Macroeconomics Theory Flashcards
Define full emp.
What does it always accept?
✅ Emp. level at market clearing wage rate
✅ no. workers firms want to hire = no. workers wanting to work.
✅ ~ 3%
✅ Accepts that always some unemp., e.g. frictional unemp.
What 2 Δ affect Government Spending?
✅ Pol. priorities
✅ Econ. priorities
Define deflation
✅ Sustained decrease in APL in an econ.
What economist advocated more government intervention? What was his justification?
✅ Keynes
✅ Argued gov could stabilise business cycle + regulate econ. output, esp. during a recession
How do Δ interest rates affect consumption?
✅ ⬇️ int/r => ⬇️ cost of borrowing + reward for saving => inventivises consumers to spend.
How does high inflation expectations => cost-push inflation?
✅ ⬆️ inflation expectations => workers push for a wage ⬆️ to incorporate inflation so real wage doesn’t ⬇️ => $ of prod ⬆️ => reflect in prices
✅ Self-fulfilling prophecy
Define Seasonal unemp.
✅ Unemployment arising in different seasons of the year, caused by weather /holidays
✅ e.g. end of the Christmas shopping period
Problems with measuring inflation with CPI
✅ Only considers a 'typical' household - regional / seasonal / ethnic / different class variations not taken in account. ✅ Errors in data collection ✅ Changes in the goods in the basket make comparisons over time + int. ⬆️ difficult / less accurate ✅ Needs to be considered alongside many other measurements of the econ - e.g. commodity $.
How to shift LRAS rightward (general)?
✅ Improve an econ’s prod. potential (outwards shift of PPC)
✅ ⬆️ factors of prod
✅ Existing factors of prod. ⬆️ efficient.
✅ ⬆️ mobility of factors of prod.
How do Δ in income affect consumption?
Expectation?
✅ ⬆️ income = ⬆️ purchasing power => ⬆️ C.
✅ ⬆️ confidence to spend + still feel financially secure.
✅ Sometimes even expectation of ⬆️ income => ⬆️ consumption.
3 criteria for someone to be unemp.
✅ Willing + able to work
✅ Jobless
✅ Actively looking for work
How is inflation measured?
✅ CPI
✅ Representative ‘basket of goods’ + services , $ tracked over time.
✅ Basket of goods is what a typical household in that country consumes.
✅ Basket of goods vary from country to country
What is AS?
✅ Total amt. of g/s that all industries in an econ. will produce at a given $ level.
What assumptions does the circular flow of income make?
✅ Households own all the factors of production + the env: sometimes firms can own land/capital, and nobody owns the env.
✅ Firms provide all g/s. Unpaid labour + care not a factor, even though help make paid labour more efficient.
✅ National Income = National Output = National Expenditure: but businesses will hike up prices and consumers will save some of their income.
2 Benefits of unemp. to firms?
✅ ⬆️ productivity (as only best workers remain)
✅ ⬇️ pressure on wages
How does fall in exchange rate => cost-push inflation?
✅ ⬇️ in exchange rate (home currency has lower value compared to other currencies) => ⬆️ price of imports => because many factors of prod. are imported, $ of prod ⬆️ => firms ⬆️ $ to avoid ⬇️ profit margins
How do in ⬇️ Business taxes affect Investment?
✅ ⬇️ business taxes =>⬇️ costs of production + ⬆️ amt. left for investment.
What are the two types of govermental policy?
✅ Expansionary
✅ Contractionary
Define inflation
✅ Sustained ⬆️ in APL in an econ.
2 key reasons which prevent workers who are laid off from immediately filling job vacancies
✅ Geographical Immobility of Labour
✅ Occupational Immobility of Labour
2 Advantages of using GNI to measure econ. welfare?
✅ Easy to calculate, just from income tax paid
✅ Quite accurate, but only if a vast majority of the economy is formal => more suitable for more dev. econ.
Disadvantages of using Monetary Policy?
✅ Time lag: Up to 18 months for full effect of int/r change to be take place
✅ Blunt instrument: difficult to target certain groups. Change in int/r will affect every actor in the economy, so there will be unwanted effects
✅ Technical limitations: 0 or -ve int/r create new problems, e.g. there will be no one buying government bonds because buyers of the bonds will get less money than they bought it for.
