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Economics > Macroeconomics > Flashcards

Macroeconomics Flashcards

1
Q

What are the ways in which economic performance is measured?

A
  • Real GDP (national income).
  • Unemployment rate
  • Inflation rate (general price level)
  • Government budget
  • balance of payments & exchange rate
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2
Q

What are the macroeconomic objectives and state the optimal percentage.

A
  • sustainable economic growth (3-4%)
  • price stability / low inflation (2-3%)
  • full employment / low unemployment (5-0%)
  • external stability (favourable balance of payments and/or exchange rate stability)
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3
Q

Define inflation.

A

Sustained increase in the general price level.

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4
Q

What does the presence of inflation indicate?

A

Prices of goods and services are increasing on average.

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5
Q

Define deflation.

A

Sustained decrease in the general price level.

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6
Q

What is the difference between a change in price level and a change in the rate of inflation?

A

A change in the rate of inflation refers to a change in how fast the price level is rising.

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7
Q

What is disinflation?

A

Disinflation is a form of inflation not deflation. It is when inflation occurs at a lower rate.

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8
Q

What is a price index?

A

A measure of average prices in one period relative to average prices in a reference period known as a base period. They can measure inflation and deflation.

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9
Q

What is the consumer price index?

A

a measure of the cost of living, or the cost of goods and services by the typical household in an economy, and compares the value of a basket of goods and services in one year with the value of the same basket in the base year.

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10
Q

How is the consumer price index constructed?

A

It is constructed by a statistical service which creates a hypothetical basket containing thousands of goods and services consumed by a typical household in a year. The value of the basket is then the value of each item multiplied by the number of each item and adding them up.

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11
Q

How is inflation and disinflation then measured from the consumer price index?

A

inflation and deflation can be expressed as a percentage change of the consumer price index from one year to the other.

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12
Q

Define headline inflation.

A

Headline inflation is a measure of the total inflation within an economy, including commodities such a s food and energy prices which tend to be much more volatile and prone to inflationary spikes.

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13
Q

Define core inflation.

A

Total inflation minus the volatile food and energy components.

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14
Q

Why do a lot of people refer to core inflation rather than headline inflation?

A

Headline inflation may not present an accurate picture of an economy’s inflationary trend as sector-specific inflationary spikes are unlikely to persist.

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15
Q

Define demand-pull inflation.

A

Demand-pull inflation involves an excess of aggregate demand over aggregate supply at the full employment level of output, and is caused by an increase in aggregate demand. In simpler terms, there is a high level of demand for limited resources, implying competition, thus prices are driven up.

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16
Q

Define cost-push inflation.

A

Caused by a fall in aggregate supply resulting in an increase of wages or prices of other inputs.

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17
Q

Define structural unemployment.

A

Structural unemployment occurs as a result of changes in demand for particular types of labour skills, changes in geographic location of jobs and labour market rigidities (e.g. min wage legislation)

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18
Q

Define cyclical unemployment.

A

Occurs during the downturns of the business cycle, when the economy is in a recessionary gap.

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19
Q

Define economic growth.

A

Economic growth is when there is an increase in the level of national production of goods and services between one year and the next. Measured by annual percentage rise in GDP.

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20
Q

What is the circular flow of income (CFY)?

A

It is a macroeconomic model that descrives the flows of resources, goods and services, and income between the parts of the economy.

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21
Q

List all sectors of the economy.

A

Households, firms, financial, government, and overseas.

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22
Q

What are the components of the CFY?

A
  • consumption expenditure
  • savings
  • investments
  • govt expenditure
  • taxation
  • export revenue
  • import expenditure.
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23
Q

What is an injection and how is it calculated?

A

Injections are inflows of money into the circular flow of income. Injections = investment + govt expenditure + exports

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24
Q

What is a leakage and how is it calculated?

A

Leakages are outflows of money from the circular flow of income. Leakages = savings + taxes + imports

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25
Q

When is an economy at equilibrium?

A

When the rate of injections is equal to the rate of leakages from the circular flow.

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26
Q

What is the value of output flow and how is it calculated?

A

The value of total output produced by firms. If each good and service is multiplied by its respective price, we obtain the value of each good and service. The total of these is the value of output flow.

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27
Q

Thus, what does the circular flow of income demonstrate?

A

That in any given period of time, the value of output produced in an economy is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output.

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28
Q

List the three ways aggregate output can be measured.

A

Expenditure approach, income approach, and output approach.

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29
Q

What is the expenditure approach

A

adds up all spending to buy final goods and services produced within a country over a period of time.

30
Q

What is the income approach?

A

Adds up all income earned by the factors of production that produce all goods and services within a country over a time period.

31
Q

What is the output approach?

A

Calculates the value of all final goods and services produced in a country over a time period.

32
Q

What is aggregate expenditure?

A

Aggregate expenditure is the total planned spending on final goods and services at a given price level by economic agents.

33
Q

What is the AE equation?

