Theme 2 Flashcards
Aggregate Demand (AD)
Total level of real expenditure on the goods and services produced within a country
Consumer spending (C)
Business investment (I)
Government spending (G)
Net exports (X - M)
AD= C+I+G+(X-M)
Short Run Aggregate Supply (SRAS)
And
Long Run Aggregate Supply (LRAS)
Factors which cause a shift in the SRAS curve:
Wages, Material costs, Taxation, Exchange rates, Productivity
Factors which cause a shift in the LRAS curve:
Technology, Productivity, Education, Immigration, Enterprise, Factor mobility
Circular Flow Of Income
Injections:
Investment, Government spending, Exports
Withdrawals:
Savings, Taxes, Imports
Multiplier and Accelerator Effects
An increase in national income results in a even larger rise in investment (Accelerator)
An increase in one of the components of the AD which leads to an even greater in national income (Multiplier)
MPC- The proportion of extra income that is spent
MPS-The proportion of extra income that is saved
MPT-The proportion of extra income that is taxed
MPM-The proportion of income spent on imports
MPW-All withdrawals added together (MPS+MPT+MPM)
Effects LRAS
Economic growth
Nominal GDP- GDP that hasn’t been adjusted for inflation
Real GDP- GDP that has been adjusted for inflation
Per capita GDP- GDP that has been adjusted for population
GNP-GDP + the production by any citizens overseas
GNI-GDP + net overseas interest payments and dividends
Limitations- GDP doesn’t tell us how equally it is distributed, GDP excludes the black market
Fiscal Policy
Fiscal Policy is government spending and taxation
Expansionary-Aim to increase AD (Greater spending, Lower taxes)
Contractionary- Aim to decrease AD (Less spending, Higher taxes)
Limitations- Time lags, Macro economic trade offs, Imperfect data
Direct tax- A tax levied directly on individuals
Indirect tax-A tax levied on goods and services
Monetary Policy
Action by the government to influence the supply of money in the economy (BOE controls it)
-BOE base interest rate
-Quantitative easing (Buying government bonds from banks)
-Exchange rate manipulation (DON’T TALK ABOUT)
Limitations- Macro economic trade offs, No guarantee of banks lowering rates
Supply-side Policies
Government policies designed to make the markets and industries operate more efficiently and increase the productive potential of the economy (Right shift in LRAS)
Market approach:
-Reduce red-tape to cut the costs, Ev- may be hidden costs
-Opening up an economy to overseas trade, EV- Domestic industries have to become more efficient
-Lower business taxes, EV- Other taxes may be raised
Interventionist approach:
-Invest in human capital EV- Time lags
-Invest in public services, EV- History of over spending
-Commitment to a fair minimum wage, EV- Too high could lead to unemployment
Limitations- Time lags, Equity, Cost
Macroeconomic objectives
-Economic growth (2.5%)
-Low unemployment (5%)
-Low inflation (2%)
-Balanced current account
-Reducing the budget deficit
-Reducing inequality
-Environmental
Unemployment
Structural- Mismatch of skills and opportunities
Cyclical- Demand deficient employment caused by a fall in AD
Frictional- Short term unemployment between jobs
Seasonal- Regular seasonal changes in employment (Tourism, Santa)
GDP
GNP- GDP + the production by any citizens overseas
GNI- GDP + interest payments overseas
PPP- Purchasing power parity ( Measures how many units of one country’s currency are needed to buy exactly the same basket of goods and services)