How to measure short term econ. growth?
✅ Annual % change in real GDP.
✅ Mostly from AD
Example of regional unemp.?
✅ N. UK, 1980s, coal mines shut down => regional unemployment
✅ Currently, UK steel industry decline, because climaate change policies increase prod. $, China int. comp + strength of the £ => large-scale layoffs in industry in Wales + N. England
What is geographical immobility of labour?
When workers are unwilling or unable to move from one place to another in search of work.
What do Keynesian economists believe about real wage unemp.?
✅ Involuntary - Workers willing to work but no jobs available
✅ Bc caused by wage stickiness over which workers have no control.
How does Income of Trading Partners affect Levels of Imports and Exports?
✅ Income of Trading Partners ⬆️ => foreign consumers ⬆️ disposable income to spend on g/s, ⬆️ demand for exports
✅ e.g. Large emerging consumer market like China as they became richer => more willing and able to buy g/s => provided ⬆️ exports for developed markets like the US.
6 Disadvantages of inflation?
✅ ⬇️ purchasing power
✅ ⬇️ value of savings
✅ int/r to ⬆️ to keep +ve.
✅ ⬇️ int. comp. bc currency depreciation, so ⬆️$ of prod.
✅ Uncertainty - ⬇️ likely to borrow or spend money
✅ Labour unrest - workers demand ⬆️ wages to keep pace => wage crisis spiral
5 Advantages of Deflation?
✅ Some kinds of deflation involves lower prices because of ⬆️ productivity/better technology. e.g. If AS curve shifts to right, ⬇️APL but ⬆️ GDP.
✅ Improved int. comp. bc currency strengthens, so imports become cheaper
✅ Benefits the lender as the value of the interest ⬆️ (fixed loans)
✅ Savings ⬆️ in value
✅ ⬆️ consumer purchasing power
What is int. unemp.?
✅ Unemployment due to firms carrying out their work abroad, or simply because firms + consumers to import rather than buy domestically.
1 Benefit of unemp. on econ/gov?
✅ Reduced inflationary pressure.
What 7 Δ affects consumption?
✅ Income ✅ Int/r ✅ Wealth effect ✅ Household Debt ✅ Expectations of future price level ✅ Personal Taxes ✅ Unemployment
What is expansionary policy?
✅ Tools that seek to stimulate an econ. by ⬆️D , to be used to prevent or moderate economic downturns and recessions.
5 Disadvantages of using GDP to measure econ. welfare?
✅ Income Distribution: Doesn’t take into account inequality, e.g. China has massive GDP but extremely high inequality.
✅ Externalities: Ignores the -ve externalities of g/s that contribute to GDP. Not a reliable indicator of social welfare. e.g. plastic bag production
✅ Informal economy transactions not counted: e.g. Roadside stalls, unpaid care, criminal activity.
✅ Service-driven econ value not fully realised: e.g. Google, doesn’t take into account the value added to the economy.
Communication / searching for information has immense value, but doesn’t directly contribute to the econ.
✅ Composition of Output - Doesn’t tell us what is being produced and who it benefits.
What is important when considering economic growth?
✅ Output gap
✅ Position of AD curve on LRAS. Continuous ⬆️ AD will yield smaller and smaller ⬆️ in the short-run econ. growth (unless accompanied by shifts in the LRAS curve).
✅ So for econ. growth to be sustainable, must have outwards shift of LRAS (⬆️ in productive potential of the econ.)
Causes of cost-push inflation
✅ ⬆️ $ of prod.
- ⬆️ $ of prod => firms ⬆️ $ of g/s to avoid falling profit margins => inflation
✅ ⬆️ Inflation expectations
✅ ⬇️ exchange rate
2 Disadvantages of fiscal policy?
✅ gov. spending > taxation (budget deficit) not sustainable in long run
✅ Neoclassical LRAS, any rightwards shift of AD is ⬆️ GDP) and inflationary
Pros / cons of using GDP / GNI per capita?
✅ Allows economists to compare the economies of various countries, relative to the size of their pop.
✅ Same disadvantages as normal GDP/GNI.