A

AE = C + I + G + (X-M)

34
Q

Factors affecting consumption expenditure

C

A
  • income
  • interest rates
  • accessibility of credit
  • government policy
  • price expectations
  • savings
35
Q

Factors affecting investment expenditure

A
  • interest rates
  • business expectations
  • government policy
  • technological change
  • infrastructure
36
Q

What is the business trade cycle?

A

Fluctuations in the growth of real output, consisting of alternating periods of expansion and contraction.

37
Q

What is a recession?

A

A contraction that lasts 6 months or more.

38
Q

What can we derive from the understanding of how business trade cycles work?

A
  • Reducing the intensity of expansions and contractions would lessen the problems of rising price levels in expansions and unemployment in contractions.
  • increasing the steepness of the line by achieving more rapid economic growth over long periods of time.
39
Q

What is an indicator

A

An indicator is anything that can be used to predict future financial or economic trends.

40
Q

What are leading indicators?

A

Indicators that signal future events.

41
Q

Give examples of leading indicators.

A

Share prices, building approvals, inventory held by firms, manufacturers new orders, business and consumer confidence, consumer expectations, new employment vacancies, new business start ups, etc.

42
Q

What are lagging indicators?

A

A lagging indicator is one that follows an event. It confirms that a pattern is occurring.

43
Q

Give examples of lagging indicators.

A

Interest rates, consumer debt, unemployment rate, bankruptcies, and inflation rate.

44
Q

What are coincident indicators?

A

Indicators that occur at approximately the same time as the conditions they signify.

45
Q

Give examples of coincident indicators.

A

GDP, manufacturing output, sales of consumer durables, production of building materials, retail sales, job advertisements, motor vehicle sales, money supply, and capacity utilisation.

46
Q

What is economic growth?

A

Economic growth is defined as the increasing capacity of an economy to satisfy the material wants of the population. Economic growth determines the future ‘opportunity set’ of the economy and enables households to achieve a higher standard of living more quickly. There are two types of economic growth: actual growth and potential growth.

47
Q

What is actual growth?

A

Actual growth refers to an actual increase in the output that an economy produces over a period of time. An increase in actual growth is caused by an increase in any factor of aggregate demand (AD).

48
Q

What is potential growth?

A

Potential growth refers to an increase into what the economy could potentially produce if it is using all of its scarce resources. Potential growth is caused by changes in factors of aggregate supply (AS): land, labour, enterprise, and capital. Potential growth can be shown by an outward shift in the economy’s production possibility frontier.

49
Q

How is economic growth measured?

A
  • Economic growth is measured by gross domestic product (GDP) which is the total market value of all final goods and services produced in a country during a period of time.
  • Actual economic growth is measured by the annual percentage change in real national output (GDP).
    Potential economic growth is measured by the estimated annual change in a country’s potential level of national output.
50
Q

What are the causes of actual growth?

A

Actual growth is caused by an increase in any factor of aggregate demand (AD = C + I + G + ( X - M ) ). This is changes in consumer expenditure, investment expenditure, government expenditure, and net exports.

51
Q

What factors can affect consumption expenditure (C)?

A
  • An increase in consumer confidence
  • Increase in disposable income
  • An increase in level of national income increases the purchasing power
  • Lower interest rates
  • Higher accessibility of credit (more monetized system).
  • expectation of prices
  • Increase in taxes.
52
Q

What factors affect investment expenditure (I)?

A
  • Business expectations
  • Interest rates
  • Government policy such as tax
53
Q

What factors affect net exports (X-M)?

A
  • Exchange rate. Appreciation/depreciation of AUD.
  • Terms of trade. If products are in demand, terms of trade rises and so does the price received for the exports, thus value of export sales rises.
54
Q

What are the causes of potential growth?

A

Changes in factors of aggregate supply, which is land, labour, enterprise, and capital.

55
Q

How does land help cause potential growth?

A
  • Discoveries of new raw materials and key resources (e.g. oil) increase an economy’s capacity to produce.
56
Q

How does labour help cause potential growth?

A
  • A growth in the size of the working population (through net immigration or birth rates exceeding death rates) enables an economy to increase its potential output (if more people are working, more goods and services can be produced)
  • Employing a division of labour allowing specialisation. This refers to how production can be broken down into separate tasks that is undertaken by different workers / machines who are specialised in those tasks, and then combining the outputs. This is much more efficient as workers can work within their capabilities and become very good at their specific task rather than being average over all tasks, thus increasing productive capacity.
57
Q

How does capital help cause potential growth?

A
  • Investment in new technology increases the potential output for all goods and services as they are more efficient than old technology (quality, quantity, and speed could’ve improved)
  • Employing new production methods such as robots…
  • Investing in capital goods rather than consumer goods, achieves long run growth in the economy as increased investment in capital goods enables more output of consumer goods to be produced in the long run. Standard of living would initially be reduced in the short run as resources are being diverted away from private consumption, but in the long run, standard of living would increase by more than if the economy had not made that short-term sacrifice.
  • Investment in human capital (training and education) which develops more skills for workers allowing them to be more productive and efficient.
58
Q

How can land factors reduce productive potential?

