Macroeconomics Flashcards

Question

Describe trade patterns for developed counties recently. Emerging. Give eg of high tech country. Specifically, UK changes

Answer 1

Developed are less dominant due to globalization, outsourcing supply chains, e commerce and automation NEEs such as India High tech industries like China Uk is purchasing more imports because they’re cheaper. Looked for new trading partners after Brexit eg New Zealand.

Answer 2

May be x inefficient with spending (complacent) May distort inflation with increased government spending

Answer 3

Tax cuts and incentives. Inequality? Benefits of economic growth

Answer 4

Electric vehicles is infant Senile is shipbuilding

Answer 5

Personal Credit cards. Usually, higher interest rate but based on credit worthiness. Has to take legal action to recover funds.

Answer 6

Can’t address demand pull inflation. This is usually short term too. LRAS is long.

Answer 7

Tariffs on agricultural products such as lamb to help domestic farmers as there were cheap imports

Answer 8

-Interest rate rises, other economies, reduction in lending -Supply: wars, invention of new technology eg capital intensive replacing labour and free trade leading to cheaper imports, taxes/benefits

Answer 9

Since 1990s, the UK has avoided the boom and bust cycles which characterised the late 1980s when inflation rose. The independent Central Bank has, therefore, gained a reputation for keeping inflation under control. The independence from political pressures means people in the economy have more confidence that inflation will be low. This helps to reduce inflationary expectations and this makes the job of achieving low inflation easier.

Answer 10

the Bank of England can not deal with a boom in asset prices and bank lending through monetary policy and interest rates alone. This requires a different type of intervention, e.g. building more houses to deal with a shortage in supply or regulations to limit the lending of banks

Answer 11

If the economy reaches full employment through the expansion of the export sector and investment-led growth, then it is possible to achieve full employment without a deterioration in the current account. Also, SPICED can incentivise efficiency to reduce costs of exports (opposite for WPIDEC) Lower import prices increases consumer surplus.

Answer 12

No (rarely)

Answer 13

Also in the UK, trades unions are no longer very powerful (after thatcher reduced their power), so this policy would only have limited impact. Also, some argue trades unions can actually help introduce new working practises and thereby increase productivity. Monopsony exploit?

Answer 14

Depends whether it’s a cyclical or structural deficit If structural, fiscal policy doesn’t address the fundamental underlying problem, which is a lack of competitiveness. This needs to be addressed through supply side policies.

Answer 15

International students are skilled and remain and contribute to tuition fees This process of migration helps to make the UK labour market more flexible; it has helped fill shortages in sectors such as nursing Sometimes migrant workers are more willing to fill job vacancies that can be hard or to fill. These jobs sometimes known as (dirty, dangerous and demeaning). s. People fear it has led to shortages of housing in places like London; politicians are under pressure to place caps on migration numbers. Overreliance on International Tuition Fees: UK universities risk financial instability if international student numbers fall 2024 675k net

Answer 16

a deficit on the current account means that the country requires a surplus on the financial account. This could involve short term capital inflows from abroad which might dry up. E.g. the US has financed a current account deficit by attracting capital inflows from China. This makes the US vulnerable to China withdrawing its dollar holdings. However, a trade deficit could be financed by encouraging long term investment such as a Japanese firm building a factory in the UK, this has benefits to the UK economy such as greater investment and job creation. capital flows can more easily finance the deficit. For example, Chinese investors have been willing to purchase US securities and effectively finance the US deficit.

