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macroeconomis Flashcards

1
Q

Define economic growth

A

When there is a rise in the value of the real GDP due to an increase in the quality/quality of the factors of production.

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2
Q

What are the macroeconomic objectives?

A
  1. Economic growth
  2. Price stability
  3. Low unemployment
  4. Reduce the national debt/budget deficit
  5. Balance of payments
  6. Equitable distribution of income
  7. Environmental sustainability
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3
Q

What does GDP measure?

A

The quantity of goods and services produced in an economy.

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4
Q

What is real GDP?

A

The value of GDP adjusted for inflation.

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5
Q

What is nominal GDP?

A

The value of GDP without being adjusted for inflation.

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6
Q

What is the total GDP?

A

The combined monetary value of all goods and services produced within the country’s borders during a specific time period.

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7
Q

What is the volume of GDP?

A

Looking at real values over time- comparing what a particular basket of goods and services that can be bought with a given amount of money.

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8
Q

What is the value of GDP?

A

Measures the monetary cost of the basket and goods and services at a current level of prices.

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9
Q

How else can national income be measured?

A

Gross national product

Gross national income

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10
Q

Define Gross National Product

A

The total income earned by a country’s factors of production regardless of where those assets are located.

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11
Q

Define Gross National Income

A

GDP plus overseas interest payments and dividends.

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12
Q

What is purchasing Power Parity

A

A theory that estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent, according to each currency’s purchasing power.

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13
Q

What are the limitations of National Income data?

A
  1. Inaccuracies- data comes from some unreliable sources
  2. Improving quality- new technology not picked up by GDP
  3. Unrecorded economic activity- e.g. DIY, child care
  4. Illegal activity not included- e.g. drug trafficking, prostitution
  5. External costs- GDP figures do not take into account resource depletion
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14
Q

What is the equation for GDP per capita

A

Total GDP Population

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15
Q

What does the circular flow of Income model show?

A

Shows the impact of leakages and injections into the economy.

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16
Q

How to calculate the value of an economy?

A
  1. Output Method- adding up the value of goods and services produced in the economy.
  2. Income Method- measures the value of incomes earned in the economy
  3. Expenditure Method- measures the value of all spending on goods and services in the economy
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17
Q

What ways can money enter the economy?

A
  1. Investment
  2. Government spending
  3. Spending on exports
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18
Q

What ways can money leave the economy?

A
  1. Savings
  2. Taxes
  3. Spending on imports
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19
Q

What is aggregate demand?

A

The total of all expenditure in an economy so is equivalent to expenditure method

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20
Q

What are the components of aggregate demand?

A
  1. Consumption- spending by households on goods and services
  2. Investment- spending by firms on capital goods
  3. Government spending- spending by the government on capital goods
  4. Net exports- the value of UK exports minus the value of UK imports into the UK
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21
Q

What is the aggregate demand equation?

A

AD = C + I + (X - M)

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22
Q

What things affect consumption?

A

. Reduction in income taxes
. Increase in taxes
. Increase in wealth
. Increases consumer confidence

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23
Q

What things affect investment?

A

.Increased business confidence
. A fall in interest rates
. Advances in new technology

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24
Q

What things affect government spending?

A

. Ageing population
. Rise in population levels
. Policies

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25
Q

What things affect exports/imports?

A

. Rise in income in other countries
. Better quality manufacturing in the UK
. Fall in exchange rates

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26
Q

What is aggregate supply?

A

The sum of all planned production in the economy, equivalent to the output method of GDP.

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27
Q

What is the short run aggregate supply?

A

When at least one factor of production cannot be varied.

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28
Q

What factors cause a shift in the SRAS?

A
  1. Increase in wage rates in the economy
  2. A change in the cost of raw materials
  3. A change in the exchange rates altering import prices
  4. Changes in government subsidies and indirect taxes
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29
Q

What is the long run aggregate supply?

A

When all factors of production can be varied

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38
Q

How can the AS/AD be evaluated?

A
  1. Size of shift
  2. Elasticities
  3. Ceteris paribus
  4. Prioritisation- most important effect
39
Q

What is the multiplier?

A

Initial injection into the circular flow leads to a proportionately greater increase in aggregate demand and GDP

40
Q

How does the multiplier effect the AS/AD diagram?

A

An injection causes AD to increase

41
Q

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A

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42
Q

Define Marginal propensity to consume

A

What proportion of an additional income you make will be spent.

43
Q

Define Marginal propensity to save

A

What proportion of an additional income you make will be saved.

44
Q

Define Marginal propensity to be taxed

A

What proportion of an additional income you make will be taxed.

45
Q

Define Marginal propensity to buy imports

A

What proportion of an additional income you make will be imported.

46
Q

What is the multiplier equation?

A

1 1 - MPC

47
Q

What factors influence the multiplier?

