Performance & Policies - Year 1 Macroeconomics Flashcards
term
definition
What are the limitations to fiscal policy?
• Governments might have imperfect information about the economy. It could lead to inefficient spending. • There is a significant time lag involved with employing the fiscal policy. It could take months or years to have an effect. • If interest rates are high, fiscal policy might not be effective for increasing demand.• If the government spends too much, there could be difficulties paying back the debt, which could make it difficult to borrow in the future.
Discuss what is meant by a ‘positive wealth effect’?
A psychological phenomenon stating that when asset values rise, this makes individuals feel wealthier, leading to increased spending and a boost in overall consumption and economic activity
How are goods and services weighted in the basket of goods?
Weighted based on their share of total consumer expenditure, which are typically determined using data from surveys or expenditure data. The more frequently and extensively a good or service is purchased, the higher its weight in the basket of goods.
What is meant by cost-push inflation?
An increase in cost of production or a decrease in the availability of resources leading to an inward shift of supply causing higher prices.
Define shoe leather costs.
The increased time and effort spent by individuals and businesses in response to inflation, such as more frequent trips to the bank to withdraw cash, in order to minimize the loss of purchasing power.
What is the effect of a strong pound on the net trade balance?
SPICED. Strong Pound Imports Cheap Exports Dear.Net trade balance worsens as import demand rises and export demand falls.
What is meant by fiscal policy, and what is its purpose?
Fiscal policy is a demand-side policy which refers to the use of government spending and taxation to influence the overall state of the economy, stimulate economic growth and reduce unemployment
What is Monetary policy, and what is its function?
Monetary policy refers to the regulation of the money supply through adjustments to basal interest rates. It’s primary function is to stimulate aggregate demand, and maintain price stability (2% CPI).
What are the main free-market based supply-side policies?
• Reduction of income and corporation tax rates: Incentivise work, investment, and business activity• Privatisation: By reducing government involvement and allowing private ownership, privatisation aims to increase market competition and efficiency in the allocation of resources.• Deregulation: Removing unnecessary regulations and bureaucratic burdens to enhance market efficiency and promote competition.• Reduce minimum wages and welfare benefits• Trade liberalisation: Reducing trade barriers to expand market access and promote international competitiveness
Explain how GDP (Gross Domestic Product) is calculated.
Sum of the total value of all goods and services produced within an economy during one year. GDP = C + I + G + (X-M)
Discuss GDP’s limitations in evaluating standards of living within an economy
GDP does not consider several key factors such as:• Where the wealth is stored, ie. income inequality• Environmental sustainability• Access to, and the provision of public/merit goods such as healthcare• Economic and price stability• Availability of credit, education opportunities and basic necessities (such as water, food and energy)
Describe what is meant by GNI (Gross National Income)
The total income earned by a country’s residents, including both domestic, and international sources
What may be a better depiction of standards of living within an economy?
GDP per capita, or Gross National Happiness (GNH)
Define Purchasing Power Parity (PPP).
A comparison of the relative purchasing power of different currencies by equalizing the prices of a basket of goods and services across countries
Give an example of when Purchasing Power Parity may be useful.
Used for accurate international comparison of living standards and economic indicators like GDP between countries with different currencies, and price levels.
Discuss the various components within the circular flow of income model.
- Households: Pay firms for goods and services.2. Firms: Pay households for human capital/labour.3. Governments: Collect tax revenue from both households and firms; Pay firms to buy goods and services; Pay welfare benefits to households.4. Financial Sector: Collect savings, Pay withdrawals5. Other Nations: Collect imports, Pay for exports.
Give 3 examples of withdrawals, and injections into an economy.
Withdrawals:• Savings• Imports• TaxationInjections:• Withdrawals• Exports• Government spending
What is depicted on the economic cycle?
Depicts fluctuations in economic activity over time, involving periods of boom (positive output gap) and recession (negative output gap).Trend rate of GDP growth (on the PPF) is the economy’s productive potential.Actual rate of GDP growth is the economy’s current position in terms of economic activity.
What factors have the potential to cause long-run economic growth?
• Technological advancements and innovation.• Investment in physical and human capital.• Improvements in education and skilled workforce.• Access to financial resources and credit• Infrastructure development• Research and development
What are the main benefits of economic growth?
• Lower levels of unemployment• Higher nominal incomes –> Higher standards of living• Greater fiscal dividends (tax revenue) for the Government to reinvest back into providing higher quality public services• Attractive to foreign investors looking to start-up in the UK• More production in the economy –> More exports, leads to higher competitiveness in the global trade market
What are the main negative consequences of economic growth?
• High likelihood of demand-pull inflation• Environmental degradation and resource depletion• Increased carbon emissions leading to climate change• Mental health and social issues - workers forced to work longer hours than they would like• Economic instability
What factors affect the level of Consumption within an economy?
• Disposable income: Higher levels of income generally lead to increased consumption.• Consumer confidence• Interest rates: Lower interest rates can incentivize borrowing and increase consumption.• Availability of credit: Easy access to credit can facilitate higher levels of consumption.• Wealth and asset prices: Rising asset prices, such as housing or stock market values, can boost consumer spending.