Answer 17

Leads to SPICED for developing. unlikely to benefit the very poorest. The very poorest families are unlikely to be in a situation to enable anyone in their family to go and work in a developed economy. Remittances could lead to increased inequality with only families with educated and mobile young adults able to send remittances back. There is no guarantee that remittances will be funnelled into productive channels and investment. A proportion will be saved. Brain-drain. young workers abroad. Most of their income will be spent or taxed in the developed economy. The drawback is that developing economies lose a significant proportion of their best workers and potential entrepreneurs. This means economic development is held back by a loss of young workers and potential young entrepreneurs. The prospect of earning higher salaries abroad may discourage local investment and young people setting up business in the developing world. This means developing economies become reliant on remittances from abroad – rather than developing productive capacity in its own country. However, on the other hand, foreign workers may decide to return after a few years. They will return with work experience and greater knowledge than before they left. Therefore, the process of leaving, sending remittances and coming back can benefit the developing economy in the long-term. Will remittances be paid in long term?

Answer 18

UK, benefits are already quite low compared to the national minimum wage therefore a cut in benefits may not solve the problem. Worsen relative, absolute poverty and long-run potential.

Answer 19

Producers likely to stay and remain profitable. Improved BoP and GDP. Though, can reduce higher quality overseas raw materials needed. No tax rev from quotas.

Answer 20

Snapshot Pre tax

Answer 21

Lack of saving (low disposable incomes) means lack of investment which restricts growth. Leads to savings gaps (gaps between deposits and demands for loans). Restricts growth via less AD or LRAS.

Answer 22

Leads to increased AD, economic growth and thus development. Invest in more efficient machinery to lower unit costs, shift LRAS and be competitive to boost development. Reduced prices with efficiency means competitiveness, profits and corporation taxes to be used to reinvest.

Answer 23

Innovation is applying knowledge of invention to make a profitable good/adapt a production method.

Answer 24

With progressive tax, Pushes into higher tax brackets means pay more. Fiscal drag. Less consumption but higher gov revenue meaning laffer curve might shift upwards.

Answer 25

More productive, less turnover, spend more setting off multiplier David card

Answer 26

Richard Thaler Libertarian paternalism - nudges to gel well-being but not invoke on freedom

Answer 27

GPL (General Price Level) for macro.

Answer 28

Piketty's Challenge: Piketty argues that capitalist systems are inherently unequal, with the wealthy accumulating capital and passing it on to the next generation. This accumulation perpetuates inequality as those with wealth have better access to opportunities and resources, such as education and health care, further widening the gap between the rich and the poor

Answer 29

Have risen to 15%

Answer 30

For agrarian economies, they have excess labour. If they move to industrial sectors, can get higher wages without an opportunity cost of output in agriculture. Also, wages won’t rise in the agriculture sector. The profits from industry could be reinvested and agricultural productivity should increase. Profits, savings, investment and growth should increase.

Answer 31

In cities, painters, plumbers, or electricians might work way less than their potential because they are unable to find work on a daily basis

Answer 32

A theory made by an economist in the 70s whereby increases in national income per capita don’t lead to a proportional rise in human happiness as people’s incomes are still lower than others despite being higher than they previously were.

Answer 33

David Ricardo

Answer 34

Heckscher-Ohlin Model: Predicts that countries will export goods that intensively use their abundant factors of production (e.g., labour or capital)

Answer 35

Fuel poverty (can’t afford heating bills) heat or eat Data poverty (can’t afford access to internet/essential info)

Answer 36

Elinor Ostrom

Answer 37

Often higher prices which means lower real incomes and consumer surplus and possibly lower choice

Answer 38

Does it promote diversification of another economy to help it?

Answer 39

Might just bring their workers from their countries with them who are skilled

Answer 40

Some smes can compete if they’re targeting a niche

Answer 41

Rise in the sharing economy - leasing capital as opposed to owning

Answer 42

Might fork new monopoly to replace old one eg Uber replacing black cab taxis

Answer 43

Cost-benefit analysis

Answer 44

Brain gain

Answer 45

Keynesian advocates for it to stimulate demand Classical believe it is more harmful and should be left to market forces eg Adam Smith and invisible hand Austrians believe laissezfaire economics because intervention can often worsen allocation of resources

Answer 46

Manipulating markets to gain unfair advantages eg trading with non-public information

Answer 47

Black markets Strategic industry such as crops vital for economy

Answer 48

Unemployment in areas you don’t have comparative adavantage Regional unemployment/income inequality Can focus on areas with lower labour costs leading to lower wages for employees Overspecialise/current account deficit

Answer 49

PPP/inflation (real)

Answer 50

Milton Friedman

Answer 51

Elastic means if interest rates change, borrowing or saving will increase more than proportionally. Inelastic would be less than proportional. Necessary savings in recession. Inelastic borrowing would be mortgages.

