Macroeconomics Flashcards
What things do households provide in the circular flow model?
1) Labour, Land, Capital and Entreprenuership
2) Consumer Expenditure (for goods and services)
What things do firms provide in the circular flow model?
1) Goods and Services
2) Wages, Rents, Interest and Profit
What injections into the economy are there?
1) Government Spending and Consumption
2) Exports
3) Investments
What leakages out of the economy are there?
1) Imports
2) Savings
3) Tax
What is “free market” economics?
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
What is the “invisible hand”
The unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically
What is Keynesian Economics?
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,
What is marginal propensity to consume?
the proportion of an increase in income that gets spent instead of saved
MPS = 1 - MPC
What is the formula for Marginal Propensity to Consume?
Change in Consumption / Change in Income
What is Say’s law?
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.
What is the formula to calculate the multiplier effect for MPC?
k=1/(1-MPC)
What is consumption?
Expenditure by private households
What is the formula for consumption function?
a+cY
Where a = minimum consumption to survive
c = MPC
Y = Disposable Income
What is aggregate demand?
The total demand for final goods and services in an economy at a given time.
How is aggregate demand calculated?
Aggregate demand = C + I + G + (X – M)
Consumer
Investment
Government
Export - Import
What does credit creation do to a country’s money supply?
Increases it and in turn should:
1) Lower Interest Rates
2) Generate More investment
3) Stimulate Spending
What is the reserve requirement?
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.
What does the Phillips curve say about Unemployment and Wage Inflation?
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.
What gave rise to Monetarist economics?
A bout of “Stagflation” in the 1970’s
A period of inflation with stagnating growth e.g. recession and unemployment
What is monetarism based on?
The fisher equation of money
What is the fisher equation of money?
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.
What is natural unemployment?
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
What does natural unemployment prevent from happening?
Full 100% employment
What are the four stages of the economic cycle?
1) Contraction
2) Trough
3) Expansion
4) Peak
What happens during contraction?
- GDP Growth slows or contracts
- Unemployment increases
- Demand Decreases
10%+ contraction = depression (or 3 yrs+)
2+ consecutive contractions in GDP=Recession
What happens at the trough?
- Slowing Ceases
- Economy is at the bottom
- High unemployment
- Deflation in prices (consumer and assets)
- Weak sales
What happens during a recovery?
- Economy is growing
- If it lasts long enough becomes a boom
- Demand increasing
- prices rising
- unemployment falling
What happens at the peak?
- Rapid GDP growth
- High levels of activity
- economy at full capacity
- inflationary pressures
What is the difference between GDP and GNP?
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
What is perfect competition?
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
When do monopolies and ologopolies occur
When there is imperfect competition
List 5 facts about Perfect competition
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
What is a monopoly?
A form of inperfect competition where one firm produces goods with close to no substitution
What is an oligopoly?
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
On a diagram (triangle) of monopolies, perfect competition and ologopolies. What is labelled on each side of the axis?
1) Barriers to entry
2) # of Firms in industry
3) Ability to influence price
What is information assyemtry?
the different degrees of knowledge and information available to the parties of a transaction
Two examples of situations where information asymmetry would be found?
1) Lender and Borrower
2) Hiring manager & prospect
What does Asymmetry of information lead to?
- 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.
When do firms maximise profit?
When marginal costs = marginal revenue
What are production costs?
Costs incurred producing a good or providing a service
What are economies of scale?
firms can benefit from cost advantages when increasing production, thus lowering the costs, in turn making production more efficient
What are diseconomies of scale?
Production increases beyond the minimum efficient scale (MES)
Cost per unit increases
Can be caused by expansion leading to less efficient communication for example
How is inflation defined?
“The persistent tendancy for the general level of prices to rise”
- Leads to a reduction in purchasing power
What are the negative effects of inflation?
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
What is deflation and what is disinflation?
1) Deflation = A fall in prices
2) Disinflation = A fall in the rate of inflation (prices still rising)
What are the effects of deflation?
Fall in output and demand
Fall in investment / business purchases
Real cost of debt increases