What factors affect the level of consumer confidence within an economy?
• Unemployment rates and level of price stability• Value of consumer assets and house prices• Standards of living• Average incomes• Consumer expectations (anticipations of future economic growth and/or job opportunities)
How do you calculate the Marginal Propensity to Consume (MPC)?
MPC is calculated as the change in consumption divided by the change in disposable income.
Discuss what is meant by a multiplier effect.
When an initial injection of money into the economy leads to a proportionately larger final increase in AD.
What factors affect the level of Investment within an economy?
• Availability of credit and financing• Business confidence• Level of economic growth• Interest rates• Value of privately owned assets• Foreign demand for exports• Technological advancements
What factors affect the level of business confidence within an economy?
• Availability of credit and financing• Unemployment rates and level of price stability• Level of economic growth• Interest rates• Competition within markets and market demand• Availability of commodities/resources
Discuss what is meant by an accelerator effect.
When changes in investment spending have a magnified impact on the level of economic output
Define animal spirits.
Keynesian ideology stating that psychological factors driving economic behavior and decision-making. Factors such as confidence, optimism, risk-taking, and herd mentality can influence individuals and businesses in their economic choices.
How do you calculate the Marginal Propensity to Withdraw (MPW)?
MPS + MPT + MPM
How do you calculate the spending multiplier co-efficient in an economy?
1 / 1-MPC = 1/MPW
What is a credit crunch?
A credit crunch is a sudden reduction in credit availability, leading to restricted borrowing and higher borrowing costs.
Describe the factors that can cause a credit crunch.
• A financial crisis• Banking system instability• Excessive lending and borrowing• A decline in asset values• Loss of confidence in the economy
Define economically active.
Individuals who are either employed or actively seeking employment, indicating their participation in the labor market and their willingness and ability to work
Define unemployment
Proportion of economically active individuals within an economy who are willing and able to work but can not find a job.
Define cyclical unemployment
Unemployment resulting from fluctuations in the business cycle and economic downturns.
Define frictional unemployment
Unemployment resulting from the time taken for individuals to switch jobs or find new employment.
Define structural unemployment
Unemployment arising from reduced or eliminated jobs and skills mismatch in the labor market.
Define seasonal unemployment
Unemployment that occurs due to predictable, temporary fluctuations in demand for labor during certain seasons or specific times of the year, such as agricultural or tourism-related industries.
Define real-wage unemployment
Unemployment caused by wages being set above the equilibrium level, resulting in a surplus of labor, as employers are unwilling or unable to hire workers at the prevailing wage rate.
Define hysteresis.
Hysteresis occurs when a temporary shock or disturbance to an economy leads to lasting or permanent changes in variables such as employment, output, or productivity, preventing a return to the previous state.
What is the difference between those who are economically active, and those who are employed in a job?
Economically active individuals are those who are either employed or actively seeking employment, employed have a job or are engaged in work, regardless of their level of economic activity.
What are the benefits to using the claimant count to measure the rate of unemployment?
• Claimant count data is often available on a monthly basis, providing more timely information about the state of unemployment compared to other measures.• Relies on existing administrative records, making it a relatively cost-effective and efficient way to estimate unemployment rates• Provides a consistent measure over time, allowing for meaningful comparisons and analysis of trends in unemployment.
What are the drawbacks to using the claimant count to measure the rate of unemployment?
• Excludes individuals who are unemployed but not eligible for, or not claiming benefits• Some individuals may choose not to claim benefits due to the stigma associated with unemployment or personal reasons• Includes individuals who voluntarily leave their jobs, making it difficult to differentiate between voluntary and involuntary unemployment
What are the benefits to using the Labour Force Survey (LFS) to measure the rate of unemployment?
• Captures a wide range of demographic and labor market information, providing a comprehensive view of the workforce beyond just those eligible for unemployment benefits.• Uses rigorous sampling techniques to ensure the data represents diverse groups and regions accurately• Collects detailed data on employment status, occupation, industry, and hours worked• Regularly conducted, the LFS enables tracking of trends over time, providing valuable insights into changes in employment rates, workforce participation, and unemployment dynamics
What are the drawbacks to using the Labour Force Survey (LFS) to measure the rate of unemployment?
• Sample may not fully represent the entire population, leading to potential inaccuracies, especially for smaller subgroups or localized areas• Voluntary responses in the LFS can introduce response bias, because certain individuals may be more or less likely to participate• LFS is conducted less frequently than administrative data sources, limiting the timeliness of the information provided
What is meant by underemployment, and how can this have negative impacts on the economy?
Underemployment refers to workers who are employed in jobs that do not fully utilize their skills, or work desired working hours. This reduces productivity, dampens economic growth, and leads to wasted human capital, resulting in lower income levels, decreased consumer spending, and overall economic inefficiency.
What is the impact of high unemployment rates on individuals?
High unemployment rates can result in financial stress, reduced well-being, career setbacks, social isolation, and negative health consequences for individuals.
