Macroeconomics Flashcards
1
Q
Define the circular flow of income model
A
A model that illustrates the interactions between economic agents in an economy. It shows how factors of production, goods and income flow between households, firms, government, the financial sector and the foreign sector.
2
Q
what are the differences between close and open circular flow of income?
A
in the open one there are both leakages (money out the circular flow of income)and injections (money in the circular flow of income)
3
Q
Define GDP
A
Total value of all final goods and services produced within a country over a time period (usually a year)
4
Q
Define GNI
A
Total income received by residents of a country, equal to the value of all final goods and services produced by the factors of production supplied by the country’s resident (regardless where the factors are located)
5
Q
State and Explain the three approaches used to calculate GDP
A
1- The expenditure approach [C+I+G+(X-M)]
2-Income approach add up all the income earned by the factors of production
3-Output approach [the value of output by economic sector] (primary+ secondary+ tertiary)
6
Q
What are the differences between nominal and real values?
A
nominal does not take in account changes in price
7
Q
How do you calculate real GDP?
A
measures the value of current output valued at constant prices taken from a base year
8
Q
What are the advantages of GDP?
A
- Allows comparison across countries
- Informs policy makers
- Gives an indication of average income
9
Q
What are the disadvantages of GDP?
A
- overestimates the quality of life
- Does not account for disparity in income distribution
- Contains inaccuracies
- Does not account for improvements in the quality of output
10
Q
What is a deflator?
A
The value that allows data to be measured over time in terms of a base period, usually through a price index.
GDP Deflator=[(Nominal GDP)/(Real GDP)]*100
11
Q
What is the business cycle?
A
consists of a short-term fluctuations in the growth of real output, which are alternating periods of expansion and contraction.
12
Q
state and explain the different parts of the business cycle?
A
-Expansion: when there is a positive growth in real GDP unemployment decreases
-Peak: cycle’s maximum real GDP and marks the end of the expansion
-Contraction: fall in real GDP and unemployment increases (if longer than 6 months there is recession)
-Trough: representing the cycle’s minimum level
LONG-TERM GROWTH TREND: shows how output grows over time when cyclical fluctuations are ironed out, and is known as potential output or potential GDP
13
Q
Name some national income statistics, other than GDP and GNI?
A
- Green GDP
- OECD better life index
- Happy planet index (HPI)
- Gross national happiness (GNH)
14
Q
Define Aggregate Demand (AD)
A
AD is the total value of goods and services demanded by different groups at a given price level in an economy. It is the sum of the expenditure categories that make up GDP at a specific price level.
15
Q
what makes the AD curve to shift?
A
- changes in consumer spending
- changes in investment spending
- changes in government spending
- changes in net exports spending
16
Q
Define aggregate supply (AS)
A
is the total quantity of goods and services produced in an economy (Real GDP) over a particular time period at different price levels
17
Q
Define SRAS
A
the SRAS shows the relationship between the price and the quantity of real output (Real GDP) produced by firms when resource prices (especially wages) do not change
18
Q
what makes the SRAS curve to shift?
A
- change in wages
- changes in non-labour resource price
- changes in indirect taxes
- changes of subsidies offered to business
- supply shocks
19
Q
What are the two views of aggregate supply?
A
- monetarism/ new classical
- keynesian
20
Q
What are the factors that shift the LRAS ?
A
- Increase in quantities of the factors of production
- Improvements in the quality of factors of production
- Improvements in technology
- Improvements in efficiency
- institutional changes
- reduction in natural rate of unemployment
21
Q
Define Unemployment
A
refers to people of working age who are actively looking for a job but are not employed
22
Q
define labour force
A
is made up of the employed and those actively seeking work: or those being economically active
23
Q
how do you calculate the unemployment rate (UR)?
A
(number of unemployed)/(labour force) * 100
24
Q
what are the difficulties in measuring unemployment?