A

If key non-renewable resources, like oil, are exhausted, the productive capacity may be reduced. This can occur as a result of the application of more efficient production methods or the over-specialisation in producing goods from non-renewable resources. Production being too efficient does not allow for sustainable growth.

59
Q

How can labour factors reduce productive potential?

A

If there is a natural disaster, a lot of people can die, thus a reduction in the labour workforce which decreases an economy’s capacity to produce. Same goes for war.

60
Q

How can capital factors reduce productive potential?

A
  • Natural disasters and war can destroy infrastructure thus decreasing an economy’s capacity to produce.
  • Failure to invest in human (training and education) will reduce an economy’s productive capacity as the quality and productivity of labour relies on the acquisition of new skills.
  • Failure to invest in real capital will reduce an economy’s productive capacity as real capital, such as machinery and equipment, wears out with use and its productivity falls over time.
61
Q

Explain the positive effects of economic growth.

A
  • Increase in national income (higher disposable income)
  • More business and employment opportunities
  • Increase in tax revenue
  • Positive externalities (public and merit goods)
62
Q

Explain the negative effects of economic growth.

A
  • Structural unemployment
  • Strain on govt. Budget (pay welfare and less revenue)
  • High suicide and crime rates
  • Congestion
  • Environmental problems
63
Q

What is GDP?

A

Gross Domestic Product (GDP) is the total market value of all final goods and services produced in a country during a period of time. Nominal GDP is the value of output expressed in the prices of the day (current prices). Real GDP, however, is adjusted to remove the effect of price increases (or inflation), and so, overtime, real GDP tells us what the value of output is worth as if there had been no price changes in the economy.

64
Q

What is inflation? Define cost-push and demand-pull.

A

Inflation is the sustained increase in the general price level. Cost-push inflation is when rising production costs are passed on to consumers who then pay higher prices on goods and services.
Demand-pull inflation is when aggregate demand is rising at a rate that is not matched by aggregate supply. In simpler terms, there is a high level of demand for limited resources, implying competition, thus prices are driven up.

65
Q

What are the causes of cost-push inflation?

A

Cost-push inflation is caused by higher costs of production which are passed onto consumers who then pay higher prices for goods and services. An increase in price of any of the factors of production (land, labour, enterprise, capital) may have caused this. For example, the exhaustion of natural non-renewable resources (land), such as crude oil, makes it more scarce whilst demand remains the same. Since output can’t reach demand, prices are pushed up. As crude oil prices become more expensive so does the cost of energy and transport.

66
Q

What are the causes of demand-pull inflation?

A

Demand pull inflation is caused by aggregate demand rising at a rate that is not matched by aggregate supply (output of goods and services). An increase in any factors of AD (consumer expenditure, investment expenditure, govt, etc.) can cause this to happen. For example, a decrease in interest rates decreases the cost of borrowing thus encouraging consumers to take out loans and spend rather than save. This increases consumer expenditure, and with all other factors remaining constant (or rising too), thus increasing aggregate demand and causing demand-pull inflation.

67
Q

What are the effects of inflation?

A
  • loss of confidence in the currency as purchasing power falls. Ppl preserve their wealth by buying assets. Domestic currency then depreciates.
  • Redistribution of income (variable income workers vs fixed) (debtor vs lender) (businessmen vs workers) (savers vs asset buyers)
  • Inflation can lead to loss of potential sales due to changing menu costs. As the general price level changes, businesses would want to change their menu prices accordingly so that they don’t lose profit and the profit margin remains the same. But a change in menu price can involve costs such as reprinting menus, and it can make customers more apprehensive of buying the good or service at the new price. The hesitancy can result in loss of potential sales as well as the cost incurred from changing the price.
68
Q

What are the effects of mild inflation?

A
  • Mild inflation where input costs rise slower than the product price stimulates production due to high unexpected returns. This leads to an increase in investment and thus an increase in employment and productive capacity which increases the national income. However, when prices and profits rise, so does complacency and thus efficiency decreases and there is no incentive to conduct research and development.
  • During mild inflation, the general price level rises and thus so does (variable) incomes and profits, meaning tax receipts then government revenue rise. If government revenue rises faster than government expenditure there is a budget surplus.
69
Q

What are the effects of high inflation?

A
  • High inflation rates are associated with uncertainty regarding the future, making planning difficult which has adverse effects on planned capital investment, and thus having a negative effect on productive capacity and economic growth.
  • Creeping or hyperinflation where input costs rise faster than product prices can lead to businesses closing down as they start operating at a loss. However, surviving firms are forced to be more efficient in order to remain in business.
70
Q

What is unemployment?

A

Unemployment is defined as the situation in which people who are willing and able to work, but are unable to find work.

Economics (3 decks)

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