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OCR economics > Macroeconomics > Flashcards

Macroeconomics Flashcards

1
Q

What is the Circular flow of income?

A

A simplified model of the economy that shows the flow of money through the economy.

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2
Q

List the injections in an economy

A

Investment (I) + Government spending (G) + Exports (X)

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3
Q

List the leakages in an economy

A

Savings (S) + Taxes (T) + Imports (M)

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4
Q

What are the measures of Economic Activity?

A
  1. GDP (Gross Domestic Product)
  2. GNI (Gross National Income)
  3. Green GDP
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5
Q

What is GDP (Gross Domestic Product)?

A

the total value of goods produced and services provided in a country during one year.

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6
Q

What is GNI (Gross National Income)?

A

the total income that is earned by a country’s factors of production regardless of where the assets are located.

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7
Q

What is Green GDP?

A

Gross domestic product which has been adjusted to take account environmental destruction and/or health consequences of environmental problems.

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8
Q

What are three ways that economic activity can be measured?

A

At nominal value = at current prices
At real value = adjusted for inflation
Per capita = per head of population

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9
Q

How do you calculate GDP?

A

Output method: sum of value of all goods and services
Income method: sum of all incomes earned
Expenditure method: sum of expenditures by all sectors

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

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10
Q

How do you calculate GNI?

A

GDP + net income from abroad

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11
Q

How do you calculate real GDP?

A

Nominal GDP/GDP Deflator x 100

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12
Q

What is aggregate demand?

A

the total demand for goods and services in an economy at a given time. (AD = C + I + G + (X-M))

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13
Q

the total demand for goods and services in an economy at a given time. (AD = C + I + G + (X-M))

A

When the APL changes. If for example price level increases, point A will move down to B (along the curve)

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14
Q

When does a shift of the AD occur?

A

When one of the components that make up AD increase or decrease.

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15
Q

When one of the components that make up AD increase or decrease.

A

The total amount of goods and services that all industries in an economy will produce at every given price level. In the short run (SRAS) in the long run (LRAS)

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16
Q

When does a move along the SRAS curve occur?

A

When the average price level changes. If for example, the price level increases point A will move up to B (along the curve)

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17
Q

When does a shift of the SRAS curve occur?

A

When one of the components that make up SRAS increase or decrease.

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18
Q

Neoclassical LRAS

A
  • Producers are producing at full capacity, they cannot produce more.
  • Vertical LRAS

Can only shift due to changes in quantity or quality of FOP:
- changes in efficiency
- technological development (+)
- changes in unemployment
- government policy changes

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19
Q

Keynesian LRAS

A
  1. Producers are producing below capacity, so they can increase output without raising the cost of product. (The price level remains the same)
  2. When producers increase output even further, FOP will become scarce, increasing price of product.
  3. Producers are producing at full capacity, they cannot increase output any further
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20
Q

Deflationary gap

A

the situation where total spending (aggregate demand) is less than the full employment level of output, thus causing unemployment.

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21
Q

potential output (potential GDP)

A

The real output (GDP) an economy can produce when it fully employs its available resources

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22
Q

Macroeconomic objectives

A
  1. Low unemployment
  2. Low and stable rate of inflation
  3. Economic growth
  4. Sustainable level of government debt
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23
Q

Unemployment

A

All people of working age that are not working and are actively looking for a job.

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24
Q

Unemployment rate Calculation

A

(unemployed people/total labor force) x 100

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25
Q

(unemployed people/total labor force) x 100

A

People aged 15 and over who are either employed or unemployed

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26
Q

Why is unemployment difficult to measure?

A
  1. Hidden unemployment (people who have given up looking for a job, people working part-time jobs, people who are overqualified for a job but cant find a better one)
  2. Unemployment figures are an average. (They also ignore regional, ethnic, age and gender differences)
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27
Q

What are the consequences of unemployment?

A

Economic:
- loss in GDP
- loss of tax revenue (income tax)
- cost of unemployment benefits
- loss of income for individuals
- greater differences in income distribution

Personal:
- increased crime rates
- increased stress levels
- increased indebtedness
- homelessness

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28
Q

What is cyclical unemployment and its solution?

A

A type of that occurs during the downturns of the business cycle (due to low AD).
Solution: Demand side policies (monetary and fiscal) to increase AD

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29
Q

What is structural unemployment and its solutions?

A

A type of unemployment that occurs as a result of technological changes and changing patterns of demand, as well as changes in the geographical location of jobs, and labor market rigidities (lack of labour market flexibility.)
Solutions:
- training of employees for other jobs
- encourage people to move to other regions
- reduce unemployment benefit to encourage people to find a new job
- less regulation so employment is easier

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30
Q

What is seasonal unemployment and its solutions?

