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IB Economics (SL and HL) > Macroeconomics 13-18 > Flashcards

Macroeconomics 13-18 Flashcards

13. The level of overall economic activity - 18. Supply-side policies

1
Q

Gross-domestic product (GDP)

A

Total value of goods produced in an economy over a given time period

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2
Q

Income method

A

Measures the value of all income earned in a country from wages, rent etc.

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3
Q

Output method

A

calculates the total output produced in a country

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4
Q

Expenditure method

A

Calculates GDP by adding up the total money spent in an economy

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5
Q

Gross national income (GNI)

A

GDP + net property income (current transfers) from abroad

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6
Q

Real GDP/GNI

A

Adjusted to the effects of inflation

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7
Q

GDP/GNI per capita

A

GDP or GNI divided by the amount of people in a nation – measure of living standards.

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8
Q

Main macroeconomics goals (5)

A
  1. A steady rate of increase of national income (economic growth). 2. Low level of unemployment. 3. low and stable rate of inflation. 4. sustainable level of gov debt. 5. equitable distribution of income
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9
Q

Leakages in circular flow of economy

A

Savings, taxes, imports

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10
Q

Injections in circular flow of economy

A

Government spending (goods and services), investments, exports

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11
Q

Problems with measuring national income (5)

A
  1. inaccuracies, 2. unrecorded activity and parallel economy, 3. external costs, 4. quality of life concerns (ppl work longer for GDP growth), 5. composition of output (weapons doesn’t benefit consumer, think USSR)
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12
Q

Calculation: GDP adjusted for inflation

A

GDP per capita / living standard

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13
Q

Calculation: GDP growth

A

new - old / old x 100%

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14
Q

Phases of the business cycle (4) and GDP

A

Recovery (increasing), boom (height), recession (decreasing), trough (low)

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15
Q

Aggregate demand

A

Total expenditure on consumption, investment, government spending and net export (AD=C+I+G+X-M)

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16
Q

Government spending

A

Spending by governments on goods and services such as health, education or law enforcement (not transfer payments)

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17
Q

Price level (APL)

A

Overall level of prices including inflation

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18
Q

What causes changes in consumption? (5)

A
  1. Changes in income, 2. Changes in interest rates, 3. Changes in wealth, 4. Changes in consumer confidence/expectations, 5. Household indebtedness
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19
Q

What causes changes in investments? (6)

A
  1. Changes in interest rates, 2. Changes in business taxes, 3. Technological change, 4. Changes in expectations/business confidence, 5. Level of corporate indebtedness, 6. Changes in national income
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20
Q

What causes changes in government spending?

A

Depends on political and economic priorities of the government. If government spending increases, AD shifts to the right

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21
Q

What causes changes in net exports?

A

Foreign incomes and inflation (export), national income (import)

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22
Q

Aggregate supply

A

Total output, total supply of goods and services produced in an economy at a given time period at an overall price level

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23
Q

Supply shock

A

Unexpected event that affects supply, sudden change in price – generally negative (e.g. hurricane destroys all factories)

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24
Q

SRAS shape and explanation

A

Upward sloping. Higher market prices, increase in output. No change in prices of FoPs in SR -> larger profit margins. Supply constrains due to diminishing returns and scarcity

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25
Q

What causes shifts in AS

A

Changes in costs of production: 1. wage rates, 2. cost of raw materials, 3. price of imports, 4. government indirect taxes or subsidies. Supply-side shocks. (ANYTHING BUT PRICE)

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26
Q

LRAS – two schools of thought

A

New classical (monetarist), Keynesian

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27
Q

Monetarist / new classical theory

A

minimal government intervention, focuses on marcoecon effects of supply of money and central banking, biggest enemy is INFLATION –> MAINTAIN PRICE STABILITY

28
Q

New classical LRAS

A

Perfectly inelastic at full employment level of output. Potential output is based on quantity and quality of FoPs and not price level

29
Q

Keynesian theory

A

State and private sector play a role in balancing business cycles, AD is driving factor, gov needs to save money, biggest enemy is UNEMPLOYMENT

30
Q

Keynesian LRAS

A

stages: 1) Perfectly elastic, costs don’t rise due to spare capacity. 2) approaches potential output, higher prices for FoPs -> price levels rise. 3) Impossible to increase production, FoPs fully in use

31
Q

What shifts the SRAS curve? (3)

A
  1. Price of labour, 2. Price of inputs, 3. Taxation and legislation
32
Q

What shifts the LRAS?

A

Changes in quality or quantity of FoPs (improved technology, increased labour capital, improved production process, better efficiency, research and development)

33
Q

Short-run equilibrium

A

AD=SRAS, no pressure on price level

34
Q

Long-run equilibrium

35
Q

Inflationary gap

A

Economy is at an equilibrium at an output higher than full employment level = only possible in SR

36
Q

Deflationary gap

A

Economy is at an equilibrium lower than full employment level

37
Q

New classical supply side LRAS

A

Changes in AD will only affect PL. AD shifts to right –> Rising prices hollows out wages and expectations force wages up –> final price for output decreases –> SRAS moves to left. Full employment at higher price level.