Answer 52

Finding optimal tax rate for a country is likely difficult.

Answer 53

Low earners impacted more than high earners Difficult to predict real rate of return

Answer 54

Can be adjusted relatively quickly and implemented Smoot-Hawley Tariff act 1930 worsened retaliations for the US. Followed great depression However, trade wars can benefit those not involved eg soviets Trump's stance echoes the core beliefs of mercantilism — an economic philosophy rooted in maximizing exports, minimizing imports, and using government power to protect domestic industries. He believes trade is a win lose, zero sum situation not a win win one

Answer 55

Falling asset prices could make houses more affordable **Lower AD could cause over supply** Deflation increases real interest rates because it affects the relationship between nominal interest rates and inflation, which is described by the Fisher equation: When Deflation Occurs: effectively increases the real interest rate because you are subtracting a negative number, which is equivalent to adding its absolute value. •m 2. Higher Real Burden of Debt: • With deflation, the purchasing power of money increases, making fixed debt payments more expensive in real terms. This discourages borrowing and increases the effective cost of debt. 3. Sticky Nominal Interest Rates: • Nominal interest rates are often slow to adjust downward due to factors like central bank policies or market expectations. During deflation, this stickiness means real interest rates rise even if central banks attempt to lower nominal rates. Implications: • Higher real interest rates reduce borrowing and investment, further slowing economic activity. • Rising real rates can worsen deflationary spirals, where reduced spending and investment lead to further price declines.

Answer 56

Creeping or hyper

Answer 57

Hyman Minsky’s Financial Instability Hypothesis (FIH) argues that financial markets are inherently unstable and prone to cycles of boom and bust. According to Minsky, stability breeds **complacency**leading investors and institutions to take on increasing levels of risk during periods of economic stability. This process culminates in financial crises as excessive leverage and speculative activities become unsustainable, triggering a sudden reversal and widespread instability.

Answer 58

The general glut refers to a situation in which there is an excess of production relative to the level of demand in an economy, resulting in widespread overproduction and unsold goods across many markets. This typically occurs during periods of economic downturn, such as recessions or depressions, when aggregate demand is insufficient and people save so firms invest less

Answer 59

Change in FDI Change in tourism A rise in FDI abroad may increase supply of currency Fall in interest leads to more hot money flows out of country Depends on whether exchange rate is free float or managed and whether governments can intervene/success of intervention with managing forex reserves. China kept the Yuan undervalued for years to promote export-led growth, but this created tension with trading partners and contributed to the global imbalance in trade. Was pegged within a certain range

Answer 60

😀 structural unemployment

Answer 61

3% (2.5% in dec ) but core inflation 3.7 (ignoring energy for example as its volatile) 11.1 in 2022

Answer 62

Venice. 5 euros per day tripper. Manage overtourism/preserve heritage. Can reduce externalities, increase local revenue and prevent house prices/costs for locals being driven up Reduced competitiveness (deter tourism), regressive, unclear where revenue may be spent.

Answer 63

More investment for lras

Answer 64

The NICE period (Non-Inflationary Consistently Expansionary) in the UK refers to the years between 1992 and 2007, characterized by steady economic growth, low inflation, and relative stability, supported by favorable global conditions and effective monetary policy.

Answer 65

Banking brain drain occurs when excessive regulation in the financial sector pushes highly skilled professionals to leave for less-regulated industries, countries with looser rules, or entirely different career paths. Over-regulation can stifle innovation, reduce job satisfaction, and limit opportunities, prompting talent to seek environments with greater flexibility and growth potential.

