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Basic Economic Concepts > Macroeconomics > Flashcards

Macroeconomics Flashcards

1
Q

What does Positive Economics focus on?

A

‘How economics works’ (Objective Explanation)

e.g. Tax on product goes up which reduces demand which reduces supply.

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2
Q

What does Normative Economics focus on?

A

‘What should be done’ (Value Judgements)

e.g. increase tax on tobacco to try and dissuade people from harmful products

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3
Q

What does Macroeconomics focus on?

A

Markets & Government
Growth
Inflation
Interest Rates
Unemployment

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4
Q

What is the ‘Economic Problem’ and what is the basic equation for it?

A

Scarcity

Scarcity = Desirability + Limited Availability

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5
Q

What is one definition of Rationality?

A

Welfare maximisation/ Optimisation under constraint

Also the idea of individual self-interest where maximise ones own preferences

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6
Q

What is efficiency?

A

Optimal allocation of resources

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7
Q

What is Opportunity Cost

A

The quantity of other goods that must be sacrificed to obtain another unit of a good

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8
Q

What is the Production Possibility Frontier?

A

The set of maximum combinations of two goods that can be produced simultaneously

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9
Q

What do prices convey?

A

Information (about demand/supply) and translate value (across goods/services)

Value = Price

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10
Q

How does Political Economy’s focus on Power differ from Economics’ focus on prices?

A

Also considers:
- market/demand structure
- government pushing for certain products through regulation or incentives
- production of a certain good may give you access to decision-making

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11
Q

What does Scarcity imply more generally?

A

Allocation:

  • of income (between consumption of different goods)
  • resources (between production of different goods)
  • consumption between present and future
  • time (between leisure and work)
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12
Q

How do you calculate aggregate consumption?

A

C(Y) = a+b(1-t)Y

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13
Q

What is a Market?

A

a set of arrangements by which buyers and sellers are in
contact to exchange goods or services

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14
Q

What is Demand?

A

the quantity of a good buyers wish to purchase at each
conceivable price

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15
Q

What is Supply?

A

the quantity of a good sellers wish to sell at each
conceivable price

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16
Q

What is Equilibrium Price?

A

price at which quantity supplied = quantity demanded

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17
Q

What is the Demand Curve?

A

shows the relation
between price and quantity demanded
holding other things constant

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18
Q

What are the other things that are kept constant in a demand curve?

A

1) the price of related
goods
2) consumer incomes
3) consumer preferences

  • Changes in these ‘other
    things’ affect the position
    of the demand curve
19
Q

What is shown in a Supply Curve?

A

shows the relation
between price and quantity supplied
holding other things constant

20
Q

What are the other things held constant in the supply curve?

A

1) technology
2) input costs
3) government
regulations

  • Changes in these ‘other
    things’ affect the position
    of the supply curve
21
Q

What direction is a Demand Curve?

A

Downward Sloping

22
Q

What direction is a Supply Curve?

A

Upward Sloping

23
Q

Where will you find Market Equilibrium on corresponding Supply and Demand Curves?

A

Where they intersect

24
Q

What can a Market tell us?

A

1) decides how much of a good should be produced
- by finding the price at which the quantity demanded equals
the quantity supplied
2) tells us for whom the goods are produced
- those consumers willing to pay the equilibrium price
3) determines what goods are being produced
- there may be goods for which no consumer is prepared to
pay a price at which firms would be willing to supply

25
Q

What is the Money Market?

A

Wages and Inflation

26
Q

What is the Goods Market?

A

Unemployment and Aggregate Supply

27
Q

What is Inflation?

A

The rate of change of prices

NOT simply, or even, high prices

28
Q

What are the positives and negatives of inflation?

A

Positives:
- Some inflation is good: ensures returns to investment (asset prices)

Negatives:
- Uncertainty → suboptimal allocation → lower efficiency
- Transaction / Shoe-leather costs → higher costs
- Redistribution: not all households/agents face same rate of inflation

29
Q

When does Inflation become Hyperinflation and what are some consequences of this?

