Other Things For Y12 Macro

Question 1

What are the main macroeconomic objectives & indicators?

Answer 1

• Economic growth - Growth has to be strong, sustained and sustainable - this is wanted as it shows higher incomes and living standards
• Unemployment - low unemployment, full employment
• Inflation - low and stable inflation (+-2%)
• Trade - balanced

Question 2

How does the circular flow of income work?

Answer 2

• The circular flow of income is the movement of spending and income throughout the economy between firms and households.
• Two parties, Households and firms.
• Households provide their 4 factors of production to firms, then firms use those FOP to make goods and services.
• In return, households recieve factor incomes from firms. Capital = interest, Enterprice = profit, Labour = wages, Land = Rent.
• Households recieve those incomes, then spend them on goods and services.

Question 3

What are leakages/withdrawals in the circular flow of income?

Answer 3

• Savings (savings)
• Taxations (T)
• Imports (M)

Question 4

What are injections in the circular flow of income?

Answer 4

• Investment (I)
• Government spending (G)
• Exports (X)

Question 5

What is the Output method of GDP?

Answer 5

• This is where you add up the final value of all goods and services in the economy produced in a year.

Question 6

What is the income method of GDP?

Answer 6

• Add up all the factor incomes in a year

Question 7

What is the expenditure method of GDP?

Answer 7

• Add up all of expenditure in the economy in a year (C + I + G + (X-M))

Question 8

What must output, income and expenditure equal?

Answer 8

Eachother

Question 9

How to calculate an index number?

Answer 9

Index number = (raw number/base year raw number) x 100

Question 10

What Factors effect the level of consumption/savings in the economy?

Answer 10

• Level of Real disposable income - cut in income tax –> increases real disposable income –> increase the MPC –> increase consumption.
• Interest Rates - self-explanatory
• Consumer confidence - If consumers are confident e.g economy is performing well, high economic growth or good job prospects/low unemployment –> consumers have higher marginal propensity to consume….

Question 11

What factors effect the level of investment in the economy?

Answer 11

• Interest rates - self expanatory
• Business confidence - if business confidence is high –> due to high expected profits or high expected demand in the economy –> businesses more likely to invest in order to meet demand in the future.
• Corporation Tax - profit after tax….
• Spare Capacity

Question 12

What factors effect the level of Net Exports in the economy?

Answer 12

• Higher disposable incomes earned abroad
• Exchange Rate
• Tariffs
• Inflation relative to other countries

Question 13

What shifts SRAS?

Answer 13

Changes to the costs of production e.g wages, raw materials, oil, VAT

Question 14

What are supply-side shocks and some examples?

Answer 14

• Supply-Side shocks are factors that affect short-run aggregate supply e.g changes to cost of production, commodity prices, exchange rate (imports)

Question 15

What are causes of short-run economic growth?

Answer 15

• C + I + G + (X-M)
• Consumption - interest rates, consumer confidence, real incomes (fall in tax)
• Investment - business confidence, interest rates, spare capacity, corporation tax
• Government spending - poverty, inequality, boosting labour force etc.
• Net exports - Exchange rate, inflation relative to other countries, incomes relative to other countries, tariffs

Question 16

What are causes of long-run economic growth?

Answer 16

• Increase in the quality and/or quantity of the factors of production.
• Increase in education and training –> increase in skills –> increase in productivty…..
• Increase in infrastucture –> can increase the quantity and/or quality of capital in the economy.

Question 17

What are the benefits of Economic Growth?

Answer 17

• Higher disposable income - explain how –> higher material living standards + non-material living standards –> increased utility in the country….
• Higher Employment –> if there is economic growth –> higher demand for goods and services –> labour is derived demand –> increased employment…..
• Higher profits for firms –> firms are making greater profits –> can invest in capital –> accelerator effect? Business growth?
• Increase in tax revenues –> higher incomes –> tax revenue –> decrease in budget deficit.

Question 18

What are some costs of economic growth?

Answer 18

• Inflation - higher demand pull inflation - erode purchasing power –> material living standards may not rise.
• Income inequality –> if economic growth is ocurring in only one industry/sector, then this may lead to greater income inequality –> give examples e.g capital intensive industries, rural v urban, poor quality jobs being created –> as a result relative and absolute poverty will not fall if there are no dedistributive systems in place e.g progressive taxation, so poverty will persist despite economic growth.
• Environmental costs –> negative externalities of production????? –> decrease in welfare loss.
• Conflict in macroeconomic objectives

Question 19

Evaluative point for Economic growth

Answer 19

• Sustainable growth
• Inclusive growth
• Balanced growth

Question 20

What are two different types of unemployment?

Answer 20

• Disequilibrium unemployment - includes real wage and cyclical unempoyment
• Equilibrium unemployment - natural rate of unemployment - this includes stucutral, frictional and seasonal.

Question 21

What causes cyclical unemployment?

Answer 21

• labour is derived demand
• with lower demand for goods and services in the economy (leftwards shift in AD)
• the derived demand for labour is lower
• FIrms’ revenue is also lower with lower demand, looking to cut costs to keep profit margins high.
• Making workers redundant.

Question 22

What contributes to the natural rate of unemployment?

Answer 22

• Structural unemployment
• Frictional unemployment
• Seasonal unemployment

Question 22

What are some causes of the natural rate of unemployment?

Answer 22

• Generous benefits systems - workers do not have incentives to gain skills and qualifications –> remain occupationally immobile –> due to the safety net of benefits –> can also increase frictional unemployment due to safety net so they can afford longer times between jobs.
• Lack of transport - lack of supply in the economy because “merit good” –> this can then increase structural unemployment due to the geographical immobility of labour –> frictional unemploeyment also because decreases search radius for job.
• Lack of education and training

Question 22

What is real wage unemployment?

