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Economics > Macroeconomics > Flashcards

Macroeconomics Flashcards

1
Q

List some organisations which forecast national economic activity.

A
  • ESRI
  • D/Finance
  • Central Bank
  • IMF
  • OECD
  • European Central Bank
  • NERI
  • IBEC
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2
Q

How do you add together a vast range of goods and services of different types?

A

Use monetary value.
In the private sector, use prices or incomes.
In the public sector, there is often no price or profit to use.

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3
Q

What is national income accounting

A

The bookkeeping system that a government uses to measure the level of the country’s economic activity in a given time period.

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4
Q

What are examples of national income accounting?

A

GDP
GNP
GNI*

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5
Q

What is the aim of national income accounting?

A

To get a meaningful measure or estimate of the quantity of goods and services produced in an economy in a period of time?

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6
Q

What is the definition of GDP?

A

GDP is the market value of all final goods and services produced within a country in a given period of time

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7
Q

Why does Ireland’s productivity look better than it should do?

A

Because GDP is used

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8
Q

How is GNP different to GDP?

A

GNP excludes depreciation

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9
Q

What is the circular flow of income?

A

The concept that production generates income and incomes allows spending and spending absorbs output.

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10
Q

How is the actual economy more complicated than the circular flow of income?

A

It includes withdrawals (tax, imports and savings) and injections (Government, exports, and investment)

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11
Q

What are the three methods of measuring GDP?

A

Income
Expenditure
Output

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12
Q

What is the calculation for the expenditure method of GDP?

A

C + I + G + X - M

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13
Q

Why do the three methods of measuring GDP not give the same result?

A

Because of a lack of appropriate definitions and perfect data

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14
Q

When referring to the component parts of national income, what is consumption?

A

Spending by households on goods and services, with the exception of purchases of new housing

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15
Q

When referring to the component parts of national income, what is investment?

A

Spending on capital equipment, inventories, and structures, including household purchases of new housing (i.e. purchase of new capital)

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16
Q

When referring to the component parts of national income, what are Government Purchases?

A

Spending on goods and services by local and state governments.
Excludes transfers.

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17
Q

When referring to the component parts of national income, what are net exports?

A

Spending on domestically produced goods by foreigners minus spending on foreign goods by domestic residents.

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18
Q

What are technical reasons why GDP is not the best indicator of economic wellbeing?

A
  • Real -v- nominal
  • Population (GDP per capita)
  • Distribution
  • Exchange rates
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19
Q

What are the conceptual reasons why GDP is not the best indicator of economic wellbeing?

A
  • Pollutoin

- Producing the “wrong” products

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20
Q

How do we measure the cost of living?

A

The Consumer Price Index

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21
Q

What is the Consumer Price Index?

A

A measure of the overall cost of the goods and services bought by the typical consumer

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22
Q

What is another example of a Consumer Price Index?

A

The Harmonised Index of Consumer Prices, which is compiled according to a methodology that has been harmonised across EU countries.

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23
Q

What is inflation?

A

An increase in the overall level of prices in the economy.

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24
Q

When does inflation occur?

A

Inflation occurs when the average level of prices in the economy increases over time.

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25
Q

List some of the causes of inflation

A
  • excess spending
  • higher labour costs
  • higher profits
  • increases in raw material prices
  • self-fuelling
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26
Q

What is the process for computing CPI?

A

1) Fix the “basket
2) Find the prices
3) Compute the cost of the basket of goods in each year
4) Choose a base year and compute the index
5) Compute the inflation rate from previous year

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27
Q

What are some of the problems in computing the CPI?

A
  • sample (average of the sample)
  • small number of outlets
  • range of products
  • substitution bias
  • introduction of new goods
  • unmeasured quality change
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28
Q

What is the nominal interest rate?

A

The interest rate as usually reported without a correction for the effects of inflation

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29
Q

What is the real interest rate?

A

The interest rate corrected for the effects of inflation.

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30
Q

How is the real interest rate calculated?

A

Nominal interest rate - inflation rate

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31
Q

What is nominal GDP?

A

The production of goods and services valued at current prices.

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32
Q

What is real GDP?

A

The production of goods and services valued at constant prices.

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33
Q

Hhow is real GDP calculated?

A

Need to first calculate a base year and then use the prices in the base year to compute the value of goods and services in all the years.

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34
Q

What other words are used to describe nominal GDP?

A

current, value

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35
Q

What other words are used to describe real GDP?