Advantages of Economic Growth
✅ ⬆️ real incomes => ⬆️ living standards
✅ ⬆️ wealth => can be used to ⬇️ poverty
✅ ⬆️ ‘fiscal dividend’ - Tax revenues for government, used to correct market failures, provide infrastructure, ⬆️ econ. welfare of the community.
✅ ⬆️ profits => ⬆️ investment
✅ Job creation => ⬆️ employment
✅ ⬆️ civilised communities, who take action to improve env.
✅ ⬆️Life span => ⬆️ productivity
✅ ‘Virtuous circle’ - ⬆️ business confidence => ⬆️ investment, ⬆️ int. competitiveness => ⬆️ profits and so on.
Define Induced Investment
✅ When firms spend on capital in order to ⬆️ their output to respond to higher demand in the econ.
✅ e.g. buy another new computer in addition to the other comp. to ⬆️ output.
Define disinflation
✅ The slowing of the rate of inflation in an econ. over time (still +ve)
Define Gov. Spending
✅ Spending by the public sector on g/s
✅ e.g. edu, health, defence
✅ Depends on the gov’s econ/pol priorities
How does the Labour Force Survey measure unemp.?
✅ Sample of pop. questioned about employment status.
✅ Gives figure of about 1/2 million more than claimant count
2 main reasons why an econ. grows.
✅ Physical Capital Improves
✅ Human (Labour) Capital Improves
✅ Either increase in the quantity/quality
Define economic growth
✅ Long-term expansions of a country’s productive potential
How do Δ levels of household debt affect consumption?
✅ ⬇️ debt => ⬆️ disposable income
✅ Borrowing $ to spend is good for GDP in the short term, but in the long term it deprives individuals of future consumption because they have to pay interest on top of that. So there will be a short run right-ward shift of AD which might result in a later leftward-shift as debt is repaid.
How does fiscal policy work?
✅ ⬆️ gov. spending => AD shifts right => ⬆️ APL
✅ ⬆️ gov. spending => ⬆️ AD more than the gov. spending because of multiplier effect
How do Δ consumer confidence affect consumption?
✅ ⬆️ consumer confidence => ⬆️ marginal propensity to consume.
Define emp.
✅ The situation where employable individuals are involved in the production of g/s, in return for a wage.
Human capital exchanged for $.
3 methods of measuring GDP and define each
✅ Output Method: add value of all domestically produced final g/s
✅ Income Method: add all incomes generated in the domestic production process
✅ Expenditure Method: add all expenditures made on domestically prodcued final g/s
How to shift AD curve?
✅ Δ any of the 5 components of AD:
✅ C + I + G + (X-M)
✅ demand - side policies
3 Disadvantages of deflation?
✅ Unemployment
✅ Decreased investment
1 benefit of unemployment on households?
✅ ⬆️ free time
What is real wage unemp.?
✅ When the minimum wage > market equilibrium => surplus of labour supply => unemployment
What is the LRAS curve always bounded by?
Why is this?
✅ A highest possible output.
✅ Infinite output not possible bc scarcity of resources.
Why do classical economists believe about emp. in the long run?
✅ Bc believe that wages are flexible.
✅ Any excess supply of labour (unemployment) eliminated in the long run by wage rates adjusting ⬇️ i.e. cyclical unemployment is only temporary.
What is the wealth effect?
✅ Wealth is NOT income. Refers to assets, e.g. ownership of property, bonds, shares, etc.
What causes shifts in SRAS?
✅ $ of costs of production (capital, labour, land, entrepreneurship)
✅ Indirect taxes (e.g. VAT)
✅ Subsidies
✅ Technical progress (improve quality + quantity of capital)
Disadvantage of using Claimant Count to measure unemp.?
✅ People won’t claim unemployment benefits, because e.g. frictional unemployment is very short-term, or hassle to sign all the forms.
How to use income method to measure GDP?
✅ Value of factors of prod. that are sold.
✅ Add all registered income earned by groups when factors of prod. are sold in resource markets.
What is an example of how Technology affects Investment?
✅ e.g. hydroponics
✅ can grow plants w/o soil + less water
✅ ⬇️ costs of production, AD shift rightward.
Define monetary policy.