Answer 66

Often very different to borrowing rates so private sector arguably sets these

Answer 67

Difficult to say exactly what caused it. Growth might be higher than average, decreasing it, but demand might not be equal in all sectors

Answer 68

Reduce level of consumption and investment to lower demand 2010-2012 eurozone crisis eg Greece. Austerity measures like tax hikes and spending cuts. Some improvements in trade balance but other economic contractions eg ad So, best when economy is in deficit due to heavy imports

Answer 69

Underinvestment in infrastructure - chronic gaps such as energy or housing . Lowest G7 investment. No “levelling up” Sluggish demand and rise in real take home wages Shortermism in finance and business. Reward shareholders over reinvestment Overconsumption Economic uncertainty postbrexit reduced fdi. Sluggish productivity growth due to a lack of investment after GFC. Cost of living crisis fallout Ageing population. Raising retirement age to 68 by 2046. Encourage skill retraining or change pension laws Long covid and economic inactivity

Answer 70

Corruption Lack of physical/intellectual property rights **Poor infrastructure** Poor human capital Poor physical capital **Savings gaps (h d model)** Primary product dependent **Informal employment and lack of tax rev**

Answer 71

Rachel Reeves is likely to unveil plans to create “Europe’s Silicon Valley” between Oxford and Cambridge. The government plan aims to boost infrastructure and innovation, with potential to add £78bn to the UK economy within a decade. It hinges on supply-side reforms, including streamlined planning regulations, infrastructure investment, and airport expansion, to accelerate economic growth. By improving transport links and easing development barriers, the plan seeks to enhance productivity and private sector confidence. However, critics warn that focusing growth in the South risks regional imbalances, while environmental groups argue that deregulation and airport expansion could jeopardise climate targets

Answer 72

Over half of uk population receiving some sort of welfare

Answer 73

Shallow cut from 4.75 to 4.5

Answer 74

1.5% to 0.75 now

Answer 75

3.7% energy and water costs. Colder winter. Believe cost push inflation is short term Only meet target by 2027

Answer 76

7. Ricardian Equivalence – This theory, proposed by economist David Ricardo, suggests that when governments increase deficit spending, consumers anticipate future tax hikes to repay the debt. As a result, they save more instead of spending, neutralizing the stimulus effect of government borrowing. However, in reality, factors such as liquidity constraints and myopic behavior often weaken this effect. 8. Zombie Firms – These are unproductive businesses that survive only because of easy credit, low interest rates, or government support. Instead of innovating or becoming more efficient, they rely on cheap borrowing to stay afloat. Zombie firms reduce economic dynamism by preventing capital and labor from being reallocated to more productive sectors. Japan’s “Lost Decade” (1990s) is a classic example, where excessive bank support for failing firms hindered economic recovery. 9. Jobless Recovery – After a recession, GDP might grow again, but employment remains stagnant due to factors like automation, outsourcing, or structural changes in the economy. For example, after the 2008 crisis, companies improved profits and productivity but were slow to rehire workers, leading to prolonged high unemployment despite economic growth. 10. Secular Stagnation – A prolonged period of low economic growth and low interest rates, often caused by weak demand, demographic shifts (aging populations), and excess savings. Economist Lawrence Summers

Answer 77

US sugar Embargo was US on Cuba in 1962

Answer 78

The UK has an AA (stable) credit rating and has never failed a repayment Sell bonds due to loss of confidence reducing price, increasing yields and initially leading to a weak pound.

Answer 79

25% for taxable profits over 250k for companies and certain organisations UK

Answer 80

Interest rates debt repayment 28%

Answer 81

inflation control isn’t just about interest rates—if governments keep borrowing unsustainably, the central bank may be forced to monetize debt, printing more money, making inflation inevitable.”