A

Constant, volume

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36
Q

What is the GDP deflator?

A

A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
i.e. the current level of prices relative to the level of prices in the base year

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37
Q

What is inflation?

A

A situation in which the economy’s overall price level is rising

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38
Q

What is the inflation rate?

A

The percentage change in some measure of the price level from one period to the next.

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39
Q

What is economic growth?

A
  • continuing increases in GDP

- more goods and services available to people

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40
Q

What pattern of growth is preferred?

A

An orderly or stable pattern of growth which avoids fluctuations

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41
Q

Why is an orderly or stable pattern of growth preferred?

A

Because it allows for a better use of resources, efficiency, planning and certainty

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42
Q

What is productivity?

A

The quantity of goods and services produced from each unit of labour input

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43
Q

What is potential GDP?

A

The quantity of output the economy could produce if everyone is employed.

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44
Q

What is actual GDP?

A

The actual quantity of output the economy produces

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45
Q

What influences potential GDP?

A

supply
(technology, investment, management capability, R&D, financial system, infrastructure, skills, entrepreneurial skills)

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46
Q

What influences actual GDP?

A

Demand

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47
Q

What are the determinants of GDP?

A
  • Physical capital per worker (K)
  • Human capital per worker (H)
  • Natural resources per worker (N)
  • Technological knowledge
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48
Q

What is physical capital per worker?

A

The stock of equipment and structures that are used to produce goods and services/

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49
Q

What is human capital per worker?

A

The knowledge and skills that workers acquire through education, training and experience

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50
Q

What is natural resources per worker

A

The inputs into the production of goods and services that are provided by nature e.g. land, rivers, and mineral deposits

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51
Q

What is technological knowledge?

A

Society’s understanding of the best ways to produce goods and services

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52
Q

What is the production function? (calculation)

A 
Y = AF(L, K, H, N)
(A = availability of technology)
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53
Q

What are diminishing returns?

A

The property whereby the benefit from each extra unit of an input declines as the quantity of the input increases.

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54
Q

Explain diminishing returns by reference to capital.

A
  • Capital is subject to diminishing returns.
  • The more capital an economy has, the less additional output the economy gets from an extra unit of capital.
  • As a result, although higher saving leads to higher growth for a period of time, growth eventually slows as capital, productivity and income rise.
  • Therefore, an increase in the saving rate leads to higher growth only for a while.
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55
Q

What is the catch-up effect?

A

The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich.
i.e. small amounts of capital investment in poor countries can substantially raise workers’ productivity

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56
Q

What are national savings?

A

The total income in the economy that remains after paying for consumption and government purchases.

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57
Q

What are private savings?

A

The income that households have left after paying for taxes and consumption.

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58
Q

How do you represent private savings

A

Y - T - G

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59
Q

What are public savings?

A

The tax revenue that the government has left after paying for its spending.

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60
Q

How do you represent public savings?

A

T - G

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61
Q

What is a budget surplus?

A

An excess of tax revenue over government spending.

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62
Q

How is a budget surplus represented?

A

T – G > O

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63
Q

What is a budget deficit?

A

A shortfall of tax revenue from government spending

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64
Q

How is a budget deficit represented?

A

T – G < 0

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65
Q

What is investment?

A

The purchase of new capital.

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66
Q

Explain savings = investment

A

Savings = investment for the economy as a whole as one person’s savings can finance another person’s investment

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67
Q

What is Foreign Direct Investment?

A

An investment that is financed with foreign money but operated by domestic residents

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68
Q

How does FDI effect different measures of economic prosperity?

A

Differently

e.g. a US company is Mexico would raise GDP only a small amount by would raise GNP more.

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69
Q

What are financial markets

A

Financial institutions through which savers can directly provide funds to borrowers

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70
Q

What type of finance does the bond market provide?

A

Debt finance

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71
Q

What type of finance does the stock market provide?

A

Equity finance?

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72
Q

What does the bond market do

A

Allow firms to borrow directly from the public

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73
Q

What is a bond?

A

A certificate of indebtedness

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74
Q

In the bond market, what is the principal?

A

The amount borrowed

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75
Q

In the bond market, what is the date of maturity?

A

when the loan will be repaid

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76
Q

In the bond market, what is the term?

A

the length of time until the bond matures

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77
Q

In the bond market, what is credit risk

A

the probability that the borrower will fail to pay some of the interest or principal

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78
Q

In the bond market, what is tax treatment?