✅ Policy carried out by the central bank to control $ supply + achieve sustainable econ. growth.
How do Exchange Rates affect Levels of Imports and Exports?
SPICED
✅ Strong Pound Imports Cheaper Exports Dearer
✅ Relative value of currencies determine relative prices of g/s.
✅ When exchange rates appreciate => home currency worth more than foreign currency => home goods relatively more expensive for foreign countries to buy => goods => exports are less competitive abroad, but also makes it cheaper to import g/s => AD shift depending on changes in the net exports level
✅ Only works ceteris paribus - no inflation in either country.
What is wage stickiness?
✅ When wages are not able to adjust freely to market forces.
✅ because e.g. wages are typically in long-term fixed contracts
Examples of hidden unemp.?
✅ People who have been looking for a job for a long time.
✅ Part-time workers who want to be full-time
✅ Workers who are overqualified for their jobs.
Define AD.
✅ Total spending on g/s in period of time at given average $ level.
1 Advantage of fiscal policy?
✅ A sharper economic instrument to use because the gov. can target certain groups in its policy, e.g. target only ⬇️-income people
Define recession.
✅ Period of -ve econ. growth lasting at least 2 consecutive quarters.
What is cost-push inflation?
✅ Inflation caused by leftwards shift in AS curve
How do Δ in personal taxes affect consumption?
✅ ⬇️ Income taxes => ⬆️ disposable income => ⬆️ C
How does the Claimant Count measure unemp.?
✅ Measures unemployment claim counts.
Pros / cons of using real GDP/ real GNI?
✅ Easier to make more accurate comparisons over time.
✅ Same disadvantages as normal GDP/GNI.
How would increased int/r decrease AD?
✅ ⬆️ int/r => borrowing disincentivised, saving incentivised => ⬇️ in consumption/investment => ⬇️ AD
5 Advantages of Inflation?
✅ Encourages consumers to spend quickly => econ. growth
✅ Allows adjustment of real wages/prices
✅ Keeps econ. away from deflation, which is much worse bc causes recessions
✅ Benefits borrowers as ⬇️ interest value (fixed loans)
✅ Associated with ⬇️ levels on unemployment => good for social health
Is demand-pull or cost-push inflation is preferred by economists and why?
✅ Demand-pull
✅ ⬆️ in output, so economic growth..
5 unemp. consequences on econ/gov?
✅ ⬇️ int. comp. ✅ ⬇️ tax revenues (fiscal costs) ✅ ⬇️ of output (economy wide) ✅ ⬆️ spending on unemployment benefits ✅ -ve multiplier effects
Define Net Exports.
What is it also called?
✅ Export Revenue - Import Revenue.
✅ aka the balance of trade.
Why do Neoclassical economists argue the LRAS curve is straight? (free market LRAS)
✅ Real GDP determined purely by supply-side factors, e.g. labour, land….. so any shift in AD purely inflationary in long run.
✅ Believe econ. is self correcting in the long run, so no need for gov. intervention.
✅ They believe in the long run there is perfect information + perfect flexibility of $.
Define Investment
✅ The addition of capital stock to the econ.
✅ Only carried out by firms when they spend on capital that they won’t sell. If individuals invest, they are actually saving bc putting money away.
e.g violin shop buying a violin making machine IS investment, buying wood to make the violins IS NOT investment
How do Δ in Interest Rates affect Investment?
⬇️ Int/r => ⬇️ cost of borrowing + reward for saving => ⬆️ I
Causes of Structural unemp.
✅ Labour market rigidities such as minimum wage laws. Wage rates set above equilibrium level increases unemployment because at higher price, difference between quantity demanded and supplied of labour.
✅ Long-run decline ⬇️D in a whole industry => ⬇️ unemployment because of int. comp.
✅ Evolving structure of an economy => occupational immobility of labour => unemployment . eg. automation of factory jobs but creation of new jobs in robot engineers, but laid off factory worker cannot easily be trained to be a robot engineer.
What is demand-pull inflation?
✅ Inflation caused by rightwards shift in AD curve
What do Keynesian economists believe about emp. in the long run?
