PRINCIPLES OF MACRO: The Macroeconomic Environment Flashcards
15.1
What are the major macroeconomic issues?
Economic growth, unemployment, inflation, economic relationships with the rest of the world, the financial well-being of individuals, businesses and government and the relationship between the financial system and the economy.
15.1
What is the term economic growth?
Economic growth is the term economists use to describe the change in the level of an economy’s output from period to period.
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How often is the rate of economic growth measured?
The rate of economic growth measures the percentage change in output. This is usually measured over short periods, such as 12 or 3 months.
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What is one of the most important observations to make about economic growth?
How growth is volatile
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What do fluctuating activity levels in growth imply for the economy?
Fluctuating activity levels are likely to affect the behaviour and well-being of many of us.
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How would fluctuating levels wellbeing and behaviour (give an example).
In 2009, for example, the UK economy shrank by 4.5 per cent, unemployment levels rose from 1.6 million during 2007 to 2.7 million by 2011 and the government experienced a 4.5 per cent fall in its receipts between tax years 2007/8 and 2009/10
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What is the significance of volatility in growth?
It is the volatility of growth that gives rise to the well-known phenomenon of the Business Cycle.
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What is the Business Cycle?
The periodic fluctuations of national output. Periods of rapid growth are followed by periods of low growth or even decline in national output.
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Explaining volatility: What’s an example of rising or falling output in terms of government spending?
For example, a rise in government spending, a reduction in taxes or a reduction in interest rates may stimulate the economy and raise the rate of economic growth.
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Explaining volatility: How else can fluctuation in economic growth be explained by the market system (demand)?
Some economists see the problem as rooted in fluctuations in aggregate demand: in other words, in the total demand for the economy’s goods and services, whether by individuals or firms. What is more, changes in the demands of individuals and firms may interact with each other, affecting the character of the business cycle.
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Explaining volatility: How else can fluctuation in economic growth be explained by the market system (supply)?
Other economists see the problem as rooted in fluctuations in aggregate supply: in other words, in the total amount of goods and services firms plan to supply at a given level of prices. These economists argue that changes in aggregate supply occur if the price, availability or effectiveness of the inputs in firms’ production processes are in some way affected.
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Explaining volatility: If people believe that the economy’s output level is about to fall, how may their actions aggravate the problem?
It’s most likely aggregate demand will fall since risk of the fall in the price of individual asset in turn reduces the value of things such as housing or property. This creates a negative wealth effect which incentivises consumers to cut spending due to these uncertain conditions.
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What do most economies experience over the long-term?
Positive long-term economic growth
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What does analysing long-run growth involve?
An understanding of a country’s capacity to produce. This is because, for growth to be sustained over the longer term, the economy’s capacity must increase.
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What does analysing short-run growth involve?
An understanding over the determinants of the business cycle and the cycle itself.
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What is the term unemployment?
Unemployment is defined as a situation where someone of working age is not able to get a job but would like to be in full-time employment.
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What do higher levels of economic activity imply in terms of employment?
Higher levels of economic activity will tend to decrease unemployment numbers, while reduced economic activity will tend to increase them.
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What are significant impacts on modern day economies from economic events (in terms of unemployment)?
Many countries have seen significant effects on the labour market of rapid industrial change, technological advance and globalisation.
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Why do labour markets need to act dynamic?
Labour markets need to be able to adapt to the dynamic environment in which they operate, not only for the sake of those who are made unemployed, but also because it represents a waste of human resources and because unemployment benefits are a drain on government revenues.
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How would you calculate an economy’s unemployment rate? Give an example?
If 30 million people were employed and 1.5 million people were unemployed, the unemployment rate would be.
1.5/(30+1.5) x 100 = 4.76%
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Why is it sensible to compare rates of unemployment between countries
When comparing unemployment across countries it is sensible to compare rates of unemployment. Total employment definitely grows per year since it is linked to the growth of a population. However, if rates of employment remain constant, this does not indicate the economy’s resources being maximised to it’s potential output.
15.1
What is meant by the term inflation?
By inflation we mean a general rise in prices throughout the economy. Government policy here is to keep inflation both low and stable. One of the most important reasons for this is that it will aid the process of economic decision making. For example, businesses will be able to set prices and wage rates, and make investment decisions with far more confidence.
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Why does government seek to keep inflation low and stable?
Government policy here is to keep inflation both low and stable. One of the most important reasons for this is that it will aid the process of economic decision making. For example, businesses will be able to set prices and wage rates, and make investment decisions with far more confidence.
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What is meant by the rate of inflation?
The rate of inflation measures the annual percentage change in the general price level.