A

the way tax laws treat the interest earned on the bond

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79
Q

Describe the owner of a bond

A
  • a creditor
  • only gets the interest
  • paid before stockholders
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80
Q

What is the stock market?

A

Sell a claim to the profits that a firm makes

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81
Q

What is a stock

A

a claim to partial ownership in a firm

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82
Q

What is the stock index?

A

monitor the overall level of stock prices e.g. Dow Jones, Industrial Average, Standard & Poor’s 500 Index

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83
Q

Describe the owner of the stock

A
  • part-owner
  • gets benefits of profits
  • has a higher risk / return than bonds
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84
Q

What are financial intermediaries?

A

Financial institutions through which savers can indirectly provide funds to borrowers

85
Q

In terms of financial intermediaries, what do banks do?

A
  • take in deposits from people who want to save and use these deposits to make loans to people who want to borrow
  • help creaste a special asset that people can use as a medium of exchange
86
Q

In terms of financial intermediaries, what are mutual funds?

A

an institution that sells shares to the public and uses the proceed to buy a portfolio of stocks and bonds

87
Q

What is the financial system?

A

The group of institutions in the economy that help to match one person’s saving with another person’s investment

88
Q

What is the market for loanable funds?

A

The market in which those who want to save supply funds and those who want to borrow to invest demand funds

89
Q

What do we mean by there is one interest rate?

A
  • return on savings

- cost of borrowing

90
Q

What are loanable funds?

A

All income that people have chosen to save and lend out and to the amount that investors have chosen to borrow to fund new investment projects.

91
Q

The market for loanable funds is governed by supply and demand. Explain

A

(1) Supply
- savings
- directly: buy onds
- indirectly: make a deposit in a bank

(2) Demand
- investment

92
Q

What is the interest rate?

A

The price of a loan

93
Q

What does the interest rate represent?

A

The amount that borrowers pay for loans and lenders receive on their savings

94
Q

What does a high interest rate mean?

A
  • saving is more attractive

- quantity demanded ↓ Quantity supplied ↑

95
Q

What is the nominal interest rate?

A

the interest rate as usually reported within a correction for the effects of inflation

96
Q

What is the real interest rate?

A

the interest rate corrected for the effects of inflation

97
Q

How is the real interest rate calculated?

A

nominal interest rate - inflation rate

98
Q

List 3 government policies that affect the market for loanable funds.

A

(1) savings incentives
(2) investment incentives
(3) Government budget deficits / surpluses

99
Q

In terms of government policies that impact on the market for loanable funds, what do savings incentives do?

A
  • increase the supply of loanable funds
  • reduces the equilibrium interest rate
  • raise the equilibrium quantity of loanable funds
    e. g. reform the tax code to encourage greater saving
100
Q

In terms of government policies that impact on the market for loanable funds, what do investment incentives do?

A

 Increases the demand for loanable funds
 Raises the equilibrium interest rate
 Raises the equilibrium quantity of lonable funds
e.g. investment tax credit

101
Q

In terms of government policies that impact on the market for loanable funds, what does a government deficit do?

A
  • decreases the supply of loanable funds
  • raises the equilibrium interest rate
  • reduces the quantity of loanable funds
102
Q

In terms of govenment policies that impact on the market of loanable funds, what is crowding out

A

a decrease in investment that results from government borrowing

103
Q

What is government debt?

A

the accumulation of past government borrowing

104
Q

In terms of policies that impact the market for loanable funds, what does a budget surplus do?

A

The Government contributes to national savings, increases the supply of loanable funds, reduces the interest rate, and stimulates investment

105
Q

What is money?

A

The set of assets in an economy that people regularly use to buy goods and services from other people

106
Q

What is wealth

A

used to refer to the total of all stores of value, including both money and nonmonetary assets

107
Q

What are the functions of money?

A

(1) Medium of Exchange
(2) Unit of account
(3) Stores value

108
Q

In terms of money, what does medium of exchange mean?

A

An item buyers give to sellers when they want to purchase goods and services.
Avoids the double coincidence of wants.

109
Q

In terms of money, what is a unit of account?

A

The yardstick people use to post prices and record debts

110
Q

In terms of money, what does stores value mean?

A

An item people can use to transfer purchasing power from the present to the future

111
Q

What are the two types of money

A

Commodity money

Fiat money

112
Q

What is commodity money

A

a commodity with intrinsic value

i. e. it would have value even if it wasn’t money
e. g. gold coins, cigarettes in POW camps

113
Q

What is fiat money?