✅ Believe that market failure will result in price + quantity rigidities => econ’s long run equilibrium may be < than potential output
2 Advantages of using green GDP measuring econ. welfare?
✅ Monetises the costs of the loss of biodiversity _ climate change =>
✅ provides a way where we can take adv. of capitalistic greed and still prevent the tragedy of the common.
How do Δ in unemployment affect consumption?
✅ Unemployment ⬇️ real annual income => ⬇️ ability to spend on g/s.
✅ Even the threat of being unemployed is a big factor of concern for people.
Problems when measuring unemp.?
What is the effect of these disparities on gov policy?
✅ Hide inequalities between groups of people, e.g.
- Geographical Disparities
- Age Disparities
- Ethnic Differences
- Gender Disparities
✅ This means that government policy could be more efficient and less broad
What is GNI and how to calculate?
✅ Total domestic + foreign output claimed by domestic residents.
✅ GNI = GDP + net foreign income.
✅ Net foreign income = income from residents working abroad - income from foreign workers working domestically
How does Changes in Trade Policies affect Levels of Imports and Exports?
✅ Can change restrictions on how g/s are imported, or change the way they support their own industries with subsidies/ tax breaks. ✅ Protectionism ✅ e.g tariffs ✅ e.g. import quotas ✅ e.g. subsi
4 Disadvantages of using GNI to measure econ. welfare?
✅ Inequality: doesn’t take into account, because it is only a sum of all incomes
✅ Informal econ: doesn’t take into account => not suitable for less dev. econ.
✅ USD: same amt. of $ can have a diff. value in diff. countries.
✅ Population: Larger pop. = higher GNI, can’t use to compare standard of living .
What is Regional unemp.?
✅ Structural unemployment which is concentrated in a particular geographical area
5 macroeconomic objectives
✅ Low unemployment ✅ Low and stable rate of inflation ✅ Equal distribution of income ✅ Strong econ. growth. ✅ Favourable balance of payments position
What is the central econ. problem?
✅ Scarcity: There are infinite human wants, but finite resources on Earth.
How do economic priorities Δ?
This affects Government Spending
✅ Δ based on health of econ.
✅ Current + future predictions of the capacity of the econ. to achieve macroecon. goals, e.g. low unemployment + low and stable inflation.
✅ Gov may ⬆️ spending on social welfare programmes, such as employment, during a recession. e.g. During 2008, France gov did this.
What do classical economists believe about emp. in the long run?
✅ Believe that markets will clear, that prices + quantities adjust to changes in the forces of supply and demand that the econ. produces its potential output in the long run.
2 ways unemp. is measured
✅ Labour Force Survey
✅ Claimant Count
What does the SRAS curve assume?
✅ Firms are aiming to maximise profits
✅ Short run, $ of producing extra units of output ⬆️ as firms produce ⬆️ output (law of diminishing returns)
✅ The capability of firms to ⬆️ output is fixed by limited amt. of the factors of prod. available
How do in Technology affect investment?
✅ Investment in tech innovation => resources used ⬆️ efficiently => ⬇️ costs of production + market growth => ⬆️ capital to use for I
✅
3 Examples of monetary policy?
✅ int/r
✅ Money supply (QE)
✅ Changing exchange rates
What is Green GDP?
✅ Index of econ. growth with the env. consequences of that growth factored into the conventional GDP.
How does deflation lead to unemployment/decreased investment?
✅ Deflation causes consumers to delay consumption and firms to delay investment => ⬇️ in output => ⬇️ workers needed => unemployment
✅ Investment also affected by uncertainty + ⬇️ in business confidence
What is hidden unemp.?
✅ Jobless persons who aren’t included in official unemployment figures.
2 types of inflation
✅ demand-pull
✅ cost-push
How do political priorities Δ?
What do political priorities influence?
This affects Government Spending.
✅ Δ as new gov. are elected.
✅ Influence gov. expenditure, e.g. distribution of tax, edu. healthcare, defence, welfare, etc.
4 Advantages of using GDP to measure econ. welfare?
✅ Easy to measure => helps policymakers to easily adjust + implement econ. policy.
✅ Easy to compare countries, bc widely used.
✅ Easy to make comparisons across time
✅ Good at measuring the production of goods and services
What are the 5 indicators of econ. welfare?