A

Above 20-30%

Inflation becomes uncontrollable
(requires devaluation & policy break) and erodes asset values,
investment, incomes and competitiveness

30
Q

What are five causes of Inlfation?

A

1) Excess demand / positive shocks at full employment
- See later: when demand raises P than Q (effect depends on AS slope)

2) Excessive increase in money supply
- Also linked to shocks at FE: more money at given (full-potential)
output have to lead to rising P –for given velocity of money

3) Expectations (not a ‘
cause
’ by itself)
- Once inflation rises, expectations may become self-fulfilling / sticky

4) Rising prices abroad / supply shocks (imported inflation)
- E.g., rise in oil / energy prices; rising int’l demand for domestic goods

5)Rising wages / costs and domestic supply shocks
- E.g., through trade unions; a sudden fall in productivity

31
Q

What is a Monetarist response to inflation?

A

monetary policy has no real-economy affects

  • High wages do not cause permanent inflation: ↑W→↑P→↓AD→↑U
  • Inflation is the outcome of profligate fiscal/monetary policies
32
Q

What is a Keynesian response to inflation?

A

inflation often due to asset-speculation

  • Role for policy as regulator (control ‘animal spirits’ – see financial
    market regulation today) and manager (control/boost demand)
33
Q

What is a Neoclassical response to inflation?

A

inflation due to shocks or distortions

  • Shocks are exogenous: little to do (but diversity, energy security)
  • Raise policy credibility / Apply conservative fiscal/monet. policies to
    reduce inflation expectations (see CBI & moral hazard / signalling)
  • Implement policy reforms to remove distortions (unions, EPL)
34
Q

What is Stagflation and describe three possible causes

A

When (high) inflation and unemployment co-exist

1) Rising production costs due to / despite falling demand (e.g., due to
losing out on economies of scale)
2) When expansionary policy is called upon to address supply-side
shocks / competitiveness problems
3) When inflation erodes investment leading to deficient demand

35
Q

What is the Phillips Curve and how can we calculate it?

A

A curve showing
that a higher inflation rate is accompanied by a lower unemployment rate

u = un – α (π - πe)

36
Q

What impacts the steepness of the Short Run (?) - Phillips Curve?

A

The interplay
between quantity- and price-adjustments

This in turn depends (among other
things) on how far we are from the
economy’s point of full capacity

37
Q

Describe NAIRU

A

Non-accelerating inflation rate of unemployment

  • In the SR, U varies due to differences b/w expected & actual inflation
  • In the LR agents ‘
    can
    ’t be fooled’, thus expected and actual inflation
    are equal and unemployment returns to its LR value
  • At this rate, any attempt to lower U will simply accelerate inflation
38
Q

What is a Monetarist’s view on aggregate suuply?

A
  • The economy operates always at (or near) full capacity
  • Increases in investment / technology and/or reductions in
    frictions (rise in flexibility) are necessary to raise the
    capacity of the economy, pushing aggregate supply up
    and leading to more employment – this then shifts the
    LR-PC to the left (NAIRU falls)
39
Q

What is a Keynesian view on aggregate supply?

A
  • The economy is rarely at ‘full capacity’ – deficiencies
  • Increases in investment are unlikely when demand is
    ‘depressed’ and uncertainty is high; aggregate supply does
    not expand unless there is (govt) intervention to stimulate
    demand and, through this, aggregate supply
40
Q

What does the aggregate supply schedule show?

A

The volume of
output firms wish to supply at each price level

41
Q

What two things impacts how much to produce at any given price?

A
  • Technology and level of unutilised resources
  • Input prices (labour, capital, raw material)
42
Q

What factors may create a deviation of aggregate supply from the potential level?

A

Sluggish wages and prices

43
Q
A

Basic Economic Concepts (1 decks)

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