A

money without intrinsic value which is used as money because of government decree
e.g. dollar, euro

114
Q

What is liquidity?

A

the ease with which an asset can be converted into the economy’s medium of exchange

115
Q

How is the money supply calculated?

A

money multiplier x bank reserves

116
Q

What is the money supply / money stock?

A

The quantity of money available in the economy
or
a group of safe assets that households and businesses can use to make payments or to hold as short-term investments

117
Q

How is the money supply measured?

A

(A) Monetary base - the sum of currency in circulation and reserve banks
(B) M1 - sum of currency held by the public and transaction deposits at depository institutions
(C) M2 - M1 + savings deposits, small-denomination time deposits, and retail money market mutual fund shares

118
Q

What are reserves?

A

deposits that banks have received but have not loaned out

119
Q

What is fractional reserve banking?

A

a banking system in which banks keep a fraction of deposits as reserves and use the rest to make loans

120
Q

What is the Reserve Ratio (R)?

A
  • fraction of deposits that banks hold as reserves

- total reserves as a percentage of total deposits

121
Q

How is money created?

A

When banks make loans they create money.

122
Q

If the money supply in an economy is €100 and R = 10%, how much money can be generated?

A

€1,000

123
Q

What is leverage?

A

the use of borrowed funds to supplement existing funds for investment purposes

124
Q

what is bank capital?

A

the resource’s a bank’s owners have put into the institution

125
Q

what is capital requirement?

A

a government requirement that specifies a minimum amoutn of capital, intended to ensure banks will be able to pay off depositors and debts

126
Q

What is the leverage ratio?

A

The ratio of assets to bank capital

e.g. for every dollar that bank owners have contributed, the bank has €20 of assets when leverage ratio is 20

127
Q

What is the money multiplier?

A

the amount of money the banking system generates with each dollar of reserves

128
Q

What is the relationship between the money multiplier and the reserve ratio
e.g. R = 10%

A
  • the money multiplier is the reciprocal of the reserve ratio (1 / R)
  • If R = 10%
  • 1 / 0.10 = 10
  • every €1 in new reserves leads to €10 in additional money
129
Q

What does a high reserve ratio mean for the money multiplier?

A

Smaller

130
Q

What is the central bank?

A

It is an institution designed to

  • regulate banks and ensure the health of the banking system (acts as lender of las resort)
  • to control the money supply
131
Q

What are the functions of a central bank?

A
  • regulates banks and ensures the health of the banking system
  • monitors each bank’s financial condition
  • facilitates interbank transactions
  • acts as a bank’s bank
  • lender of last resort
132
Q

What is monetary policy

A

the setting of the money supply by policymakers in the central bank

133
Q

What are the tools of monetary policy?

A

(1) influence the quantity of reserves

(2) influence the reserve ratio

134
Q

What are the tools for influencing the quantity of reserves?

A

(A) Open-market operations

(B) Lending reserves to banks

135
Q

What are open-market operations?

A
  • the purchase and sale of government bonds
  • an open-market purchase increases the money supply
  • an open-market sale decreases the money supply
136
Q

How does an open-market purchase increase the money supply?

A

When the central bank increases the money supply, it lowers the interest rate and increases the quantity of goods and services demanded for any given price level, shifting the aggregate-demand curve to the right

137
Q

How does an open-market sale decrease the money supply?

A

When the central bank decreases the money supply, it increases the interest rate and decreases the quantity of goods and services demanded for any given price level, shifting the aggregate-demand curve to the left

138
Q

What is the discount rate?

A

The interest rate on the loans that the central bank makes to banks

139
Q

How does the central bank alter the money supply through lending reserves to banks?

A

Higher discount rate: discourages banks from borrowing reserves from the central bank
Lower discount rate: encourages banks from borrowing reserves from the central bank

140
Q

What are the tools for influencing the reserve ratio

A

(A) reserve requirements

(B) paying interest on reserves

141
Q

What does “reserve requirements” mean in terms of influencing the reserve ratio?

A

Raising reserve requirements raises the reserve ratio, lowers money multiplier and decreases the money supply

142
Q

How does paying interest on reserves influence the reserve ratio?

A

The higher the interest rate paid by the Fed on reserves to banks, the higher the reserve ratio, lower the money multiplier, and lower the money suply

143
Q

What are some of the problems that central banks face in terms of controlling the money supply?