A
- Discouraged workers (unemployed workers who gave up looking for a job NOT CONSIDERED UNEMPLOYED)
- Do not make a distinction between full-time and part-time employment (both considered employed)
- Make no distinction on the type of work done (working at a lower skill job is NOT considered unemployent, but only underemployment)
- Do not include people on retraining programmes
- do not include workers in the underground market (overstimate of unemployment)
25
what are the consequences of unemployment?
- loss of real output
- loss of income for unemployed workers
- losso of tax revenue
- costs of unemployment rates
- costs to deal with the results caused by unemployment
- larger budget deficits or smaller budget surplus
- more unequal distribution of income
- unemployed people may have difficulties finding work in the future
- fall in welfare
- struggle to satisfy their basic needs
- psycological stress
- indebtness
- family tension
- breakdown
- low level of health and suicide
- increase crime and violence
- drug use
- homelessness
- growing poverty
26
what are the types of unemployment?
- structural unemployment (changes in the demand from the market)
- frictional unemployment (workers that are between jobs)
- seasonal unemployment (demand for labour in certain industries changes in seasonal basis because of variationin needs)
- cyclical unemployment (depends on the business cycle)
27
Define inflation, disinflation and deflation
Inflation: is the sustained increase in the general price level
Deflation: is the sustained decrease in the general price level
Disinflation: is a decrease in the rate of inflation
28
Define CPI
A weighted basket of typical goods and services that are bought in the economy by the typical family, used to measure changes in inflation.
29
what are the types and causes of inflation?
demand-pull (excess in AD over AS at the full employment level of output, and is caused by an increase in AD)
cost-push (fall in AS, resulting from increase in wages or prices of other inputs, shown in the AD-AS model as a shift to the left of the AS curve)
30
Consequences of inflation
1)redistribution effect
groups who lose:
-people who receive rixed income or wages
-people who receive incomes or wages that increase less rapidly than the rate of inflation
-holders of cash
-savers
-lenders (creditors)
groups who gain:
-borrowers (debtors)
-payer of fixed income or wages
-payer of income or wages that increase less rapidly than the rate of inflation
(when deflation occurs it's the other way around)
2) uncertainty
3) effects on saving
4) international competitiveness
5) effects on economic growth
6) effects on resource allocation
7) social and personal cost that are unequally distributed
31
What are the causes of deflation?
decrease in AD (bad deflation)
| increase in SRAS (good deflation)
32
what are the consequences of deflation?
- redistribution effect
- increase in real value of debt
- uncertainty
- high and increasing cyclical unemployment
- risk of bankruptcies and financial crisis
- inefficient resource in allocation
- policy ineffectiveness
33
what does the Phillis courve shows?
it shows a negative relationship between the rate of inflation and the rate of unemployment
34
descirbe the Phillis curve
- when unemployment is high, the rate of wages decreases
| - when there is a decrease in unemployment there is an increase in wage rate
35
Define stagflation
results from one or more supply shocks, which cause the cost of production to increase and the SRAS shift to the left.
It generates: -falling GDP, rising unemployment and a rising price level.
36
Define economic growth
an increase in real GDP, or the real quantity of goods and services produced over a period of time (tipically a year)
37
in the AD-AS model, economic growth occurs as a result of:
- increase in AD (short-term growth)
- increase in SRAS (short-term growth, but far less common)
- increase in LRAS (long-term growth)
38
How do you show economic growth in the PPC model
- move from one point to another if there is an increase in the actual output
- shift of the PPC curve outwards if there is an increase in the quanity or in the quality of resources
39
what are the consequences of economic growth?
-improving
in living standards
-growth is usually associated with a decrease in sustainability
- there is NO impact on the income distribution, since there is no correlation between the GDP and the inequality
40
Define equality
refers to situations where economic outcomes are the same (or similar) for different people or social groups.
41
Define equity
refers to the concept of fairness or evenness and is considered an economic objective.
42
Define economic inequality
Economic inequality refers to how wealth, assets or incomes are distributed differently among individuals and the population as a whole. This is often called the ‘wealth gap’ between the rich and poor.