Answer 22

This is when wages are forced above the equilibrium in the labour market creating excess supply e.g on NMW diagram.

Question 23

What is Equilibrium unemployment?

Answer 23

This is the natural rate of unemployment even when the labour market is at equilibrium.

Question 23

What are the costs of unemployment?

Answer 23

• Lost output - decrease in AD fall in living standards –> decreased economic growth?
• Deterioriation of government finances - decreases tax revenue for the government –> increases the budget deficit more debt-fuelled government spending –> crowding out effect????
• Negative externalities - social costs - mental health disorders, crime etc….
• Hysterisis - when unemployment becomes long-term in nature then hysterisis occurs –> workers become unemployable –> due to de-skilling of workers who have been out of work for so long –> as a result, this results in very low income, living standards, surviving on welfare –> harms short-term economic growth –> Also, since they lack skills, they leave the labour force completely –> decreasing the size of labour force –> productive capacity falls -> decrease in long-run economic growth –> impacts all other costs and makes them worse –> increases the natural rate of unemployment also.

Question 24

What are the benefits of unemployment?

Answer 24

• Greater pool of workers for firms –> great for firms –> greater flexibility in the labour market –> can choose the most productive worker with highest MRP –> higher revenue/profit margins.
• Low inflation + improved current account position - since there is a lot of unemployment e.g during a recession –> workers have less wage bargaining power –> decreased wages, decrease the COP –> lower prices on goods and services in the economy –> lower inflation –> this can improve the current account positon —> lower relative inflation increases price competitiveness –> increase in X –> also, since there is unemployment –> less import expenditure also.

Question 25

What are some evaluation for costs/benefits of unemployment?

Answer 25

• Rate
• Duration
• Type

Question 25

What causes demand-pull inflation?

Answer 25

anything that affects AD

Question 26

What are two types/causes of inflation?

Answer 26

• Demand-pull inflation
• Cost-push inflation

Question 27

Why does demand-pull inflation occur?

Answer 27

When AD shifts rightwards there is a rise in incomes and the price level, which causes demand-pull inflation. Demand-pull inflation occurs because there is greater pressure on the factors of production to produce more output due to higher demand. As a result, the economy gets closer to YFE i.e full employment. This means that existing factors of production become more scarce, putting upwards pressure on price of said scarce resources e.g higher wages - price of labour. This then increases firms’ costs of production, causing firms to raise prices increases the price level in the economy.

Question 28

Why does cost-push inflation occur?

Answer 28

Higher costs of production, means higher prices for consumers meaning higher inflation.

Question 29

What causes cost-push inflation?

Answer 29

• Increase in raw material prices
• Wages
• Higher price of imported raw materials due to weaker exchange rate.

Question 30

What are the costs of inflation?

Answer 30

• Lower purchasing power –> in real terms workers are worse off –> decrease in material living standards –> increase relative and absolute povert of those on the lowest incomes.
• Macroeconomic objective conflicts –> lower price competitiveness relative to other countries –> law of demand –> decrease in exports –> decrease in net exports –> harms short-run economic growth and current account position.
• Wage/consumer price spirals –> if inflation is higher and consumers anticipate higher levels of inflation –> they are going to bargain for higher wages –> negotiate for higher wages –> if successful COP for firms increase –> pass onto consumers in the form of higher prices –> inflation in the economy rises again –> higher wages again and the cycle repeats –> potentially causing hyperinflation and inflationary spiral.

Question 31

What are the benefits of inflation?

Answer 31

• Workers with higher wages –> if inflation is higher, workers may bargain for higher wages –> even if this is a nominal increase and not a real increase this can have benefits –> such as increased productivtity in the economy –> workers are more motivated due to higher wages –> more efficient and produce more in a given time period.
• Improvement of government finances –> if prices rise in the economy due to inflation –> then any taxes based on nominal values will rise, creating more revenue for the government –> For example, VAT. As prices rise, the government generate more revenue –> improving budget deficit.

Question 32

What are some evaluative points for inflation?

Answer 32

• Depends upon the rate
• Depends upon the cause of inflation e.g cost-push inflation is worse than demand pull
• Anticipated V unanticipated inflation.

Question 33

What is deflation?

Answer 33

Deflation is a sustained fall in the general price level in a given period of time

Question 34

What are the two types of deflation and what are they?

Answer 34

• Demand side deflation - generally known as bad/malignant deflation - this is bad because it comes with lower growth and is also long-term and anticipated
• Supply side deflation - generally known as good/benign deflation - comes with higher growth, this is short-term and unanticipated.

Question 35

What are consequences of anticipated (usually demand side deflation/malignant deflation)

Answer 35

• Delayed spending –> rational consumers are going to delay their spending. This is because, if they anticipate deflation in the future, then the prices of goods and services in the future are going to be cheaper. As a result, they will delay spending to get the goods and services cheaper. However, this is bad for the economy as consumption will fall, decreased SR economic growth. Producers slash prices leading to a deflationary spiral. Other macroeconomic consequences???
• Positive real interest rates –> if inflation falls, then real interest rates will always be positive. Even if the government (unrealistic) cut interest rates to 0% to stimulate the economy and promote inflation, interest rates will always be posititve in real terms. For example, if nominal interest rates are 0 but inflation is -2%, real interest rates are 0–2%=2%. As a result, this creates a greater incentive to save, instead of consume due to the positive real interest rates. Consequently, this decreases AD (macroeconomic consequences)

Question 36

What are consequences of short-term deflation/supply-side deflation/benign deflation?

Answer 36

• Falling prices for consumers –> increase living standards economic growth???
• Falling input prices for firms –> reduces COP –> increases profit margins –> LR economic growth????