A

. Marginal propensity to consume (MPC)
. Marginal propensity to save (MPS)
. Marginal propensity to tax (MPT)
. Marginal propensity to import (MPM)

48
Q

How does the multiplier shift the AD?

A

If an economy has a lot of spare capacity, extra output can be produced quickly and at little extra cost. This makes AS elastic and it means the size of the multiplier will be larger. A small increase in AD will lead to a large increase in national income. This is perhaps best shown on the Keynesian curve. The vertical section is perfectly
inelastic, with no spare capacity, whilst the horizontal section is perfectly elastic, with lots of spare capacity.

49
Q

What are the four stages of the business cycle?

A

.Boom
.Recession
.Slump
.Recovery

50
Q

What are the characteristics of a Boom?

A 
.High rates of economic growth
.Low rates of unemployment
.Demand pull inflationary pressures
.Higher business and consumer confidence
.Improvement in the government budget balance
51
Q

What are the at the recession?

A 
.Negative economic growth
.High unemployment
.Low inflation
.Low business and consumer confidence
A worsening government budget balance
52
Q

What is the negative output gap?

A

When real GDP is below it’s long run trend

53
Q

What is the positive output gap?

A

When real GDP is growing faster than the trend and is above the trend.

54
Q

Define inflation

A

The sustained rise in the general price level over time. It causes the average price level to rise and the value of money to fall.

55
Q

Define Deflation

A

When the rate of inflation is negative. Where the average price level in the economy falls. It causes the average price level to fall and the value of money to rise.

56
Q

Define disinflation

A

The falling rate of inflation. It causes the average price level to fall and the value of money to rise.

57
Q

How is inflation measured?

A

.A household survey is used
.Weighted basket of goods
.Measures average price change of the goods
.Updated annually

58
Q

What is the equation for index number?

A

Index number = value(current year)

value(base year) x100

59
Q

What are the causes of inflation?

A
  1. Demand pull: when aggregate demand is growing unsustainably
  2. Cost push:
60
Q

What factors cause a movement along the AD curve?

A

Changes in the price level

61
Q

Why is the AD curve downward sloping?

A

o Higher prices lead to a fall in the value of real incomes, so goods and services
become less affordable in real terms.
o If there was high inflation in the UK so that the average price level was high,
foreign goods would seem relatively cheaper. Therefore, there would be
more imports, so the deficit on the current account might increase, and AD
would fall.
o High inflation generally means the interest rates will be higher. This will
discourage spending, since saving becomes more attractive and borrowing
becomes expensive.

62
Q

What factors cause a shift on the AD curve?

A

When any of the components of AD increase.

63
Q

What is fiscal policy?

A

Governments use fiscal policy to influence the economy. It involves changing government spending and taxation.

64
Q

What causes a movement along the AS curve?

A

Changes in the price level, which occur due to changes in AD

65
Q

Why is the SRAS curve upwards sloping?

A

At a higher price level, producers

are willing to supply more because they can earn more profits.

66
Q

What cause a shift in the AS curve?

A

Changes in the conditions of supply, any of the factors which affect SRAS.

67
Q

What is the relationship between short run AS and long run AS

A

o The short run is the period of time when at least one factor of production is fixed, whilst in the long run all factors of production are variable.

68
Q

What does the LRAS curve show?

A

The long run aggregate supply curve (LRAS) shows the potential supply of an economy in the long run. This is when prices, and the costs and productivity of factor inputs, can change. Similarly to the PPF, it can show the economy’s productive potential.
The curve is vertical in the classical model, because supply is assumed not to change as the price level changes.

69
Q

What does the SRAS curve show?

A

The short run aggregate supply curve (SRAS) only covers the period immediately after a change in the price level. It shows the planned output of
an economy when prices change, whilst the cost of production and productivity of the factor inputs are kept constant. A change in one of these will result in the shift of the curve.

70
Q

What factors influence short run AS?

A
  • The cost of raw materials and energy may change. A rise in their costs would increase costs for businesses and thus decrease SRAS
  • A stronger currency reduces the price of imports, so imported products will be cheaper. This would reduce business costs..
  • Increased tax rates would increase business costs and therefore decrease SRAS
71
Q

What is the Keynesian model?

A

The Keynesian view suggests that the price level in the economy is fixed until resources are fully employed. The horizontal section shows the output and price level when resources are not fully employed; there is spare capacity in the economy.
The vertical section is when resources are fully employed.
Over the spare capacity section, output can be increased without
affecting the price level.. In other words, output changes are not inflationary.
Once resources are fully employed, an increase in output will be inflationary (price level increases)

72
Q

What is the classical theory?

A

This view suggests that output is fixed at each level. All factors of production in the
economy are fully employed in the long run.
This means that changing AD only makes a change in the price level and it will not change national output (real GDP).

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