43
what is the Lorenz curve?
plots the cumulative share of the population in either deciles or quintiles on the x-axis against the cumulative share of income earned by those groups, along with a 45° line to represent perfect equality.
44
what is the gini coefficient?
A measure of distributions of income in an economy used to measure levels of inequality.
45
How do you calculate the Gini Coefficient?
(area between the perfectly euality curve and the lorenz curve) / (the area under the perfect equality curve)
46
Define absolute poverty
Absolute poverty refers to people earning below internationally defined levels of income, currently USD 1.90 per day.
47
Define relative poverty
Relative poverty refers to a low level of income that is country-specific and relative to the average earnings in that country.
48
what are the causes of poverty and income inequality?
- inequality of opportunity
- different levels of human capital
- different levels of resource ownership
- discrimination
- unequal status and power
- governemnt tax and benefit policy
- Globalization and techonological change
- Market based supply-side policies
- unemployment
- age
- POVERTY
- increase in pay of ceirtain occupations
- high abnormal profit of firms with increasing market power [HL]
49
Define direct taxation
Taxes that are paid directly to governments, such as an income tax.
50
what are the different systems of taxation?
- Progressive taxation : This refers to a system that taxes people higher rates the more they earn. This is not to be confused with just paying more tax; the percentage paid rises too.
- Regressive taxation: This is when a higher percentage of tax is paid the less a person earns.
- Proportional taxation: This is a fixed rate of tax levied on all individuals. Thus, people pay the same percentage but not the same total amount.
51
what are the different types of direct taxation?
- Personal income tax
- Corporate income tax
- Wealth taxes
52
Define indirect taxation
They are paid indirectly by consumers when they purchase a good, as indirect taxes are included in the price of the good.
53
what are the different types of indirect taxes?
- general expenditure taxes
- Excise taxes
- Custom duties
54
Explain why indirect taxes are regressive?
as income increases the fraction paid on the indirect taxes decreases
55
define marginal tax rate
defined as the tax paid on ADDITIONAL income, expressed as percentage
56
Define the ATR and explain how do you calculate the ATR
definition: defined as tax paid divided by total income, also expressed as percentage
ATR= [(tax paid) / (gross income)]*100
57
Explain other methods to reduce income and wealth inequalities and poverty (other than taxes)
- Policies to reduce inequalities in opportunity
- Transfer payments (are payments made by the government to individuals specifically for the purpose of redistributing income away from ceirtain groups and towards other groups)
- targeted spending on goods and services
- Universal basic income
- policies to reduce discrimination
- government intervention in markets (minimum wage, and price controls)
58
Define Monetary Policy (demand side policies)
Refers to the central bank's use of interest rates and money supply to influence the level of aggregate demand and economic activity
59
What is the central bank?
is the institution in most modern, market economies that controls the overall supply of money in the nation's economy
(most central banks are independent)
60
What are the goals of monetary policy?
- low and stable rate of inflation
- low unemployment
- reduce business cycle fluctiations
- promote a stable economic economic environment for long-term growth (LRAS)
- External Balance (Difference between X and M)
61
what is the nominal rate of interest (HL)?
- determined by the forces of supply and demand for money without any intervention by the central bank
62
Describe the shape of the money supply curve (HL)
-perfectly inelastic (since the supply of money is fixed and determined by the central bank)
63
How does the money supply affects the interest rates (HL)?
- increase in money supply leads to fall in the interest rates
- decrease in money supply leads to increase in interest rates
64
state the weaknesses and strenghts of monetary policies
```
WEAKNESSES:
-Possible ineffectiveness in recession
(interest rates cannot fall when close to zero-low consumer and producer confidence-banks may be fearful fo lending money)
-Conflict between government objectives
-may be inflationary
-inability to deal with stagflation of cost-push inflation
STRENGTHS:
-interest rates changes can be incremental
-interest rates changes are reversible
-monetary policy is flexible
-relatively quick implementation
-limited political constrains
-no budget deficits of debt
-no crowding out (HL)
```
65
Define fiscal policy (demand side policies)
it is definded as the manipulation by the government of its own expenditures and taxes to influence AD
- affects G by changing government expenditure
- affects C by changing taxes on consumers (changing disposable income)
- affects I by changing taxes on business profits
66
what are the goals of fiscal policy?
