Module 11 Flashcards
Increase in national income
Injection x 1/MPS
MPS=
1-MPC
Income (Y)=
Savings (S) + consumption (C)
Aggregate demand =
Consumer spending (C) \+ investment (I) \+ government spending (G) \+ exports (X) - Imports (M)
The consumption function is
C = a + bY
C is amount consumes
a is Autonomous consumption (amount will consume if income is zero)
b is the MPC, proportion of an increase in their income a person will spend consuming goods 0-1
Trade surplus
Exports > imports
Trade deficit
Exports < imports
Governments 4 key macroeconomic objectives?
Economic growth
Low unemployment
Low inflation
Avoidance of balance of payments deficits and exchange rate problems
GDP
sum of the market values of all goods and services produced in an economy during a period of time
Four types of unemployment
Frictional
Seasonal
Structural unemployment
Real wage
What is frictional unemployment
Time takes to switch jobs
Seasonal unemployment
Industry where demand for labour is seasonal
What is structural unemployment
Supply of labour in one industry outstrips demand and people’s skills are too inflexible to be transferred
What is real wage (classical) unemployment?
Demand curve : people firms are willing to employ at each wage rate
Supply curve: number of people willing to work at each wage rate
Crossing point is equilibrium so no unemployment
Why is inflation a problem?
Uncertainty
Redistribution of income
Balance of payments (exports more expensive to buyers, levels fall)
Macroeconomic schools of thought
Classical
New classical
Keynesianism
Monetarism
Demand pull inflation?
Increase in prices caused by increase in demand
Increasing output and rocked
Shift to right demand curve
Cost push inflation
Rising prices met with demands for higher wages
Increases production costs
Demand side - Fiscal policy
Expansionary - increase gov spending, cut tax to increase agg demand
Contractionary - cut gov spending, raise tax to reduce agg demand
Can be unsustainable as increase budget deficits and add to national debt
Difficult to predict long term
Macroeconomic policy may be
Demand side- change level of spending
Supply side - influence level of production
Demand side - monetary policy
Expansionary - decrease interest rates, encourage to save less spend more
Contractionary- increase interest rates , save more spend less
Supply side policies
Market orientated- remove regulation
Interventionist- increase aggregate supply
Disadvantages
- time/cost
- necessary increase in aggregate demand, must be high enough to absorb increase created
Aggregate demand and supply graph
Aggregate demand \
Aggregate supply / becomes perfectly inelastic at the point where factors of production are used up, can’t supply any more
Who owns the factors of production?
Households
Firms need them as inputs to product goods and service so pay for their use
How do firms pay for the factors of production?
Land - Rent
Labour - Wages
Capital - Interest
Enterprise - Profit
Firms use factors to manufacture goods
Households will consume by spending income they receive for providing the factors
Circular flow model savings and investment?
Savings are a withdrawal out of the economy
Investments are an injection in
Circular flow imports and exports
Imports are withdrawals as money is paid to foreign supplier
Exports are injections as money flows in
Governments in circular flow model?
Spend money on both households and firms
Injection into economy
Tax both households and firms
Withdrawal from
When the economy is in equilibrium
Planned withdrawal = planned injections
Often out of balance
Budget deficit
Gov spending > taxation
Must borrow money
Usually through gov bonds and loan stock
Public sector net cash requirement - total requires to borrow for a period
What is aggregate demand?
The total demand for goods and services in an economy
What is MPC?
Proportion of an increase in income a person will spend consuming goods
0-1
What is MPS?
Proportion of an increase in come an individual would save
MPS=
1-MPC
What is the multiplier effect?
Effect whereby an injection into the economy leads to a greater increase in national income
Increase in national income =
Injection x 1/MPS
1/MPS is the multiplier
What is cyclical unemployment? Demand deficit
In times of very low economic growth or recession, aggregate demand falls
Shifts to left
Employ fewer workers
Wage rates not flexible so don’t fall to new equilibrium
Results in unemployment
What is inflation?
Sustained increase in the price level in an economy
How is inflation measured in the UK?
Monthly using the CPI and RPI
Consumer price index (doesn’t include council tax or mortgage interest)
Retail price index
What are the macroeconomic schools of thought?
Classical
New classical
Keynesianism
Monetarism
What is classical school of thought?
Works best when left alone
Minimum government intervention
Naturally always return to equilibrium level with full employment
1st school
Adam Smith 18th C economist
What is new classical school?
Belief that individuals make rational decisions and firms act to maximise their profits
Leave market alone to work itself
What is Keynesianism?
Interventionist approach
Influencing aggregate demand to achieve optimal economic performance
‘Demand side theory’
John Maynard Keynes 1930s
What is monetarism?
Centres around amount of money in circulation
Inflation is caused by too much money chasing too few goods
Producers only option of increasing prices
Milton Friedman
If aggregate demand is too high in comparison to aggregate supply?
Could lead to inflation and balance of payments deficits
AD too high- demand pull inflation and trade deficit
AD too low- recession and unemployment.
What is demand side policy?
Seeking to change level of spending
What is supply side policy?
Seeking to influence the level of production directly by encouraging to produce more
