Macroeconomics Flashcards
What is macroeconomics?
Macroeconomics is the branch of economics that looks at the performance and behaviour of an economy as a whole, rather than as individual people, markets or businesses.
What are the labels of the axis and lines for a graph in macroeconomics?
Y axis - Price level - i.e currency $ - represented by P
X axis - Real output - i.e GDP - represented by Y
Aggregate demand (AD) - Sum of all the demand in the economy.
Aggregate Supply (AS) - Sum of all the supply in the economy

What happens when the AD shifts outwards?
- The AD shifts outward (AD – AD1) due to increase consumption.
- There is an increase in real output which shows economic growth (Output increases over time).
- Due to the increase in real output - suppliers require more workers so unemployment falls.
- As a result of the Outward shift in AD there is also an increase in price level - This represents inflation

What is the consumption function? What are the components of AD?
Consumption function – AD = C + I + G + (x-m)
C - consumption –> Total spending by consumers on domestic goods/services.
I - Investment –> The addition of capital stock to the economy. This may either be Replacement investment (spend on capital to maintain productivity) or Induced investment (Spend on capital to increase output in response to increased demand).
G - Government spending –> Gv. spending on a variety of goods/services.
X-M - net exports (exports-imports)
How does confidence influence aggregate demand?
Confidence can effect aggregate demand. If people are confident they tend to spend more whereas when they are nervous they spend less.
More confidence - More consumption
Less confidence - Less consumption
Why does consumption change?
Consumption –> Total spending on domestic goods/services.
- Changes in wealth (Not same as income –> Wealth is the value of assets people own)
Two factors influence wealth:
- Change in house prices –> increase in house prices –> feel more wealthy –> increase spending/decrease savings
- Change in the value of stocks/shares –> increase in value –> feel more wealthy –> increase spending/decrease savings
2. Changes in expectations/confidence –> Increased consumer confidence –> increased consumption.
3. Interest rates —> Mainly refers to durable goods
High interest - lower spending –> As it is more expensive to borrow.
Lower interest - high spending –> Less expensive to borrow.
Interests also impact savers
Higher interest - People tend to save more money –> Less consumption
Lower interest - People tend to spend more money –> increased consumption.
- Changes in Income (Money people earn) –> Most significant factor
- Household indebtedness - (the extent to which households are willing and able to borrow money) –> I.e. Easy to borrow + low-interest rates –> consumers are more likely to take on debt.
Why does investment change?
Investment –> The addition of capital stock to the economy –> Money is obtained via ‘retained profits or borrowing.
- Businesses buy more equipment /machinery –> due to increased pressure on existing capacity due to increased consumption (Induced investment).
- Interest rate —-> High interest –> decrease incentive to borrow/increased incentive to ‘retain profits’ in bank.
- Businesses confidence —> A lot of investment decisions are based on expectations of the future.
- Technological change –> Changes in the level of tech in the economy –> forces firms to keep up in order to stay competitive.
- Business taxes and the level of business indebtedness.
Why does government spending change?
Government spending changes depending on the priorities of the politicians and where they beleive the money is best spent.
They could either spend money on…
Education
Roads
Public services
benefits
military
etc.
What factors influence net exports?
Net exports (x-m) - Exports - imports
Exports - money that flows in / Imports - money that flows out
Exports change due to…
- Changes in foreign income
- Exchange rates –> Appreciation –> More expensive for foreigns –> decrease in exports (Visa-Versa)
- Changes in Trade policies (i.e. reduce imports by taxing them heavily - used to improve domestic economy)
- Inflation —> Higher inflation –> less competitive –> More expensive.
Imports Change due to…
- Economic expansion/changes in domestic demand for foreign goods–> increase in imports
- Exchange rate –> Appreciation –> Less expensive to import –> decreased import expenditure (Visa-Versa).
- Trade policies
- Inflation rates in foreign nations.
What is the business cycle? Annotate all the parts of the graph.
- It shows what happens to GDP over time
- It shows that GDP fluctuates - rises and drops
- The overall trend is that GDP grows over time
- Output gap refers to the distance between the trend line and the actual line (Difference between actual and potential output)
The top of the economic cycle - Boom - Postive output gap (low unemployment/high inflation)
The bottom of the economic cycle - Bust (recession) - Negative output gap (high unemployment/low inflation)
Recovery phase —> Economic expansion –> increase in demand –> increase in supply –> increase in employment –> more spending –> cycle continues.
Trough —> The point where contraction comes to an end –> Output doesn’t fall lower –> some people in the economy maintain consumption/demand for exports/ G.v spending/etc.

