Macroeconomics

Question 1

How do you calculate AD

Answer 1

C+I+G (X-M)

Question 2

What are the factors influencing levels of consumption

Answer 2

Wealth effect-physical/monetary

Real disposable income

Rate of interest

Availability of credit

Composition of households

Question 3

What are the factors influencing investment

Answer 3

Consumer confidence

Interest rates

Availability of credit

Price and availability of new tech

Question 4

What are the factors influencing government spending

Answer 4

Level of government revenue

State of economy

External shocks

Proximity to election

Question 5

Factors influencing net exports

Answer 5

Exchange rate- pound weak- more exports less imports

Foreign consumer confidence

Foreign real disposable income

Question 6

What is aggregate supply

Answer 6

Total output of goods and services that producers are willing and able to supply at different price levels in a give time period

Question 7

Factors causing a shift in AS curve

Answer 7

Change in cost of production

Quantity and quality of labour

Improvements in tech

Role of private sector

Question 8

What are the macroeconomic objectives

Answer 8

Low unemployment 
Economic growth 
Low stable inflation 
Balanced budget 
Balance of payments 
Redistribution of income

Question 9

What is aggregate demand

Answer 9

Total or sum of all demand or expenditure in an economy at a given price

Question 10

What is discretionary fiscal policy

Answer 10

Deliberate manipulation of government spending and revenue to achieve macroeconomic objectives- used to stimulate economic growth

Question 11

What would happen if government wanted discretionary expansionary fiscal policy

Answer 11

Increase its own spending

Reduce levels of income tax- increase consumption levels

Reduce levels of VAT

Reduce corporation tax- increase investment

Question 12

However exact impact on discretionary policy will depend upon…

Answer 12

Initial position of market equilibrium

Size of policy changes

Duration of policy changes

Consumer and producer confidence levels

Question 13

What is automatic fiscal policy

Answer 13

Designed to prevent highs of economic boom being too high but increasing tax as income increases and prevent lowest of lows by JSA/ welfare payments

Question 14

What are the 3 tax regimes

Answer 14

Progressive tax- higher tax with higher income

Regressive tax- pay less tax as income increases

Proportional/flat tax- pay the same amount of tax no matter the income

Question 15

What are Adam smiths Good tax themes

Answer 15

Equity- everyone should contribute to support of government depending on ability

Certainty - taxes shouldn’t be arbitrary

Convenience- should be levied in a time and manor which is convenient

Economy - ought to take out and keep out of people’s pockets as little as possible

Question 16

Elements of the government budget

Answer 16

Government spending equal to revenue- balanced budget

Spending higher than revenue- deficit - will add to national debt

Revenue higher than spending is known as a surplus- government pay off debt

Question 17

What is monetary policy

Answer 17

The deliberate manipulation of me tart variables such as the interest rate or money supply to achieve macro goals

Question 18

Give an example of monetary policy and how it works

Answer 18

Interest rate increase - cost of loans to firms increase- cost of production is higher- set prices higher - inflation - appreciation of pound- exports expensive Imports cheaper- balance of payments in doubt - value of savings increase- bigger gap between rich and poor

Question 19

What effects does a reduction in interest have?

Answer 19

Opposite effects to increase. Leads mainly to an increase in U.K. Exports and a reduction in imports- improve (X-m) balance of payments element and cause economic growth

Question 20

However exact impact upon interest rates will depend upon:

Answer 20

Forgiven consumer confidence

Initial equilibrium position

Size/ duration of depreciation/appreciation

Actions of other central banks

Martial learner conditions

Question 21

What are the supply sided measures to cause outward shift in LRAS- labour market

Answer 21

Trade unions- less power
Welfare benefits-cut
Minimum wage-abolish
Marginal tax rates- lower tax
Taxes on labour- won’t take on labour if cost too much
Reduce cost of changing jobs/house prices- pensions taken from jobs to job- house prices lower- people move if necessary

Question 22

Supply sided measure to cause outward shift in LRAS– capital market

Answer 22

Profitability- investment in order to make profit- gov needs to make environments to encourage investment
Allocating scarce capital resources- private sector should do this
Increase range of sources of capital- encourage private sector to provide financial capital

Question 23

Supply sided measures to cause outward shift in LRAS– goods market

Answer 23

Encourage free trade-reduce taxes and barriers in imports
Encourage small business
Privatisation- eliminates distortion created by public monopolies
Deregulation- allowing all to compete in market- increases competition

Question 24

What are the first 4 problems of supply sided policy

Answer 24

• Education and training- costly- opportunity cost
• Time lag- while before benefits are seen
• High skilled jobs won’t necessarily be more available
• workers might not become more skilled (quality of training may be poor)

Question 25

Another 3 problems of supply sided policy

Answer 25

• Size and duration will influence shift
• increasing minimum wage to stop voluntary unemployment- increase cost for firms+ won’t take on workers
• decreasing tax rates- incentivise longer work hours- reduce government revenue

Question 26

Name 3 policy conflicts with macro objectives

Answer 26

• Unemployment+inflation
  Economy reaches FE- workers bargain for high wages- increase costs- increase price
• growth and inflation- short run growth Ad on vertical- inflation
• inflation + balance of payments price of imports increase-inelastic- cost of production increase- inflation

Question 27

Name another 2 policy conflicts with macro objectives

Answer 27

• Economic growth and balance of payments: growth- higher incomes- mpm increase- decline in BofP situation
• growth and wealth equality- more reward for owners of capital not normal worker- increased gap between richest and poorest