A
  • Central banks can’t control the amount of money that households choose to hold as deposits in banks
  • Central banks can’t control the amount of money that bankers choose to lend
144
Q

What is inflation?

A

an increase in the overall level of prices

145
Q

What is deflation?

A

a decrease in the overall level of prices?

146
Q

What is hyperinflation?

A

an extraordinarily high rate of inflation, normally described as inflation exceeding 50% per month

147
Q

What is future value?

A

the amount of money in the future that an amount of money today will yield given prevailing interest rates

148
Q

What is present value?

A

the amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money

149
Q

What is the classical theory of inflation?

A

aka the quantity theory of money
a theory asserting that the quantity of money available determines the prices level and that the growth rate in the quantity of money available determines the inflation rate

150
Q

What is velocity?

A

the rate at which money changes hands

i.e. the nominal value of output (price by real GDP) by the quantity of money

151
Q

What is the calculation of velocity?

A

V = (P x Y) / M

152
Q

What is the quantity equation?

A

M x V = P x Y

Quantity of money times the velocity of money equals the price of output times the amount of output

153
Q

What does the quantity equation show?

A

an increase in the quantity of money must be reflected in one of the other three variables (velocity of money, price of output, the amount of output)

154
Q

What is the equilibrium price level and the inflation rate

A

(1) the velocity of money is relatively stable over time
(2) therefore, when the central bank changes the quantity of money it causes proportionate changes in the nominal value of output
(3) the economy’s output of goods and services is primarily determined by factor supplies and the available production of human tech. Because money is neutral, money does not affect output.
(4) With output determined by factor supplies and technology, when the central bank alters the money supply and induces proportional changes in the nominal value of output, these changes are reflected in changes in the price level.
(5) therefore, when the central bank increases the money supply rapidly, the result is a high rate of inflation

155
Q

What is an inflation tax?

A

When the government prints money, the price level rises, and the money in your wallet is less valuable. Thus inflation tax is like a tax on everyone who holds money.

156
Q

What is the Fisher Effect?

A

The one-for-one adjustment of the nominal interest rate to the inflation rate
(long run perspective, not short run)

157
Q

What is the classical dichotomy?

A

the theoretical separation of nominal and real variables?

158
Q

In terms of the classical dichotomy, what are nominal variables

A

variables measured in monetary units

e.g. dollar prices

159
Q

In terms of the classical dichotomy, what are real variables?

A

variables measured in physical units

i. e. the price of one good relative (divided by) another
e. g. relative prices

160
Q

In terms of the classical dichotomy, what is monetary neutrality

A

the proposition that changes in the money supply do not affect real variables
i.e. the irrelevance of monetary changes to real variables

161
Q

List the costs of inflation

A
  • shoeleather costs
  • menu costs
  • relative-price variability and the misallocation of resources
  • inflation-induced tax distortions
  • confusion and inconvenience
  • arbitrary redistribution of wealth
162
Q

What is the labour force?

A

People in work plus people unemployed seeking work

163
Q

What is the difference between frictional and structural unemployment

A

Frictional unemployment is that which results because it takes time for workers to search for the jobs that best suit their tastes and skills
Structural unemployment is that which results because the number of jobs available in some labour markets is insufficient to provide a job to everyone who wants one

164
Q

What is the solution to demand deficient / Keynesian unemployment?

A

increase aggregate demand

165
Q

What is classical unemployment?

A

people not willing to work at those wages

166
Q

What is the solution to skills mismatch?

A

investment in training programmes or public works programmes

167
Q

What is the solution to not having enough commercially viable enterprises?

A

investment in factories, etc.

168
Q

What are the solutions to location specific unemployment

A

people move

regional development

169
Q

In classical economics, what are the effects of minimum wage legislation?

A

When minimum wage laws force the wage to remain above the level that balances supply and demand
- it raises the quantity of labour supplied
-reduces the quantity of labour demanded
compared to the equilibrium level.
There is a surplus of labour.
- unemployment

170
Q

What are efficiency wages?

A

above-equilibrium wages paid by firms to increase worker productivity

171
Q

What is a recession?

A

a period of declining real incomes and rising unemployment

172
Q

What is a depression?

A

A severe recession

173
Q

What are economic fluctuations?

A
  • economic fluctuations are irregular and unpredictable
  • most macroeconomic quantities fluctuate together
  • as output falls, unemployment rises
174
Q

What does the classical theory (classical dichotomy and monetary neutrality) describe?

A

the world in the long run but not the short run

175
Q

What is the model of aggregate demand and supply

A

the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend

176
Q

What is the aggregate demand curve?

