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A-Level Subjects > Macroeconomics > Flashcards

Macroeconomics Flashcards

1
Q

What are the 4 main sections of macroeconomics?

A

Economic Growth
Unemployment
Inflation
Balance of Payments

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2
Q

What does aggregate demand stand for?

A

Total spending on goods and services in an economy

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3
Q

What is the equation for aggregate demand?

A

AD = C + I + G + (X - M)
C = Consumption
I = Investments
G = Government spending
X = Exports
M = Imports

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4
Q

What does economic growth measure?

A

The rate of change of a country’s output

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5
Q

What is the key measurement for economic growth?

A

Gross Domestic Product (GDP)

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6
Q

What does GDP calculate?

A

The sum of a country’s output over a calendar year

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7
Q

Why is high economic growth an objective?

A

It increases quality of life, creates new jobs and improves tax revenues

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8
Q

Why is unemployment bad?

A

It’s a waste of resources and a high unemployment rate usually means poor economic performance

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9
Q

What are the benefits of low unemployment?

A

More disposable income
Higher consumption
Higher aggregate demand
Higher incomes
higher tax revenue
lower government spending on unemployment
Reduced poverty (absolute and relative)

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10
Q

What is inflation?

A

The rate of change of average prices in an economy

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11
Q

What measures Inflation?

A

Consumer Price Index (CPI)

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12
Q

What can inflation affect?

A

Value of currency
Workers wage demands
Consumer confidence

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13
Q

Who controls inflation in the UK?

A

Bank of England

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14
Q

What is the goal rate for inflation?

A

Between 1 and 3 percent. Ideally 2

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15
Q

What is the balance of payments?

A

A measure of a country’s record of economic activities with other countries

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16
Q

Which account are countries primarily concerned with?

A

The current account

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17
Q

What happens if exports are greater then imports?

A

You get surplus

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18
Q

What happens if exports are smaller then imports?

A

You get deficit

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19
Q

What does the UK have in terms of goods and services? (BoP)

A

A surplus in services but a deficit in goods

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20
Q

What does the UK have a sustained and persistant x in?

A

Deficit

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21
Q

What does a high level of imported goods mean?

A

More variety which may be of higher quality and have lower prices

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22
Q

What is aggregate supply?

A

The total value of goods and services in an economy

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23
Q

What does it usually mean if a product can be made quicker?

A

It is cheaper and therefore the demand increases as more people can afford it

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24
Q

What is equilibrium?

A

Companies want to sell their goods or services for the most amount of money possible. Consumers want the goods and services to be as cheap as possible. Equilibrium is the point where companies are happy to sell their product at and consumers are happy to buy it at that price

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25
Q

What happens when the production potential has been reached?

A

People will want more of the service or good and this will drive the price up

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26
Q

How do you avoid hitting the production potential?

A

Make more factories, hire more people. If demand continues to rise, companies will be forced to expand

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27
Q

What are the 3 different ways of calculating the level of national income in an economy?

A

Income method
Output method
Expenditure method

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28
Q

What is nominal national income?

A

It’s expressed in monetary terms and doesn’t take inflation into account

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29
Q

How do you find real national income?

A

Nominal National Income ÷ Average Price Level

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30
Q

What is short-run economic growth measured by?

A

The annual percentage change in real GDP

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31
Q

What is the circular flow of Income?

A

It’s an economic model that illustrates the flow of goods and services, the factors of production and their payments between households and firms within an economy

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32
Q

What are the payments for each factor of production?

A

Land = Rent
Labour = Wages
Capital = Interest
Enterprise = Profit

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33
Q

What is unemployment usually measured as?

A

A level or rate

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34
Q

What is the trend rate of growth?

A

The rate of growth that can be sustained without generating any inflationary pressure

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35
Q

How do you determine the trend rate of growth?

A

The rate of growth of productive potential

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36
Q

What is the positive output gap?

A

When the economy temporarily grows faster than the trend rate operating in the short run beyond its full capacity

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37
Q

What is the negative output gap?

A

When aggregate demand is acting at a slower rate or falling in relation to its productive potential

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38
Q

What are the causes of inflation?