✅ GDP ✅ GNI ✅ GDP/GNI per capita ✅ Real GDP/GNI ✅ Green GDP
4 Types of Unemp.
✅ Seasonal
✅ Frictional
✅ Structural
✅ Cyclical
Define fiscal policy
✅ Policy carried out by the government to influence econ. conditions.
✅ e.g. changing tax policies
Define Cyclical unemp.
aka?
✅ Unemployment fluctuations because of the business cycle.
✅ aka Keynesian or ‘demand -deficient’ unemployment.
What does the LRAS curve reflect?
What is it not influenced by?
✅ Economy’s productive potential
✅ Not influenced by $ level.
What 4 Δ affects Investment?
✅ Int/r
✅ Technology
✅ Business Expectations / Confidence
✅ Corporate taxes
What causes short-run econ. growth?
✅ Usually demand-side changes (C+I+G+(X-M))
What are the 2 types of government policy that target AD?
✅ Fiscal Policy
✅ Monetary Policy
(Gov almost always focus on shifting AD, not AS curve)
Disadvantages of Economic Growth
✅ Scarcity problems arising from consumer society
✅ Opportunity costs of increased capital investment
✅ Risk of demand-pull inflation
✅ Overexploitation of scarce, finite resources
✅ Growth may be linked with rising inequalities in the distribution of income/wealth (Kuznets curve)
✅ Risks of env. damage
✅ In its early stages, it leads to rapid pop growths, which leads to more hunger + poverty
Define Consumption
✅ Total spending by consumers on domestic g/s.
How to shift LRAS rightward (specific)?
✅ Capital:
- Improve tech, e.g. 5G, more powerful comp
- ⬆️ / improvement in materials, e.g. ⬆️ silicon = ⬆️ microchips
- Improve production techniques
✅ Entrepreneurship:
- Better edu
- Less barriers to entry
- Democratic gov / capitalist system
✅ Land:
- More effective use, e.g. vertical farming / irrigation
- sustainable practices
- Exploration for discovery of new resources, e.g. oil
✅ Labour:
- Immigration
- Better education / training programs
- Healthcare (healthier workers are more productive)
- Trade unions are bad for labour productivity bc people aren’t working when they go on strikes and companies will employ fewer people if they have to pay more for better working conditions.
What does AD/AS curve have on x/y-axis?
✅ Average Price Level (APL) on y-axis
✅ Output on x-axis.
What else matters when measuring econ. welfare?
___ amt of ___ can have ___ ___ in diff. ___
___ Better Life Index
✅ Purchasing Power Parity: takes into account that the same amt of $ can have diff. values in diff. countries.
✅ Quality of Life
✅ Fluctuations in the business cycle: ⬆️/⬇️ of GDP shouldn’t spark overreaction because it might just be normal fluctuations in the business cycle.
Explain how ⬇️AD => cyclical unemp.
✅ ⬇️ in a component of AD => ⬇️ in AD, ceteris paribus => AD will shift to the left (draw a diagram) => movement along the AS curve + new equilibrium => ⬇️ in output => When firms produces ⬇️ output, they require ⬇️ inputs (i.e. workers) => ⬆️ in cyclical unemp.
Why ⬆️ $ levels => ⬆️ AS?
✅⬆️ profitable to supply, encouraging firms to produce more ( and incentivising more firms to enter the market) ✅⬆️$ levels => being cost efficient less relevant bc can have ⬆️ costs of production + still make profits => ⬆️ ‘inefficient producers’ can enter a market.
What does the Keynesians’s belief of long-run wage rigidity mean for unemp.?
✅ Unemployment can persist bc imperfections in labour market => prevent wage rates falling to eliminate excess supply in labour market.
Why do Keynesian economists believe about emp in the long run?
✅ Assumes wage rigidity => price + quantity ‘stickiness’, such that econ’s long run equilibrium output < potential output.
What is contractionary policy?
✅ Tools that seek to combat econ. distrortions caused by an overheating econ, to be used during times of extreme inflation or an extended period of investment
Define Replacement Investment.
✅ When firms spend on capital in order to maintain productivity.
e.g. when computed breaks, buy a new comp. to maintain the level of prod.