38
Q

Keynesian supply side LRAS

A

LR equilibrium can occur at different levels below full employment (depending on AD)

39
Q

Demand side policies (describe + two categories)

A

Focus on changing AD and counteracting effects of SR fluctuations in real GDP = stabilisation policies. Fiscal policy and monetary policy

40
Q

Government budget

A

A country’s planned (forecasted) revenues and its planned expenditures over a period of time (one year usually)

41
Q

Sources of gov revenue

A

Taxes, sale of goods & services, sale of gov owned assets and property

42
Q

Budget surplus

A

Money left over after covering expenses

43
Q

Budget deficit

A

Expenditure is larger than revenue (borrowing money by selling gov bonds)

44
Q

Fiscal policy (definition + three categories)

A

Set of government’s policies relating to its expenditure and taxation rates to influence AD. 1. Capital expenditures (roads etc.), 2. Current expenditure (wages etc.), 3. Transfer payments (pensions etc.)

45
Q

Aims of fiscal policy (6)

A
  1. Low and stable rate of inflation, 2. low unemployment, 3. stable economic environment for growth, 4. reduce fluctuations in business cycle, 5. Equitable distribution of income, 6. External balance between export revenue and import expenditure
46
Q

Expansionary fiscal policy

A

Keynesian demand management to INCREASE AD: lower income taxes (C), lower corporate taxes (I), increase government expenditure (G)

47
Q

Contractionary fiscal policy

A

To DECREASE AD: increasing income tax (C), increasing corporate tax (I), reducing government spending (G)

48
Q

Trade-off in expansionary and contractionary fiscal policy

A

Lower inflation means higher unemployment, higher inflation means lower unemployment

49
Q

Strengths of fiscal policy (2)

A
  1. Effective in the LR at dealing with recession, 2. Ability to target specific sectors of the economy
50
Q

Limitations of fiscal policy (6)

A
  1. Time lags (changing policy), 2. Political pressure (unpopular to increase taxes), 3. Sustainable debt (expansionary is expensive), 4. Effect on net export (increase in gov spending, increase in interest rates –> bad exchange rate), 5. Crowding-out effect (same as before except firms can’t invest), 6. Inability to achieve specific targets
51
Q

Governmental debt and costs of having high levels of it

A

Accumulation of all budget deficits, expressed as % of GDP. Debt servicing increases, to maintain same Level of services gov raises taxes –> less output. Decrease in gov response (to sudden events e.g. covid)

52
Q

Monetary policy

A

Official policies to govern the supply of money + level of interest rates

53
Q

Aims of monetary policy (5)

A
  1. low inflation, 2. low unemployment, 3. stable economic growth in LR, 4. Reduce fluctuations in business cycle, 5. Achieve external balance between export and import
54
Q

Expansionary monetary policy

A

To INCREASE AD: lower cost of money, lower interest rates. Less unemployment, higher price level, increase in GDP growth.

55
Q

Contractionary monetary policy

A

To DECREASE AD and lower inflation: higher interest rates, less consumption and investments. Increasing unemployment but less inflation.

56
Q

Strengths of monetary policies (4)

A
  1. Relatively quick to put into place, 2. No political intervention – not reliant on popularity, 3. an absence of crowding-out, 4. ability to make small and precise changes
57
Q

Limitations of monetary policies (4)

A
  1. Time lags, 2. Ineffectiveness (when low interest rates cannot be lowered), 3. low consumer and business confidence (lowering interest rates may not increase AD), 4. inability to target specific sectors
58
Q

Calculation: real interest rate

A

nominal - inflation

59
Q

Supply-side policies (main goal + two categories)

A

To increase the potential output of the economy by increasing quality or quantity of FoPs. Market orientated policies (markets operate freely) or interventionist policies.

60
Q

Aims of supply-side policies (5)

A
  1. Long-term economic growth, 2. Improved competition and efficiency, 3. Reduced labour costs and unemployment through increased labour market responsibility, 4. International competitiveness (low inflation), 5. Increased incentives for firms to invest and innovate (reducing costs)
61
Q

Main idea of market-orientated supply-side policies

A

To increase incentives for labour to work harder and more productively, and incentive for firms to increase productivity

62
Q

What are market-orientated supply-side policies? (7)

A
  1. Reduction in income taxes, 2. Reduction in corporate taxes, 3. labour market reforms, 4. Deregulation, 5. Privatisation, 6. Policies to increase competition, 7. Trade liberalisation
63
Q

Limitations of market-orientated supply-side policies

A

People may choose to work less with less taxes and it may benefit those who are rich, reduction in living standards, negative externalities, monopoly creation by privatisation, time lags

64
Q

Interventionist supply-side policies (5)

A
  1. Investment in human capital (education and training), 2. Research and development, 3. Provision of infrastructure, 4. Direct support for business / industrial policies, 5. Improved information (trade fairs)
65
Q

Limitations to interventionist supply-side policies

A

Expensive, dependent on ideological aims of government, time lags, controversies regarding education (for whom, what resources allocated, etc.)

66
Q

Supply side policies are __ policies but have __ effects on demand side

A

Long run, short run

67
Q

Connection between supply-side and demand-side policies (2)

A
  1. Reduction in taxes and corporate taxes will also have expansionary fiscal effects –> Econ growth, unemployment reduced –> inflationary pressure, 2. Expansionary fiscal policies may have supply-side effects –> increased gov spending leads to increase in quality and quantity of FoPs

IB Economics (SL and HL) (3 decks)

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