A

Demand-Pull
Cost-Push

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39
Q

What is unemployment?

A

The number of people looking for work but cannot find a job at that point in time. They are members of the labour that want to work but are unable to find a job

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40
Q

What is the measurement for unemployment?

A

The labour force survey or the claimant count.
There’s a difference between level and rate

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41
Q

What are the types of unemployment?

A

Cyclical
Structural
Frictional
Seasonal
Technological
Regional

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42
Q

What is cyclical unemployment?

A

It usually occurs during recessionary periods in an economy. A lack of demand for goods and services leads to a lack of demand for labour to produce those services

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43
Q

What is structural unemployment?

A

It occurs when there’s a difference between the characteristics workers have (skills and geographic mobility) and the characteristics wanted by employers

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44
Q

What is frictional unemployment?

A

The moment in time where a worker is moving between two jobs. It’s usually considered as short-term in nature

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45
Q

What is seasonal unemployment?

A

It occurs through seasonal fluctuations in demand throughout the year. Unemployment figures are usually adjusted for this and look more normal

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46
Q

What is technological unemployment?

A

It occurs through the increasing degree of automation in the production process

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47
Q

What is regional unemployment?

A

It’s typically linked to structural unemployment, a situation where a town or region experiences a downturn

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48
Q

What are the consequences of unemployment?

A

Lower living standards
De-skilling
Health implications
Social issues
Unemployment traps
Longer term employability
Government finances
Lost output
Lower international competitiveness
Rising inequality
Loss of resources invested in training
Lower consumer spending

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49
Q

Economists measure the productivity of all factors of production. What are the productivities for labour and capital?

A

Labour = total output of workers
Capital = output per unit capita

50
Q

How is the labour force survey constructed?

A

Questionnaire data is collected face-to-face and other methods. The office for national statistics puts the data together to provide evidence for policy and decision making

51
Q

How is the claimant count constructed?

A

It consists of all people claiming money at job benefit offices. They must prove that they’re looking for work and that they were out of work the week they make the request

52
Q

What is the capital account?

A

It primarily records international flows of capital such as inter-country loans or government investments overseas

53
Q

What is the financial account?

A

It primarily records foreign direct investment(FDI). It also includes government owned assets like gold, currency reserves and private assets abroad. It will also include short-term capital flows, such as speculative movements on currency or share investments like hot money

54
Q

What are index numbers?

A

It’s a data figure reflecting price or quantity compared with a standard or base value which is usually 100

55
Q

How do you calculate an index number?

A

(Current Value ÷ Last Year Value) x 100

56
Q

How do you calculate base year value?

A

(previous value ÷ this year value) x 100

57
Q

What is a weighted index number?

A

It’s an average index index that is made up of a combination of other indices

58
Q

How to calculate weighted index numbers?

A

sum of weightings x index numbers ÷ sum of index numbers

59
Q

What is a withdrawal and give examples?

A

It’s when money leaves the economy for example taxes, savings and imports

60
Q

What is an injection and give examples?

A

When money enters the economy like government spending, investments and exports

61
Q

What is the definition of aggregate demand?

A

The total demand for all goods and services in an economy at any given price level over a period of time

62
Q

What is the level of consumption dependent on?

A

The household’s income, interest rates, levels of personal debt, levels of personal wealth, confidence and marginal propensity to consume/save

63
Q

What is the multiplier effect?

A

When an initial injection into the circular flow causes a bigger final increase in real national income

64
Q

How do you find the multipliers effect coefficient?

A

Final change in real GDP ÷ Initial change in AD

65
Q

How does the multiplier affect occur?

A

One agent’s spending is another agent’s income. When a spending project creates new jobs for example, this creates extra injections of income and demand into a country’s circular flow

66
Q

How does a negative multiplier effect occur?

A

When an initial injection or leakage of spending from the circular flow leads to knock-on effects and a bigger final drop in real GDP

67
Q

What is the accelerator effect?

A

It shows the relationship between GDP and the rate of investment. It states that a rise in GDP will lead to a proportionately larger increase in investment

68
Q

Why might the accelerator effect take place?