- low unemployment
- external balance
- low and stable inflation
- stable economic growth
- equitable distribution of income
- reduce business cycle fluctuations
67
State and explain the two types of Fiscal Policy
```
EXPANSIONARY FISCAL POLICY
policy undertaken to eliminate a recessionary gap. It works to expand AD and economic activity
-increasing government spending
-decresing personal income taxes
-decresing taxes
-both decreasing taxes and increasing expenditure
CONTRACTIONARY FISCAL POLICY
policy undertaken to close an inflationary gap. it works to contract AD and economic activity
-decresing government spending
-increasing personal income taxes
-increasing business income txes
-Both increasing and decreasing spending
```
68
State the weaknesses and strengths of fiscal policy
WEAKNESSES
-problem of time lags
-political constrains
-sustainable debt (may also not be sustainable)
-in a recession tax cuts may not be very effective in increasing AD
-inability to 'fine tune' the economy
-may be inflationary
-inability to deal with cost-push inflation of stagflation
-crowding out (HL)
STRENGTHS
-pulling and economy out of a deep recession
-ability to target sectors of the economy
-direct impact of government spending on aggregate demand
-dealing with rapid and escalating inflation
-ability to affect potential output
-Automatic stabilisers (HL)
69
What is crowding out (HL)?
crowding out is when
- the government decreases taxes on loans
- this shifts the demand for loans to the right (increase)
- causing an increase in interest rates
- the increase in interest rates causes a decrease in I (investment spending) causing aggregate demand to move to the left
Therefore firstly AD shifts to the right and then to the left. the difference between the first and the second shift is called crowding out
70
What are the automatic stabilisers?
factors that automatically, without any action by the government autorities, work toward stabilising the economy by reducing the short-term fluctuations of the business cycle (nondiscretionary policy)
for instance:
- progressive taxation
- unemployment benefits
71
What is the Marginal propensity to consume and how to calculate it (HL)?
the proportion of an increase in income that households spend on consumption of domestically produced goods and services
MPC = change in consumption / change in income
72
What is the Keynesian Multiplier and how do you calculate it(HL)?
is the number used to multiply the autonomous expenditure by, in order to work out the overall change in national income from the injection into the circular flow.
1/ (1 - MPC) or 1 / MPW
73
What is the Margina propensity to withdraw (HL)?
MPT + MPS + MPM
The portion of income that households save or do not re-inject into the econmy
MPT (marginal propensity to Tax)= Δtax/Δincome
MPS (marginal propensity to savings)= Δsavings/Δincome
MPM (marginal propensity to Imported Goods) = Δtax/Δincome
[MPC + MPM + MPS + MPT = 1]
74
How to calculate the final change in rGDP in an economy (HL)?
ΔrGDP = Initial Change in expenditure x Keynesian Multiplier
75
What is the minimum reserve requirement or required reserve ration (HL)?
Is the percentage of a deposit that a commercial bank has to keep available to the depositor. while can lend out the rest of the money
76
What is the credit multiplier (HL)?
the reciprocal of the minimum reserve requirement=
100 / x
where x is the minimum reserve requirement
Total deposit = Initial deposit x Credit Multiplier
Total Credit Creation = Initial credit creation x Credit Multiplier
Monetary Multiplier = 1 / minimum reserve ratio
77
What can the central bank do in order to create more money (other than changing interest rates and print more)?
-lower the required reserve ratio
78
What are the tools fo Monetary policy (HL)?
- open market operations
- minimum reserve requirements
- changes in the central banks minimum leading rate
- quantitative easing
79
What is the nominal interest rate and what is the real interest rate?
nominal interest rate is simply the market rate that prevails at any moment in time
the real interest rate is the nominal interest rate corrected for infaltion
Nominal interest rate - rate of inflation