Answer 82

“The Diamond-Dybvig Model shows that even solvent banks can collapse due to self-fulfilling prophecies—if depositors believe the bank is in trouble and rush to withdraw their funds (bank runs), the bank’s collapse becomes inevitable, despite being financially stable.”

Answer 83

Some argue it’s not effective during a recession as banks are risk averse and don’t want to lend or do so with strict conditions Lots goes to stocks/shares not consumer spending Some argue it inflates asset prices such as houses, helping the wealthy not the average family

Answer 84

Tax revenue to directly provide Subsidise firms who do provide it or encourage them to eg charities Contracting out

Answer 85

Avoidance is legal Evasion is illegal

Answer 86

Supply-side issues refer to structural weaknesses in an economy that limit its productive capacity and long-term growth potential. In the UK, key supply-side challenges include low productivity growth, skill shortages, infrastructure gaps, and declining business investment. The government can address these issues through supply-side policies, which can be broadly categorized as market-based (reducing government intervention) or interventionist (increasing government involvement). This essay will evaluate different policies, their effectiveness, and potential drawbacks. 1. Investment in Education and Training Youth unemployment persists One of the biggest supply-side issues in the UK is low productivity growth, which has stagnated since the 2008 financial crisis. The UK lags behind countries such as Germany and the US in labour productivity, partly due to skills mismatches in the workforce. Government investment in education and vocational training can improve human capital, making workers more productive and adaptable to technological advancements. For example, the UK government has promoted apprenticeship schemes to equip young people with practical skills. The introduction of the Apprenticeship Levy (2017) was designed to encourage firms to invest in workforce training. However, this policy has faced criticism because many businesses use levy funds for generic training rather than developing high-demand skills. Moreover, investment in education is a long-term strategy—it takes years for improvements in schooling and training to translate into higher productivity. There is also the risk of government failure if funding is misallocated, leading to inefficiencies and limited impact. 2. Tax Cuts and Business Incentives Reducing corporation tax and offering tax relief on research and development (R&D) can encourage firms to invest in innovation, capital equipment, and workforce development. For instance, the UK reduced corporation tax from 28% in 2010 to 19% by 2017 to attract investment and stimulate growth. However, evidence suggests that cutting business taxes does not always lead to higher investment. Many firms, particularly large multinationals, use tax savings for share buybacks or dividends rather than reinvesting in productivity-enhancing measures. Additionally, following the pandemic and the cost-of-living crisis, the UK government has been running a high fiscal deficit, meaning large tax cuts may not be fiscally sustainable. A more targeted approach, such as tax incentives specifically for high-tech industries, green energy, and digital innovation, may be more effective in driving long-term economic growth. 3. Deregulation and Labour Market Reforms Reducing regulatory burdens can lower business costs and encourage entrepreneurship. For example, relaxing planning laws could make it easier for businesses to expand operations, particularly in the housing sector, where restrictive regulations limit construction. Similarly, labour market reforms—such as making it easier for firms to hire and fire workers—can improve job market flexibility and reduce structural unemployment. However, deregulation comes with trade-offs. If employment protections are weakened, it could lead to job insecurity and lower consumer confidence, reducing aggregate demand. Additionally, excessive deregulation in the housing market could result in low-quality developments and environmental issues. The UK already has a relatively flexible labour market compared to European counterparts, meaning additional deregulation may yield limited benefits. Instead, policies should focus on ensuring that deregulation is targeted—for instance, streamlining bureaucracy for startups while maintaining core worker protections. 4. Infrastructure Investment Poor infrastructure is a major constraint on UK productivity. Transport inefficiencies, broadband gaps, and energy supply issues increase business costs and limit economic potential. Investment in roads, rail, and digital connectivity can reduce logistical costs and improve efficiency. For example, the government has invested in the HS2 rail project, which aims to improve connections between the North and South. While this could boost regional economies and improve labour mobility, cost overruns (now exceeding £100 billion) and delays have raised concerns about its value for money. Similarly, investment in broadband infrastructure—such as the rollout of full-fibre internet by 2030—could support businesses in rural areas and promote remote working. However, infrastructure projects require substantial public spending, and with rising government debt post-COVID, prioritizing the right investments is critical. 5. Increasing Labour Force Participation Labour shortages have become a major supply-side issue in the UK, particularly following Brexit, which reduced the inflow of EU workers in key industries such as hospitality, agriculture, and social care. Encouraging greater workforce participation—particularly among older workers, women, and the long-term unemployed—can help address shortages. Policies such as expanding affordable childcare, increasing retraining programs for older workers, and offering targeted immigration policies for high-demand sectors could increase labour supply. For instance, the UK government introduced the Health and Care Worker Visa to attract foreign workers into the NHS. However, increasing labour force participation does not automatically boost productivity. If more workers enter low-skilled, low-wage jobs, the economy may not see significant long-term gains. Additionally, immigration policies are politically sensitive, and excessive reliance on migrant labour may reduce incentives for domestic workforce training. Evaluation and Conclusion While all these policies can help address supply-side weaknesses, their effectiveness depends on implementation, timing, and coordination. Education and infrastructure investment offer the most significant long-term benefits but require substantial public spending and careful planning. Tax cuts and deregulation can provide short-term boosts but may not always lead to higher business investment. A balanced approach—combining targeted tax incentives, strategic infrastructure investment, and well-designed labour market policies—would be most effective. For instance, improving technical education while investing in digital infrastructure could enhance both human and physical capital. Given the UK’s post-pandemic economic challenges, policymakers must prioritize high-impact, cost-effective measures, ensuring that supply-side reforms support sustainable, inclusive economic growth. Final Judgment: A combination of well-targeted interventionist and market-based policies—rather than reliance on any single measure—offers the best strategy for addressing the UK’s supply-side issues.

