand for exports
  • Investment by firms
95
Q

What is cost push inflation?

A

Inflation caused by an increase in cost of production (business costs)

96
Q

Explain cost push inflation

A

When firms incur high production costs, they will rise their prices to maintain their profits i.e. rising costs

97
Q

Name 5 causes of cost push inflation

A
  • Rising costs of oil/raw materials
  • Increase in indirect taxes
  • Rising wage costs
  • Rising interest rates
  • Currency depreciation as imports become expensive
98
Q

Illustrate a cost push inflation curve

A
99
Q

Illustrate a demand pull inflation curve

A
102
Q

What is money supply inflation?

A

Inflation caused by rapid growth in the money supply

103
Q

What does the money supply refer to?

A

The stock of notes and coins, bank deposits and other financial assets in the economy

104
Q

Where does an increase in the money supply occur?

A

Where interest rates are too low, encouraging borrowing which increases demand and prices rise

105
Q

What are the consequences of inflation? Name 7

A
  • Lost purchasing power of money
  • Discourages savings
  • Increased government spending
  • Balance of payments/reduced export competitiveness
  • Unemployment
  • Debtors gain as creditors lose
  • Increased business costs
106
Q

Explain how inflation causes lost purchasing power of money

A

High inflation, people with fixed income (do not change with inflation) = real purchasing power of their income will buy less than before

107
Q

Explain how inflation discourages saving

A

Purchasing power of money saved falls = savers lose out = discourages savings

108
Q

Explain how inflation increases government spending

A

High unemployment levels = government expenditure on social welfare increases

109
Q

Explain how inflation balance of payments/reduced export competitiveness

A

When rate of inflation in country is higher than its trading partners = its exports become expensive + unattractive in global market. Imports will increase at higher rate than exports = balance of payments deficit.

110
Q

Explain how inflation causes unemployment

A

Inflation reduces demand for country’s products locally and aboard = because local goods are more expensive then imports. Force firms to cut down on output = lay off workers.

111
Q

Explain how inflation causes debtors gain as creditor lose

A
  • Debtors benefit from inflation, real value money have to repay will fall.
  • Creditors will lose, especially if they lend out their money at a fixed interest rate.
112
Q

What is the difference between how CPI and RPI measured?

A

RPI includes house prices and Council Tax

113
Q

Explain how inflation causes increased business costs

A
  • Higher production costs
  • Higher wage demands and conflict
  • Searching for cheaper goods
114
Q

Name four functions of money

A
  • Medium of exchange
  • Store of value
  • Unit of account
  • Standard for deferred payments
115
Q

Explain how high inflation can affect the function of money - medium of exchange

A

Hyperinflation = money may cease to medium of exchange. People may find other ways of trading.

116
Q

Explain how high inflation can affect the function of money - store of value

A

Money is poor store of value during inflation. Value of savings falls if inflation is higher > than interest rates.

117
Q

Explain how high inflation can affect the function of money - unit of account

A

Money may not function as unit of account bc monetary values may become distorted & there is uncertainty about values of goods