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CWM Financial Markets > Macroeconomics > Flashcards

Macroeconomics Flashcards

1
Q

What things do households provide in the circular flow model?

A

1) Labour, Land, Capital and Entreprenuership
2) Consumer Expenditure (for goods and services)

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2
Q

What things do firms provide in the circular flow model?

A

1) Goods and Services
2) Wages, Rents, Interest and Profit

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3
Q

What injections into the economy are there?

A

1) Government Spending and Consumption
2) Exports
3) Investments

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4
Q

What leakages out of the economy are there?

A

1) Imports
2) Savings
3) Tax

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5
Q

What is “free market” economics?

A

A system in which the government stands aside as far as possible

Prices are determined solely by the market in a self regulating manner

it is generally considered to have started with the ideas of Adam Smith

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6
Q

What is the “invisible hand”

A

The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically

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7
Q

What is Keynesian Economics?

A

Keynesian economic theory is a macroeconomic theory that advocates for increased government spending and lower taxes to stimulate demand.

Spending + Lower Tax = Demand Growth

the classical school of thought was failing to rescue economies from the Great Depression of the 1930s,

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8
Q

What is marginal propensity to consume?

A

the proportion of an increase in income that gets spent instead of saved

MPS = 1 - MPC

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9
Q

What is the formula for Marginal Propensity to Consume?

A

Change in Consumption / Change in Income

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10
Q

What is Say’s law?

A

to have the means to buy, a buyer must first have produced something to sell. Thus, the source of demand is production

Say’s Law implies that production is the key to economic growth and prosperity and the government policy should encourage (but not control) production rather than promoting consumption.

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11
Q

What is the formula to calculate the multiplier effect for MPC?

A

k=1/(1-MPC)

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12
Q

What is consumption?

A

Expenditure by private households

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13
Q

What is the formula for consumption function?

A

a+cY

Where a = minimum consumption to survive
c = MPC
Y = Disposable Income

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14
Q

What is aggregate demand?

A

The total demand for final goods and services in an economy at a given time.

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15
Q

How is aggregate demand calculated?

A

Aggregate demand = C + I + G + (X – M)

Consumer
Investment
Government
Export - Import

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16
Q

What does credit creation do to a country’s money supply?

A

Increases it and in turn should:
1) Lower Interest Rates
2) Generate More investment
3) Stimulate Spending

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17
Q

What is the reserve requirement?

A

The amount of capital a bank is required to hold in reserve.

Central banks can tighten these requirements to restrict the money supply.

financial institutions will have to be more selective in their lending, as they have effectively less to lend.

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18
Q

What does the Phillips curve say about Unemployment and Wage Inflation?

A

Low unemployment = higher wage growth

Higher unemployment = lower wage growth

Companies must pay more to attract talent when unemployment is low. This pressure subsides when unemployment increases.

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19
Q

What gave rise to Monetarist economics?

A

A bout of “Stagflation” in the 1970’s

A period of inflation with stagnating growth e.g. recession and unemployment

20
Q

What is monetarism based on?

A

The fisher equation of money

21
Q

What is the fisher equation of money?

A

MV = PT

M = Money Supply
V = Velocity of circulation
P = Average Price
T = Total Volume

V is relatively stable whilst T is subject to growth

The Fisher Equation is often used to illustrate the concept of inflation, where an increase in the money supply, if not accompanied by a proportional increase in production, leads to higher prices.

22
Q

What is natural unemployment?

A

Unemployment as a result of real or voluntary factors

1) Frictional - Moving between jobs or searching for Jobs (uni grad)
2) Structural - long term changes (e.g. mismatch in skills or replaced by tech)

unemployment that exists even when the economy is operating at full capacity

23
Q

What does natural unemployment prevent from happening?

A

Full 100% employment

24
Q

What are the four stages of the economic cycle?

A

1) Contraction
2) Trough
3) Expansion
4) Peak

25
Q

What happens during contraction?

A
  • GDP Growth slows or contracts
  • Unemployment increases
  • Demand Decreases

10%+ contraction = depression (or 3 yrs+)

2+ consecutive contractions in GDP=Recession

26
Q

What happens at the trough?

A
  • Slowing Ceases
  • Economy is at the bottom
  • High unemployment
  • Deflation in prices (consumer and assets)
  • Weak sales
27
Q

What happens during a recovery?

A
  • Economy is growing
  • If it lasts long enough becomes a boom
  • Demand increasing
  • prices rising
  • unemployment falling
28
Q

What happens at the peak?

A
  • Rapid GDP growth
  • High levels of activity
  • economy at full capacity
  • inflationary pressures
29
Q

What is the difference between GDP and GNP?

A

GDP is the total output of an economy

GNP is the total output of the participants of the economy and therefore includes residents net income from abroad.

GNP = GDP + Net Property Income from Abroad

There is also GNI which is GDP + Foreign Factor Income

30
Q

What is perfect competition?

A

A market, with infinite firms where no one firm can influence the price of the good or service

Firms only make normal profits & no one firm dominates the industry

31
Q

When do monopolies and ologopolies occur

A

When there is imperfect competition

32
Q

List 5 facts about Perfect competition

A

1) Firms only make normal profits
2) A single homegenous product is provided by all firms
3) If supernormal profit exists, firms will join market and supply good (reaches equilibrium price)
4) No one firm dominates the industry

33
Q

What is a monopoly?

A

A form of inperfect competition where one firm produces goods with close to no substitution

34
Q

What is an oligopoly?

A

A form of imperfect competition in which a small number of large firms produce similar but different products

In both monopolies and oligopolies, high barriers to entry exist

35
Q

On a diagram (triangle) of monopolies, perfect competition and ologopolies. What is labelled on each side of the axis?

A

1) Barriers to entry
2) # of Firms in industry
3) Ability to influence price

36
Q

What is information assyemtry?

A

the different degrees of knowledge and information available to the parties of a transaction

37
Q

Two examples of situations where information asymmetry would be found?

A

1) Lender and Borrower
2) Hiring manager & prospect

38
Q

What does Asymmetry of information lead to?

A
  • can lead to adverse selection, in turn affecting the quality of goods and services available on the market
  • disturb the process of allocating resources efficiently, and
  • mean that the correct prices cannot be set, according to the law of supply and demand.
39
Q

When do firms maximise profit?

A

When marginal costs = marginal revenue

40
Q

What are production costs?

A

Costs incurred producing a good or providing a service

41
Q

What are economies of scale?

A

firms can benefit from cost advantages when increasing production, thus lowering the costs, in turn making production more efficient

42
Q

What are diseconomies of scale?

A

Production increases beyond the minimum efficient scale (MES)

Cost per unit increases

Can be caused by expansion leading to less efficient communication for example

43
Q

How is inflation defined?

A

“The persistent tendancy for the general level of prices to rise”
- Leads to a reduction in purchasing power

44
Q

What are the negative effects of inflation?

A

1) Economy can overheat - demand outstrips supply and prices spiral
2) Inflation can strip away competetive advantage from nominal exchange rate
3) Can lead to hyperinflation (>50% rise in a single month)
4) Reduced spending power

A positive effect is a decrase in real value/cost of debt

hyperinflation e.g. Weimar Republic post WWI

45
Q

What is deflation and what is disinflation?

A

1) Deflation = A fall in prices
2) Disinflation = A fall in the rate of inflation (prices still rising)

46
Q

What are the effects of deflation?

A

Fall in output and demand
Fall in investment / business purchases
Real cost of debt increases

47
Q
A

CWM Financial Markets (58 decks)

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