A

If a firm sees that GDP and AD is increasing, it needs to be certain that this is going to continue. Initially the firm will use their existing capacity and make their existing capital and labour force work harder to meet the demand

69
Q

What happens during the accelerator effect when the firm reaches full capacity?

A

If they believe that the growth will be sustained, they’ll invest in capital equipment to meet future anticipated demand. This increase in investment will boost AD further and assist yet more economic growth

70
Q

What is government spending?

A

Tax revenue and borrowing spent by the government for the benefit of a country’s citizen

71
Q

What affects how much we import and export?

A

UK productivity
Exchange rates
Economic growth in other countries
Extent of free trade

72
Q

What is a high level of AD in an economy also linked with?

A

A high level of economic growth

73
Q

What is the formula for the multiplier effect?

A

K = Change in Y ÷ Change in J

Y = Real National Income
J = Injections

74
Q

How is a negative multiplier effect formed?

A

Cuts in spending and increases in taxes. It will also lead to a fall in gdp

75
Q

What is the size of the negative multiplier dependent on?

A

The marginal propensity to consume

76
Q

What factors affect the size of the negative multiplier effect?

A

Interest rates
Tax rates
Imports
Spare capacity

77
Q

What happens if AD causes economic growth?

A

Price levels rise

78
Q

What happens if AS causes economic growth?

A

Price levels decrease

79
Q

What must occur to allow long-run economic growth?

A

An increase in the productive capacity of the economy

80
Q

What could make LRAS increase?

A

A change in quantity or quality of the factors of production

81
Q

Why is it important that the government find a balance between SR + LR economic growth policies?

A

High levels of inflation are likely to occur if you only stimulate the demand side. If you focus on the supply side, you’ll suppress the demand side

82
Q

What is an economic cycle?

A

Variations in the level of productive capacity of an economy over time

83
Q

What is a boom and what is linked with it?

A

When the economy grows faster than average rates.
High levels of economic growth, high demand, low unemployment, inflationary pressure, labour skill shortages, high confidence, high capital investment

84
Q

What is a recession and what does it come with?

A

When the economy starts slowing down. GDP falls for 6 months straight
Economic growth falls, demand falls, unemployment rises, firms go out of business, low confidence, less investments

85
Q

What is a slump and what comes with it?

A

When economic growth is at its lowest .
Low or negative growth, low demand, low inflation, high unemployment, low confidence, high bankruptcy rate

86
Q

What is recovery and what does it come with?

A

Economic growth starts to increase.
Economic growth rises, demand increases, demand increases, unemployment falls, rising inflation, confidence rises, capital investment rises

87
Q

What is a demand-side shock?

A

An unexpected change in the economy that directly impact on AD

88
Q

What is a supply-side shock?

A

An unexpected change in the economy that directly impacts AS. It will often refer to the size and productivity of the workforces and firms ability to produce goods and services

89
Q

Why is the use of money better than barter?

A

A medium exchange
A store value
A unit of account
A standard of deferred payment

90
Q

What are the issues with the claimant count?

A

Not everyone bothers to claim it
Under 18s and over 60s don’t count
The criteria for it always changes
Some people claim without looking for a job
Some people have black economy jobs and still claim it

91
Q

What two factors affect the consequences of unemployment?

A

Rate of unemployment and duration of unemployment

92
Q

What is another word for de-skilling?

A

Hysterisis

93
Q

What is the current account made up of?

A

Trade in goods
Trade in services
Investment income
Transfers

94
Q

What is trade in goods?

A

Measures the net exports of visible goods. The UK has traditionally run a large deficit on the trade of goods component due to the reduction in its manufacturing sector

95
Q

What is trade in services?
(In current account terms)

A

Measures the net exports of visible items such as banking, insurance and tourism. The UK has traditionally run a large surplus on the trade in services component

96
Q

What is investment income?

A

The profits and dividends that are received are sent to the UK and count as credit items of investment income

97
Q

What is transfers?

A

Payments made or received usually by the government to or from other countries. The main transfers include EU membership and foreign aid

98
Q

What is Keynesians idea?

