Macroeconomics part 1 Flashcards
What are the main objectives of government macroeconomic policy?
economic growth,
price stability (linked to inflation),
minimising unemployment
stable balance of payments on current account
balancing the budget
achieving an equitable distribution of income
What is economic growth?
The rate of change of a country’s output over a period of time. measured by GDP
What is the key measure for economic growth?
Gross Domestic Product
What are the benefits of steady economic growth?
- Job creation
- rising incomes
- improved standards of living
- improved international competitiveness of the UK economy
- Multiplier and accelerator benefits
- Improved confidence of consumer spending, and business investing
- Lower government spending on job seekers allowance -and associated benefits
- Tax revenues likely to increase allowing the government to reinvest in infrastructure or spend on public services
Why do governments wish to pursue a policy of low unemployment?
Unemployment is seen as a waste of resources and
It’s an indicator of poor economic performance. Countries with strong economic growth have low unemployment.
What are the benefits of low unemployment?
- Higher consumption and aggregate demand
- Higher incomes
- Improved standards of living
- higher tax revenue for government
- lower government spending on unemployment related welfare
- improved productivity of UK economy
- Reduced poverty (absolute and relative)
- Social benefits (reduced crime, improved well being)
What is inflation measured by?
Consumer price index
What is the bank of England inflation target?
2%
What is balance of payment?
It measures the UK’s records of economic activities with other countries
What is a budget deficit?
Occurs when government spending is greater than tax revenues.
(Reducing the deficit can be achieved by tax increases or cuts in government spending or a period of economic growth which brings about a rise in direct and indirect tax revenues)
Describe the economic cycle
BOOM, Downturn, Recession, recovery.
The graph is Real GDP (y axis) against Time (x axis). A shallow positive gradient is the trend growth rate.
Descirbe the circular flow of income diagram
Inside: Households—-Taxes–> Government—Govnt Purchases—> Firms–Taxes—>Government—Social welfare—>Housholds
Outside: Households—Purchase goods and services
—> deamdn for Firms—Wages dividends, interest, profit and rent–>Inocme of households
At top: Imports–>Rest of world–>Exports
What are 3 injections to the circular flow of income?
Investments, exports of goods, Governemnt spending
What are 3 leakages from the circular flow of income?
Savings, taxation, imports
Formula for Aggregate demand?
C+I+G+(x-m) C=Consumption I=Investemnt G=Government spending x=Exports m=Imports
The multiplier effect
The mulitplier effect occurs when an initial injection into the economy, or ciricular flow of income, causes a larger final increase in the level of real national income output
How do you calcuate the multiplier?
K=Change in Y/Change in J
K=Mulitplier
Y=income
J=injections
Give a fiscal policy to reduce unemployment
Income tax reduced... more disposable income... Consumer spending... Increase in firms demand... Employ more workers... UNEMEPLOYMENT FALLS
Give a monetery policy to maintain growth
Lower interest rates... borrowing for investments is cheaper... Improved technology... Increase producitivty... GROWTH
Monetary policy to reduce inflation
Increase interest rates…
Increase cost of borrowing…
discourage spending…
LOWER INFLATION, but low economic growth
What is the FTSE 100 index?
Measures the value change of the biggest 100 companies on the LSE
What is an index number?
An economic data figure reflecting price or quantity compared with a standard or base value. The base usually equals 100 and the index number is usually expressed as 100 times the ratio to the base value.
What is measure with index numbers?
House price index FTSE index CPI GDP Exchange rate index Employment/unemeployment Wages
What is the base index?
100
What do index numbers measure?
changes in a representative group of date
if the index number is 102 what does it mean?
2% rise from the base year
if the index number is 98 what does it mean?
2% fall from the base year
Aggregate demand
The total demand for all goods and services in an economy at any given price level over a period of time
Positive mulitplier
Initial increase in an injection leads to a greater final increase in real GDP
Negative mulitplier
Initial decrease in injection leads to a greater final decrease in real GDP
Give an example of a negative multiplier
Savings increase so people are spending less money on businesses, this could lead to business not being able to employ many workers. So injections would further fall which would lead to a greater final decrease in real GDP
Describe an AD graph
Price level (y axis) against Real national output (x axis) neagtive gradient labeled AD
What causes an expansion in AD?
Fall in price level
What casues a contraction in AD?
Rise in price level
How would you describe the realtionship between AD and price level?
Inverse
What causes AD to shift left? (Fall in AD)
Fall in net exports (m>x)
Cut in Governemnt spending (G)
Higher interest rates
decline in household welath and confidence
What causes AD to shift right? (rise in AD)
depreciation of the exchange rate
cuts in direct and indirect taxes
increase in house prices
expansion of supply of credit + lower interest rates
Monetary policy
Involves chaning the interest rates and influencing money supply
Fiscal policy
Involves the governemtn chainging tax rates and levels of governemnt spending to influence aggregate demand in the economy
Base interest rates
Set by bank of england, it is the rate of interest used by commercial banks as the basis for their lending rates
(If interest rates rise consumption would fall as people save more, borrowless.)
CPI
Measure of the price level based on the prices of a collection of goods and services that are designed to reflect the consumption basket of the average consumer.
If the price level increases, consumption falls
Disposable income
Household income after the deduction of taxes and the addition of welfare benefits
More disposable income, more consumption
FTSE 100 index
THe FTSE 100 tracks the share prices of the 100 largest companies listed on the LSE
If share prices increase consumption rises as people have more consumer confidence
Saving ratio
Is the % of disposable income saved rather than spent
eg. if person has an annual income of £25k and save £2.5k then the saving ratio is 10%
VAT
A tax on consumption, which is paid to the tax authorities by the seller on behalf of the consumer
If it rises, consumption falls
Marginal propensity to consume=
change in consumption/ change in income
Aggregate supply
Quantity of goods and services that producers in an economy are willing and able to supply at a given level of price
Short run aggregate supply
Shows the total planned output when prices can change but the prices and productivity of factor inputs eg. wage rates and the state of technology, are held constant
What are the factors of production?
Land
Labour
Capital
Enterprise
What shifts aggregate supply?
Unit wage cost
Indirect/direct tax
Capital goods
Price of raw materials
When does macroeconomic equillibrium occur?
When AD=AS
Boom
A period when the rate of growth of real GDP is fast and higher than the longterm trend
Business cycle
SR fluctations of national output (real GDP) around its long term trend
Slowdown
A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate
Recession
A period of at least six months when an economy suffers a fall in output. Or a broadly-based contraction in output, employment, investment and confidence
Recovery
A phase of the cycle, after a reccesion, during which real GDP starts to increases and unemployment begins to fall
Depression
a PROLONGED DOWNTURN IN THE ECONOMY AND WHERE A NATION’S gap FALLS BY AT LEAST 10%
Spare capacity
Access to unutilised resources for production
Negative out put gap
When level of actual GDP is less then potential GDP
Some factors resources are under utilised e.g.. demand deficit unemployment
Main problem is likely to be higher unemployment and possible deflation rise
positive output gap
Actual GDP is greater than the estimated potential GDP
Some resources working beyond usual capacity (like overtime)
Main problem is rising demand pull and cost push inflationary pressures
Inflation targets set by?
Government
Interest rate set by?
Monetary Policy Committee (MPC)
The accelerator principle
illustrates the relationship between planned capital investment and the rate of change of National income
Real interest rates
real interest rate is the cost of borrowing and/or reward for saving money as a percentage of sum
borrowed/saved which has been adjusted to take into account the rate of inflation