When is an economy considered to be in recession?
After 2 consecutive quarters of negative growth.
How do changes in confidence influence AD (Chain of reasoning)?
- Increase in consumer confidence - Period of economic growth
- Causes an increase in consumption (i.e people are more confident)
- This increases the value of C (consumption) in the consumption function.
- This leads to an increase in AD.
How do changes in interest rates influence AD (chain of reasoning)?
- Interest rate increase (more expensive to borrow / more favourable to keep money in a deposit due to the interest gained).
- Mortgage payments rise which leads to a drecrease in discretionary income. People have to pay back more for their loans. Or people rather save as it is more beneficial.
Mortgage - A loan to finance the purchase of real estate, usually with specified payment periods and interest rates.
Discretionary income - Income after paying morgage, bills (money you can use for anything).
- Drop in consumption
- Decrease the value for C in the consumption function.
- Decrease in AD
How do interest rates influence Investment/AD? (Chain of reasoning)
Investment - Money spent by buisnesses on equipment and machinery (Capital goods)
- Decrease in interest rates
- Cheaper to borrow - More borrowing
- Increase in investment
- Increase in AD
or
- Increase in interest rates
- Decrease in borrowing (more expensive to borrow)
- Decrease in investment
- Decrease in AD
What happens to investment if consumption increase?
If consumption increases, investment increases in order to accomodate the increase in consumption (factories need to increase output by buying more machinary/land etc.)
Which factor of the consumption function has the greatest impact on AD?
Consumption contributes the most to AD.
What is aggregate supply?
The total quantity of goods and services produced in an economy over a particular time period, at different price levels.
Basically, the sum of the supply curves of all industries.
What factors influence AS?
When AS changes, the potential output of the economy changes.
- Improvement in technology - increased potential output
- Education/training
- Discovery of raw materials
This is demonstrated by the PPF.

What are the two different views of macroeconomics?
- Classical view
- Keynesian
Describe the classical view of economics? What is the view based on?
Classical view
It has a long run (LR) and a short run (SR) aggregate supply curve. (LRAS/SRAS)
The long run is said to be inelastic therefore any deviation (i.e SRAS excedding the LARAS) is temporary.
The long run represents full employment within the economy.
It is based on unrestricted workings within the economy and supports the pursuit of individual interests.
Classical view beleives that output of an economy is determined by supply factors.

Describe the Keynesian view of economics?
Keynesian view
The graph has one aggregate supply curve - LRAS (L - shaped) - which represents supply in the long run.
Keynesian are interventionist therefore, they advocate for government intervention.
In their policies they place emphasis on changing AD to overcome recession and to boost the economy.

How can the position on the AD curve relative to the LRAS curve inform governments on their actions?
As you go along the LRAS curve the slope goes from elastic to a inelastic supply curve.
The position of the AD curve relative to the LRAS curve can inform governments how to intervene.
I.E.
Elastic – Increase in AD – Large increasse in output + less unemployment - minimal inflation. Beneficial
Inelastic - Increase in AD – Small increase in output + no significant change in unemployment – large increase in inflation. Not Beneficial

In what situations should keynesian view be used and in what situation should a classical view be used?
- The Keynesian view is better for viewing policies and changes in AD. Hence, it is often used more in essay style questions.
- The classical view of supply is better to represent the short run aggregate supply.
Why is deflation generally seen as not beneficial?
Some might argue that during deflation people will say ‘Cheaper is better’
However, deflation can discourage people from big purchases becuase the price of goods/services will constantly be cheaper therefore making them beleive that if they wait they can buy the good/service for a cheaper price.
This leads to a reduction in consumption — AD shifts inwards — less economic growth.