Answer 87

Depreciation is market driven Re/Devaluation (competitive) done purposefully

Answer 88

China are looking to relocate car manufacturing to turkey to avoid tariffs to eu market

Answer 89

1.25% but was 2.5% prior to GFC Uk labour productivity 30% less productive

Answer 90

0.94 vs 0.55

Answer 91

Remains a challenge as it is high 15% NEET (Not in Education Employment or Training)

Answer 92

Maternity Unpaid work eg domestic work or childcare

Answer 93

Environmental showing how degradation initially increases at first with increase in gdp then falls with technology development Kuznets inequality one too with agrarian economies first experiencing more inequality (higher gini on y) then falling with progressive taxation

Answer 94

Could do a ppc curve \. The steeper one (below the other one) has a comparative advantage.

Answer 95

4% histroically. 2.5% 2024 Struggling to finance deficits within the financial account due to higher employment costs, economic uncertainty post Brexit, supply side constraints

Answer 96

Reach their hurdle criterion/rate of return on investment more easily and plan

Answer 97

Promoting development policies

Answer 98

Always a budget deficit with parties spending out of self interest to be elected

Answer 99

Price of agricultural goods declines relative to manufactured rise

Answer 100

MPC BoE reduces base rate This reduces market base interest rates This makes saving less attractive and the opportunity cost of not spending increases. Should increase consumption

Answer 101

AI superpower investment

Answer 102

The average maturity of UK government debt is about 14 years — one of the longest among developed economies. This means a big chunk of the debt won’t need to be repaid or refinanced for quite a while, giving the UK a bit of breathing room when market interest rates rise including bond yields rise. The UK does issue short-term debt too — things like Treasury bills, which mature in under a year — but those make up a smaller part of the total.

Answer 103

GDP minus environmental costs. Obviously, hard to actually quantify env costs

Answer 104

Aid Depends on how long aid lasts

Answer 105

APS (average propensity to save) In medium term, savings are good to prevent household debt

Answer 106

Capital one off transfers like debt forgiveness or inheritance transfers from elsewhere Intangible assets such as franchise agreements