macroeconomics

Question 1

what are the 4 economic indicators?

Answer 1

• high economic growth
• low unemployment
• low inflation
• positive balance of payments

Question 2

high economic growth?

Answer 2

• an increase in the availability of G+S produced in an economy at a given period of time
• measured by GDP (gross domestic product)
• it’s important because:
  ↳ firms make more profit
  ↳ consumers have more choice
  ↳ corporate tax (a tax on company profits) revenue rises for gov

Question 3

low unemployment?

Answer 3

• the amount of people of working age who are willing, able and actively seeking work - but not yet employed → (close to full employment)
• measured by:
  ↳ claimant count → amount of ppl claiming JSA (job seekers allowance)
  ↳ labour free survey → survey for unemployment
• it’s important because:
  ↳ receiving higher incomes
  ↳ gov would pay less welfare benefits
  ↳ more workers can lead to higher profits (more productivity)

Question 4

low inflation?

Answer 4

• a rise in the general price level in an economy at a given time period
• objective = low + stable rate of 2%
• measured by CPI (consumer price index)
• it’s important because:
  ↳ cheaper for consumers –> they’re encouraged to buy more
  ↳ if G+S = too expensive in UK, exports may fall (deficit)
  ↳ firms may suffer due to lower demand (if prices rise too much)

Question 5

positive balance of payments

Answer 5

• an accounting record of exports + imports w 1 country & the rest of the world
• it consists of 3 parts: the current, financial and capital accounts
• measured from trade deficit / surplus
• it’s important because:
  ↳ exports increase revenue for the economy
  ↳ more exports = higher demand for workers (full employment?)
  ↳ higher exports can encourage econ growth

Question 6

list the possible conflicts between the objectives

Answer 6

• low inflation w high economic growth
• low unemployment w low inflation
• low unemployment w positive balance of payments
• high economic growth w sustainability of the environment

Question 7

low inflation w high econ growth?

Answer 7

• high econ growth = more demand for labour
  ↳ this enables workers to have a higher disposable income (income after tax)
• with higher income, the more encouraged they will be to spend more → causing consumption to rise, and in turn firms will increase prices this would increase inflation → [hence the conflict]

Question 8

low unemployment w low inflation?

Answer 8

• there would be more worker with disposable income (income after tax)
• with higher income, the more encouraged they will be to spend more → causing consumption to rise, and in turn firms will increase prices → this would increase inflation → [hence the conflict]

Question 9

low unemployment w positive balance of paymments

Answer 9

• lower unemployment = more disposable income → more inclined to import from abroad → imports > exports = negative balance of payments // trade deficit
• lower unemployment = higher inflation → can decrease international competitiveness in UK (meaning less exports) = exports < imports = negative balance of payments // trade deficit

Question 10

high economic growth w sustainability of the environment?

Answer 10

• higher econ growth - more production of goods / possible services → can create pollution + congestion → harmful towards the environment

Question 11

what is the circular flow of income?

Answer 11

a way of representing the flow of money (including injections + withdrawals) between the 2 main groups in society: producers (firms) & consumers (households)

income = output = expenditure

Question 12

what are injections?

Answer 12

money / income entering the circular flow of income (to households + firms)

Question 13

examples of injections?

Answer 13

• government spending
• • if the gov decide to build a new school –> more jobs would be available –> households will receive income (form of injection)
• exports
• • more exports = more revenue for UK firms ( = injection)
• foreign investment
• • more jobs –> more income for households ( = injection)

Question 14

what are withdrawals?

Answer 14

money leaving the circular flow of income (from households + firms)

Question 15

examples of withdrawals?

Answer 15

• taxes
• • money that gov takes from household income ( = withdrawal) –> {like income tax // corporate tax}
• imports
• • money taken from UK firms & sent abroad to other firms ( = withdrawal)
• savings
• • money saved aside which isn’t spent in firms / households ( = withdrawal –> as money is not being used)

Question 16

what are the impacts of injections?

Answer 16

• exports:
• • lower unemployment
• • higher / more positive balance of payments
• • higher producer revenue
• government spending:
• • lower unemployment
• • higher inflation

Question 17

what is affected by withdrawals

Answer 17

tax, savings and imports

Question 18

how is tax impacted by withdrawals?

Answer 18

• tax = income tax // corporate tax (tax of a firm’s profit)
• more tax = more voluntary unemployment (as they would receive little)
• {lower inflation} more tax = lower disposable income –> low inflation –> lowered prices (to encourage household spending)
• higher gov revenue –> can use these funds to invest in better infrastructure

Question 19

how are savings impacted by withdrawals?

Answer 19

• more savings = less consumption –> can decrease inflation (lower prices to encourage spending)
• more savings = more unemployment –> reduces consumption –> firms higher less workers
• more savings = less growth / production –> consumption falls –> firms produce less

Question 20

how are imports impacted by withdrawals?

Answer 20

• imports = purchasing goods + services (mostly from abroad)
• more imports = less domestic growth (reduces growth in UK as we’re not buying from there)
• more imports = more unemployment
• • less demand for G+S = less produced = less workers needed
• more imports = less inflations
• • less spent in UK –> low inflation

Question 21

what is aggregate demand?

Answer 21

the total demand for G+S produced within the economy over a period of time

Question 22

what makes up AD?

Answer 22

AD = C + I + G + (X-M)

• (C) consumption
• • the spending of households of G+S in an economy @ a given time period
• (I) investment
• • the spending on capital goods (machinery) in an economy @ a given time period
• (G) government spending
• • the spending by the public sector on G+S on stuff like education // health care
• (X) exports
• • when G+S in 1 country = shipped to another for future sale / trade (aka - an injection in the circular flow of income)
• (M) imports
• • G+S brought from another country (aka - a withdrawal in the circular flow of income)

Question 23

how would AD look on a graph and how would it shift?

Answer 23

• downwards sloping –> ‘ \ ‘
• increase in factors of AD causes it to shift to the right (and vice versa for when the factors decrease – imports being the opposite to this rule)

Question 24

what is aggregate supply?

Answer 24

the total amount of G+S produced in an economy @ a given time period

Question 25

what are the types of AS?

Answer 25

short-run aggregate supply (SRAS) and long-run aggregate supple (LRAS)

Question 26

SRAS?

Answer 26

• impacted by changes in cost of production, like:
• • corporate tax (tax on profits)
• • wages
• • cost of raw materials
• • rent / mortgage
• • energy bills

Question 27

shifting SRAS on diagrams?

Answer 27

• increase in cost of production = less production –> hence, it shifts to the left
• decrease in cost of production = more production –> rightwards shift

Question 28

LRAS?

Answer 28

• determined by all factors of production like:
• • size of workforce
• • size of capital stock
• • quality of education
• • labour productivity

Question 29

shifting LRAS on a diagram?

Answer 29

• quantity / quality of FOP increases = rightwards shift

- quantity / quality of FOP decreases = leftwards shift