A

In recessions governments should intervene through expansionary fiscal policies with higher spending and borrowing
No crowding out
Multiplier effect is significant
Reducing unemployment > controlling inflation
LRAS can be horizontal
Generally advocate fiscal policy

99
Q

What is monetarists idea?

A

The economy is inherently stable and markets work efficiently with minimal intervention
Government spending crowds out private sector investment
Control of monetary supply is crucial for low inflation
Low inflation > control unemployment
LRAS is steep
Generally advocate monetary policy

100
Q

What is the Quantity Theory of Money?

A

Explains the link between the supply of money and the general level of prices

101
Q

What is the equation for Fishers equation of exchange?

A

Money Supply x Velocity of Circulation of Money = General Price Level x Output produced in an economy

102
Q

What do monetarists believe inflation is caused by?

A

Changes in the money supply

103
Q

What do monetarists believe about Money Supply and Velocity of Circulation of Money?

A

They are both stable and that any deviations from the stable trend are considered temporary

104
Q

What do economic agents do if inflation has been stable for a long period of time?

A

They’ll factor it in to future spending decisions, wage bargaining or investment plans and they’ll be able to anticipate and predict the level of inflation in the future

105
Q

What do economic agents do if inflation is volatile and unpredictable?

A

Disrupted consumer spending decisions, workers wage bargaining or firms investment plans

106
Q

What are the consequences of Inflation?

A

Wage-Price Spirals - Higher wage demands increase inflation further
Shoe Leather Cost - Uncertain inflation increases search cost
Menu Costs - Costs to a firm of changing pricing information
International Competitiveness - Lower exports
Investment - Worth less
Fixed Incomes - Need to be correctly indexed-linked (pensioners etc.)
Savings - Worth less
Income Redistribution - Create a regressive effect, hitting the poor more

107
Q

What are the consequences of Deflation?

A

Delayed purchases and consumer spending
Wages and Unemployment - Can’t bargain for higher wage
Debts - Worth more
Lower Confidence
International Competitiveness
Real Interest Rates - Increased costs of borrowing
Entrenchment - The continuous delay of consumption or investment

108
Q

What does the Phillips Curve show?

A

The relationship between unemployment and the rate of change of money wages

109
Q

What does the Phillips Curve suggest in the SR?

A

Changes in unemployment have direct and predictable effects on inflation

110
Q

Why is the Phillips Curve important?

A

Established one of the key causes of inflation (excess AD)
High employment = demand-pull inflation
Low employment = cost-pull inflation

111
Q

What are the flaws of the Phillips Curve?

A

Doesn’t apply to stagflation
Doesn’t recognise supply-side impacts
Only works for short run

112
Q

What is Stagflation?

A

High unemployment and high inflation occurring together

113
Q

What does NAIRU stand for?

A

Non-Accelerating Inflation Rate of Unemployment

114
Q

What is NAIRU?

A

It’s the level of unemployment when there’s zero inflationary pressure

115
Q

Why does NAIRU exist?

A

There’s a point where reduced unemployment doesn’t cause inflationary pressure due to supply-side slack. However, after this NAIRU point, inflation is created with more unemployment

116
Q

Why does the long-run Phillips Curve exist?

A

It shows that trade-offs between inflation and unemployment aren’t possible
It accounts for expectations and assumes economic agents will adapt their behaviour

117
Q

What does the long-run Phillips Curve assume?

A

Individuals base their expectations of future inflation on the current rate
Workers suffer from money illusion

118
Q

What is Money Illusion?

A

Price inflation isn’t expected and when workers receive nominal wage increases they falsely believe that they’re better off

119
Q

What are the costs of Economic Growth?

A

Negative Externalities
Inequality
Scarce Resources
Inflation

120
Q

What are Asset Price Bubbles?

A

The price of an asset has significantly deviated from its intrinsic value and prices rise very quickly in the long term

121
Q

What is Speculation?

A

The act of trading in an asset that has a significant risk of losing most or all of the initial outlay

122
Q

What is Herding?

A

Irrational consumer behaviour which is predominantly characterised by a lack of individual decision making

A-Level Subjects (2 decks)

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