A

A type of unemployment that occurs when the demand for labor in certain industries changes on a seasonal basis because of variations in needs.
Solutions:
- reduce unemployment benefits

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31
Q

sticky wages

A

nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages

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32
Q

Inflation

A

a sustained increase in the general price level

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33
Q

Disinflation

A

Disinflation

34
Q

Disinflation

A

A sustained decrease in the general price level

35
Q

How can you measure inflation and what is the calculation?

A

Consumer Price Index (CPI)
1. Construct a weighted price index (value): quantity x price
2. (value of basket in a specific year/value of same basket in base year) x 100

36
Q

How do you calculate the rate of inflation?

A

Calculated in percentage

% change in A = ((final value of A - initial value of A)/initial value of A) x 100

37
Q

What are the consequences of inflation?

A
  • greater uncertainty
  • decrease in purchasing power
  • less savings
  • damage to export competitiveness
38
Q

What are the consequences of deflation?

A
  • deferred consumption (consumers will wait to spend money because prices are decreasing: goods bought in the future will be cheaper)
  • high level of cyclical unemployment (less consumption will lead to less production and therefore unemployment)
  • bankruptcies (less consumption will cause profits of firms to decline. This may cause them to shut down.)
39
Q

What are the difficulties of measuring inflation?

A
  • different income earners may experience a different rate of inflation when their consumption pattern is not accurately reflected in the CPI (it is an average)
  • inflation figures may not accurately reflect changes in consumption patterns and the quality of goods purchased.
  • sudden swings in the price level of food and oil can influence CPI heavily.
  • CPI only measures change in consumption prices, while changes in producer prices are also important.
40
Q

What is demand-pull inflation?

A

A type of inflation caused by an increase in aggregate demand.

41
Q

What is cost-push inflation? Draw a diagram.

A

a type of inflation caused by a fall in aggregate supply, usually resulting from increases in costs of production

42
Q

How can the government reduce inflation?

A
  • increase taxes / reduce government spending (fiscal policy): this will cause incomes of people to decrease, reducing spending and thus reducing demand pull inflation.
  • raise interest rates: will cause people to save money, thus reducing demand-pull inflation (contractionary monetary policy.)
  • reduce money supply (monetary policy): when there is less money in circulation, the value of money will increase. So less money is needed to buy something and the price is reduced.
  • supply-side policies (shift supply curve to the right): (eg. education, invest in technology, etc.). This will reduce the cost for producers, reducing cost-push inflation.
43
Q

What is the Phillips Curve?

A

A curve that shows the short-run trade-off between inflation and unemployment

44
Q

What is the relationship between inflation and unemployment in the short run? Draw.

A

Phillips Curve:
- at low unemployment, wages will be high (because demand for labour will be high). High wages will lead to high production cost and high cost-push inflation. And vice versa.
- if SRAS suddenly decreases (supply shock), this can cause prices to rise (less supply means prices increase), but unemployment remains the same because firms cant fire people in the short run). This causes Philips curve to shift outwards (stagflation)

45
Q

What is the relationship between inflation and unemployment in the long run? Draw.

A

Phillips Curve:
- when the economy is at long run equilibrium, there will be full employment.
- in this case the unemployment rate = full employment. Therefore inflation does not influence unemployment.

46
Q

What is economic growth?

A

Increases in total real output (real GDP) produced by an economy over time.

47
Q

How do you calculate economic growth?

A

% change in real GDP = ((final value of real GDP - initial value of real GDP)/initial value of real GDP) x 100

48
Q

What are the two possible sources of economic growth? Draw two possible diagrams.

A
  1. GDP increase due to increases in aggregate demand (short-term growth)
  2. GDP increases due to increases in long-run aggregate supply (long-term growth)
  3. Uncommon: GDP increases due to an increase in short-run aggregate supply.
49
Q

What are the four possible causes of increases in AD?

A
  • consumption
  • investment
  • government spending
  • net exports
50
Q

Draw a Production Possibilities Frontier

A

Draw

51
Q

What are the consequences of economic growth?

A

+ higher disposable income (firms make higher profits = higher wages, lower unemployment)
+ higher employment (more demand for country’s goods and services)
+ higher profits for firms (households spend more, firms can invest)
+ Fiscal Dividend for government (increase in tax revenue)
- inflation (demand-pull inflation, lower purchasing power)
- income inequality (eg. if growth comes from one dominant sector high incomes are contained within sector, eg. urban vs. rural)
- environmental costs (since resources are exploited eg. air pollution)

Judgement:
1. We want sustainable growth (without negative environmental and health impacts)
2. Inclusive growth (age, sex, ethnicity)
3. Balanced growth (across all sectors)

52
Q

What is government debt?