How do Δ in the wealth effect affect consumers?
✅ ⬆️ asset prices => people feel wealthier => ⬆️ C.
Difficulties of measuring GDP?
✅ Informal sect. + criminal activity not counted => less dev. econ. harder to count GDP.
✅ If ⬆️ corruption, where it’s easier to hide economic activity => difficult to measure GDP.
✅ If no strong gov. system in less dev. econ. => no registered addresses / tax returns => harder to track rent / wages => lose out on GDP.
What is the LRAS curve?
✅ Max. sustainable level of output that econ. can produce when econ is on its production possibility frontier.
What is an example of the wealth effect?
✅ e.g. In the run up to the financial crisis in 2008, housing markets experienced speculative bubbles as property $ rose. AD shifted rightward but this wasn’t fuelled by ‘real’ money.
How do in Business Expectations/Confidence affect Investment?
✅ Firms invest to meet future demand.
✅ They need to know the future health of the econ. to plan for expansion.
✅ Optimistic about future => confidence to buy more => AD shift right.
✅ One of the best indicators of how econ. is doing, so closely monitored to find a warning sign of an econ. slowdown.
What is a limitation of how technology affects investment?
✅ ⬆️ initial resource investment to develop, implement + train workers to use the new technologies.
What are shifts in SRAS caused by?
✅ CHANGES IN $ OF PRODUCTION
✅ supply-side shocks
✅ willingness of a firm to produce more is not fixed, fuelled by profit. ⬇️ $ of production => firms more WiLLING and ABLE to supply at every $ level.
Define Frictional unemp.
✅ Short term, when a worker switches jobs.
✅ No worries
✅ Or when university graduates may take time to find the work they want at a wage rate they are prepared to accept.
What is technological unemp.?
✅ When workers lose their jobs due to advances in technology
2 unemp. consequences on firms?
✅ ⬇️ of profits (due to ⬇️D)
✅ $ of making staff redundant
Why do Keynesian economists argue LRAS curve is curvy? (L-shape)
✅ Even in the long run, the economy can be operating below full capacity because:
✅ Sticky prices - firms don’t instantly change their prices to changes in the economy, e.g. because wages are set in pretty long-term contracts + also menu costs
✅ -ve multiplier effect - someone loses their job, doesn’t spend as much, someone else doesn’t get $, on and on.
✅ Paradox of thrift - The effect of a recession is that people will lose confidence + save ⬆️ in long run.
5 Macroeconomic objectives
✅ ⬇️ Unemployment ✅ ⬇️ + Stable rate of inflation ✅ Equitable Distribution of Income ✅ Econ. Growth ✅ Improved Int. Competitiveness
Causes of demand-pull inflation
✅ ⬆️ C, I, G, or (X-M)
✅ ⬆️Inflation expectations
✅ Expansion of $ supply
What is occupational immobility of labour?
✅ When workers are unwilling or unable to move from one type of job to another, e..g because different skills are needed.
How do Δ in the expectations of the future price level affect consumption?
✅ Expect ⬆️ prices in the future (inflation), spend more and save less now, ⬆️ C
What do free classical economists believe about real wage unemp.?
✅ Voluntary - workers choose to remain unemployed + refuse job offers at market wage rate
✅ Believe that workers + trade unions should be prepared to accept wage cuts
Define Structural Unemp.
✅ Long-term unemployment when industries decline, even though other industries may be growing.
✅ When production requires new skills that the workers who lose their jobs have.
✅ Caused by the geographical/occupational immobility of labour.
✅ Requires expensive retraining
What 5 factors affect Net Exports?
✅ Income of Trading Partners ✅ Exchange Rates ✅ Changes in Trade Policies ✅ Rate manipulation + health and safety Requirements ✅ Exports ✅ Imports
How does increased taxation decrease APL?
✅ ⬆️ taxation => ⬇️ disposable income => ⬇️consumption/investment (depending on whether tax is income/corporate tax) => ⬇️ AD => ⬇️ APL
4 unemp. consequences on households?
✅ ⬇️ of skills (hysteresis)
✅ ⬇️ confidence / self-esteem
✅ ⬇️ income
✅ Social deprivation
How does Rate manipulation and health & safety requirements affect Levels of Imports and Exports?