A

A curve that shows the quantity of goods and services that households, firms, the government and customers abroad want to buy at each price level

177
Q

What is the short run aggregate supply curve?

A

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

178
Q

What is the long run aggregate supply curve?

A

A curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

179
Q

What way does the aggregate demand curve slope?

A

downwards

180
Q

What way does the short term aggregate demand curve slope?

A

upwards

181
Q

What way does the long run aggregate supply curve slope?

A

vertical

182
Q

List three ways that the price level affects the quantity of goods and services demanded for consumption, investment and net exports?

A
  • the wealth effect
  • the interest-rate effect
  • the exchange-rate effect
183
Q

List three theories why the quantity of output supplied deviates from its longrun or natural level when the actual price level in the economy deviates from the price level that people expected to prevail

A

(1) Sticky wage theory
(2) Sticky price theory
(3) misperceptions theory

184
Q

What is the sticky wage theory?

A

Nominal wages are slow to adjust to changing economic conditions

185
Q

What is the sticky price theory?

A

Prices of some goods and services adjust sluggishly in response to changing economic conditions

186
Q

What is the misperceptions theory?

A

Changes in the overall price level can temporarily mislead suppliers about what is happening in the individual markets in which they sell their output.

187
Q

What does the quantity of goods and services supplied in the long run depend on

A
  • supplies of labour, capital, natural resources and technology
  • NOT PRICE
188
Q

What causes shifts in aggregate demand?

A

changes in

  • consumption
  • investment
  • government purchases
  • net exports
189
Q

What causes shifts in short run aggregate supply?

A

Changes in

  • labour
  • capital
  • natural resources
  • technological knowledge
  • price level
190
Q

What causes shifts in long run aggregate supply?

A

Changes in

  • labour
  • capital
  • natural resources
  • technological knowledge
191
Q

What is the natural level of output?

A

Yn
The production of goods and services that an economy achieves in the long run when unemployment is at its normal rate
aka potential output, full-employment output, long run level of production

192
Q

What are the two ways of describing monetary policy?

A
  • Money supply

- Interest rate

193
Q

Changes in monetary policy aimed at expanding aggregate demand can be described as either …

A

increasing the money supply
or
as lowering the interest rate

194
Q

Changes in monetary policy aimed at contracting aggregate demand can be described as either

A

decreasing the money supply
or
raising the interest rate

195
Q

What is the Theory of Liquidity preference?

A

Keyne’s theory that the interest rate adjusts to bring money supply and money demand into balance

196
Q

In the Theory of Liquidity, if the interest rate is above the equilibrium the central bank has created …

A

this surplus puts downward pressure on the interest rate

197
Q

In the Theory of Liquidity, if the interest rate is below the equilibrium level …

A

the quantity of money that people want to hold is greater than the quantity the central bank has created and this shortage of money puts upward pressure on the interest rate

198
Q

In the Theory of Liquidity, the forces of supply and demand in the market for money push the …

A

interest rate towards the equilibrium interest rate, at which people are content holding the quantity of money the Central Bank has created

199
Q

What shifts the money-demand curve?

A

An increase in the price level.

200
Q

What is fiscal policy?

A

the setting of the level of government spending and taxation by government policymakers

201
Q

What is the crowding out effect?

A

The offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

202
Q

Explain the crowding out effect

A
  • Increase in Government purchases
  • leads to increased wages for workers/owners of firm
  • leads to increased wages for other firms due to multiplier effect
  • leads to households planning to buy more goods and services (i.e. to hold more wealth in liquid form)
  • because there is an increased demand for money without increasing the supply this leads to increases in the interest rate
  • leads to reduced demand for goods and services
203
Q

What is the multiplier effect?

A

The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending

204
Q

What is the marginal propensity to consume?

A

the fraction of extra income that a household consumes rather than saves

205
Q

What does a marginal propensity to consume of 3/4 mean?

A

for every €1 that the household earns, it spends €0.75 and saves €0.25

206
Q

What are the two types of counter-cyclical fiscal policy?

A

Discretionary fiscal policy

Automatic stabilisers

207
Q

What is discretioanry fiscal policy?

A

incremental, proactive programs/projects undertaken by the government in response to a recession

208
Q

What are automatic stabilisers?

A

Fiscal tools which act immediately to smooth out cycles without any deliberate action by governments at all e.g. income tax, income security programmes

Economics (4 decks)

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