A

The government’s accumulation of deficit minus surpluses.

53
Q

What is a budget deficit?

A

a situation in which government expenditures exceed tax revenues.

54
Q

What is a budget surplus?

A

a situation in which government tax revenues exceed expenditures.

55
Q

What is sustainable debt?

A

A level of debt where the borrowing government has enough revenues to meet its debt obligations without overdue debt payments, while also allowing economic growth at an acceptable rate

56
Q

What is debt servicing?

A

The payments that must be made in order to repay the principal (the amount of a loan) plus interest.

57
Q

What are the consequences of a budget deficit?

A
  • increased income inequality
  • low private investment
  • possibility of a debt trap
  • lower economic growth (due to lower government spending, increased taxes, reduced investments and fewer exports)
58
Q

What is equity?

A

The state or quality of being just, fair, or impartial

59
Q

What is equality?

A

The state of being equal, especially in status, rights, and opportunities.

60
Q

How do you promote equity?

A

Taxation to redistribute income:
direct vs. indirect taxes:
- Direct - taxes paid directly to the government, including personal income taxes, corporate income taxes and wealth taxes
- Indirect - taxes levied on spending to buy goods and services, including VAT.
progressive, regressive snd proportional taxation:
- Progressive - taxation where, as income increases, the fraction of income paid as taxes increases.
- Regressive - taxation where, as income increases, the fraction of income paid decreases.
- Proportional - taxation where, as income increases, the fraction of income remains constant.

Direct government expenditures:
- provide money directly to people
- subsidies (eg. unemployment benefits, pensions)

Transfer payments (eg. Unemployment benefits, pensions)

61
Q

What are the arguments in favour of redistribution?

A
  • taxes are important revenue for the government
  • taxes can help reduce market failure
  • redistribution makes the distribution of income more fair
62
Q

What are the arguments against redistribution?

A
  • taxes may discourage people to work or engage in entrepreneurial activities
  • taxes have negative effects on economic growth
  • transfer payments cost a lot of money which could be used somewhere else
63
Q

Draw the Lorenz curve

A

Draw.

64
Q

What is the Gini coefficient?

A

A summary measure of the information provided by the Lorenz curve

65
Q

What is absolute poverty?

A

The inability of an individual or a family to afford a basic standard of goods and services.

66
Q

What is relative poverty?

A

The inability of an individual or a family to afford an adequate standard of goods and services.

67
Q

What are the three causes of poverty?

A
  • low incomes
  • unemployment
  • lack of human capital, not having education may lead to unemployment and low incomes.
68
Q

What are the two consequences of poverty?

A
  • low living standards
  • lack of access to healthcare and education
69
Q

What is fiscal policy?

A

Manipulations by the government of its own expenditures and taxes in order to influence the level of aggregate demand.

70
Q

What are demand-side policies?

A

Government policies that attempt to change aggregate demand in order to achieve the goal of stability, full employment and economic growth, and minimise the severity of the business cycle.

71
Q

What are supply-side policies?

A

Government policies that focus on aggregate supply, namely factors aiming to shift the LRAS curve to the right, in order to achieve long-term economic growth.

72
Q

What is monetary policy?

A

Government policy that attempts to manage Ad by controlling monetary tools (interest rates/money supply or QE/exchange rates))

73
Q

What are transfer payments?

A

What are transfer payments?

74
Q

What are characteristics of expansionary fiscal policy?

A
  • reducing taxes
  • increasing government spending
  • AD increases
75
Q

What are the characteristics if contractionary fiscal policy?

A

What are the characteristics if contractionary fiscal policy?

76
Q

How does the government earn revenue?

A
  • taxes
  • sale of goods and services (eg. by companies that belong to the government)
  • sale of state owned enrerprises
77
Q

What are the three types of government expenditures?

A
  1. Current expenditures
  2. Capital expenditures
  3. Transfer payments
78
Q

What are current expenditures?

A

Government spending on the day-to-day running of the public sector, including raw materials and wages of public sector workers.

79
Q

examples of expansionary monetary policies? (policies to increase AD)

A
  • Increase inflation
  • Increase growth
  • Reduce unemployement
80
Q

examples of contractionary monetary policies? (policies to decrease AD)

A
  • reduce inflation
  • reduce excessive debt + prevent saving
  • reduce current account deficit
81
Q

examples of expansionary fiscal policies? (policies to increase AD)

A
  • Boost growth
  • reduce unemployment
  • increase inflation
  • redistribute income

OCR economics (25 decks)

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