✅ Manipulate currency to appreciate/depreciate to change levels of imports/exports.
✅ e.g. China relies heavily on exports, so devalued the yuan to make exports more competitive.
What affects Consumption (C)
- Consumer confidence
- Int/r
- Level of consumer indebtedness
- Wealth
What affects Investment (I)
- Int/r
- Business confidence
- Public policy towards investment (eg. tax incentives, subsidies etc.)
- Overall macroeconomic environment
- Income and its growth (Firms forced to increase capacity to meet increased D for g/s.
What is crowding-out effect
- Criticism of Keynesian expansionary fiscal policy (government)
- Keynesians say expansionary fiscal policy good because multiplier effect.
- But negative multiplier effect must be applied too - taxing people and taking money away from them, which they could’ve spent on other goods.
Evaluation of fiscal policy
- time lags (time between economy entering a recession and the time the policy has an impact)
- has expansionary bias: politicians want to spend more to increase popularity => may widen trade deficit: increased incomes increases imports + decreases exports as exports become less competitive
- expansionary crowds out private investment, making it less effective. Increased government borrowing => increased int/r on gov bonds => increased int/r in other parts of the economy => decreased consumption
Evaluation of monetary policy
- Spending doesn’t only depend on int/r. Consumer/business confidence important determiner of responsiveness to int/r change
- natural limitations: cannot have -ve int/r
- time lags lead to uncertainty
What are supply-side policies
- aim to shift AS rightwards.
- eg. improving education, health services, infrastructure
Examples of pro-market supply-side policies
- making labour market more flexible
- increase competition so economy benefits from increased efficiency
- decreasing tax rates to incentivise working
Criticisms of pro-market supply policies, eg.
- making labour market more flexible
- increase competition so economy benefits from increased efficiency
- decreasing tax rates to incentivise working
- tax cuts may increase inequality
- privatisation leads to unemployment in the short run
- deregulation is usually unsuccessful in raising competition and lowering prices, eg. 1990s energy crisis. Deregulation of utility companies created a private monopoly with no incentive to lower prices.
examples of industrial policies (a type of supply-side policy)
- subsidised low interest loans
- lower tax rates
- protection from foreign competition
Policies to deal with demand-pull inflation
- increase int/r (monetary)
- lowering gov spending + increasing taxes (fiscal)
Policies to deal with cost-push inflation
- increase int/r (monetary)
Dealing with deflation
- usually self-corrected from increase in AD from decrease in (X-M) due to depreciation of currency
What does the long run Philips Curve look like
- straight line
What does the long run Philips Curve (LRPC) look like
- straight line at the natural/equilibrium rate of unemployment
Policies to lower structural unemployment?
- training and retraining programs
- eliminating min. wage laws
- reforming education to produce people who are creative and willing to learn, and give people skills such as use of technology that can be widely applied
Problems with policies trying to reduce structural unemployment
- decreasing worker protection (eg. min wage) => social unrest => hinders growth and increases inequality => slows economic development
- expansionary demand-side policies ineffective at lowering structural unemployment as in the long term demand-side policies only increase inflation, any decrease in unemployment will be short-term
Why should governments not try to lower unemployment below natural rate?
- LRPC is vertical => any expansionary policies to move SRPC rightwards would only succeed temporarily and just cause higher inflation
Benefits of equitable income distribution
- poorer people have a higher propensity to consume than the rich => redistribution increases AD especially for inferior goods
- Poor can access crucial resources, eg. education and healthcare => productivity of human capital increases + quality of life increases => AS shifts rightwards => development and economic growth
- Fewer social tensions => people more willing and able to save more + decrease uncertainty for investors => higher rates of investment by banks and investors=> economic growth.
What does Laffer Curve look like and why slopes downward after a while?
- after a while higher tax rates create disincentives for people to work and invest.
- at 100% tax rate, zero tax revenues as no reward to individuals for any productive effort.
2 short-run solutions to redistribute income
- progressive income tax
- transfer payments (eg. unemployment benefits)
3 long-run solutions to redistribute income
- improving quality +access to education and health services for lowest income groups.
- job creation policies
- lower corruption
