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🔱Microeconomics > Theme 2 > Flashcards

Theme 2 Flashcards

1
Q

What is Aggregate Demand (AD)?

A

The ‘Aggregate’ (total) demand/ expenditures in the whole economy at any price level
AD=C+I+G+(X-M)

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2
Q

What effects Consumption (C)? / Consumption function

A

Interest rates
Consumer confidence
Wealth effect
Availability of credit
Inflation
Composition of households (young people and old people spend more than average)

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3
Q

Depreciation / capital consumption

A

Value of capital stock depreciates over time as it wears out overtime or is used up

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4
Q

Gross investment

A

Measures investment before depreciation

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5
Q

Net investment

A

Gross investment - depreciation

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6
Q

What’s the accelerator theory?

A

The theory that an increase in income over a period of time will increase investment

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7
Q

What’s the acceleration theory equation?

A

I(t)=a(Y(t)-Y(t-1))
In the year ‘t’
a - acceleration coefficient, or the capital-output ratio: the ratio between how capital and output produced, so like the efficiency

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8
Q

Animal spirits

A

Business confidence
Term used by John Maynard Keynes in 1930s

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9
Q

Retained profit

A

Profit that is kept by the firm, not distributed to shareholders
About 7% of industrial and commercial investment in the Uk is financed by retained profit
Higher the retained profit, the higher the investment

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10
Q

Investment function (determinants)

A

Access to credit
Retained profit
Rate of interest
Animal spirits
Government influence
Regulations

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11
Q

Budget deficit

A

Gov spending > gov receipts (like taxation)

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12
Q

Budget surplus

A

Gov receipts > gov spending
More saved than spent

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13
Q

Net trade balance / net exports

A

Exports - Imports
How much is made by the country

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14
Q

Demand for exports/ imports determinants

A

Price
Real income in domestic economy
Exchange rate
State of world economy
Degree of protectionism
Non-price factors - next day delivery, quality, etc

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15
Q

How does a stronger pound affect the economy?

A

Higher the value of the pound, the more expensive exports are for foreigners, and imports will be cheaper for domestics, so AD decreases
SPICED

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16
Q

What happens when the pound gets weaker?

A

The weaker the pound, the more it buys foreigners on Uk products, so exports increase, but imports are more expensive for domestics, as it buys them less, so imports decrease
So AD will increase

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17
Q

What is protectionism

A

Limits goods/ services coming into the country
Like Quotas and tariffs
Trade partnerships like the EU won’t need them
The higher the protectionism, the less trade between countries

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18
Q

What is a quota?

A

A limited quantity of a product being imported/ exported from a country

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19
Q

What is a tariff?

A

A tax on imports

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20
Q

Why is SRAS upwards sloping

A

In the short run, wage rates and prices are fixed, so if firms want to increase output, they will have to make workers work longer and leads to an increased price in the short run

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21
Q

Why is SRAS price elastic

A

As in the short run, wages rates are fixed, making workers work more will just give them higher wage earnings, as they work longer, so the increase in price would be fairly small
So it’s price elastic

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22
Q

What’s the classical LRAS

A

As LRAS is the productive potential, they believe no matter the PL, they will produce the same amount no matter the price level

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23
Q

What is the Keynesian LRAS curve?

A

The Keynesian view is that the productive potential of the economy will be the same no matter the PL, but in a recession, the PL will be still as they believe due to all their recourses, it will be set, and to get out the recession will have to be an increased AD

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24
Q

What shifts LRAS?

A

Anything that improves efficiency:
Technological advances
Changes in relative productivity to completing economics
Changes in education and skills
Changes in gov regulations
Demographic population changes and migration
Competition policy
Enterprise and risk taking
Economic incentives
Institutional (political) structure of economy

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25
Q

Reflation

A

rise in GDP occurring in a recession

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26
Q

economic stagnation

A

slow economic growth

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27
Q

stagflation

A

high inflation, but low economic growth

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28
Q

What are the 2 ways inflation is measured in the Uk?

A

Consumer price index (CPI)
Retail Prices Index (RPI)

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29
Q

CPI vs RPI

A

CPI - the main measure - used geometric measure, but RPI uses more arithmetic measure
RPI - the alternative measure -look at housing costs, like council tax, morgage, but CPI don’t

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30
Q

How is CPI measured?

A

basket of goods, around 650 are measured for increased price
Weights are added
Index numbers are generated, base year being 100
This is repeated monthly

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31
Q

Indexation

A

adjusts economic variables, like wages and taxes when anticipated inflation happens

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32
Q

Underemployment

A

someone who could be producing more than capable of
So if they want to work longer hours, or their job don’t reflect their skills

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33
Q

How is unemployment measured?

A

Monthly survey of the population
Counting number of people who claim benefits
measured on a certain day a month, e.g the 30th

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34
Q

Short vs long unemployment

A

Without work for less than a year = short
Over a year = long

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35
Q

Hidden unemployed

A

Population who would take a job if offered, but are not in work
Underemployed count for this also

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36
Q

Frictional unemployment

A

Workers who loose their jobs but quickly find new ones
Short term unemployment factor
E.g construction workers may be out for a bit whilst waiting for next job

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37
Q

Seasonal unemployment

A

Construction and tourist workers tend to work on a seasonal basis
so may be unemployed for, say Winter

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38
Q

Structural unemployment

A

when structure of economy leads to demand for labour from firms < supply for labour
So people are left without jobs
Theres different types:
- regional unemployment
- sectorial unemployment
- technological unemployment
- classical/ real wage unemployment

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39
Q

regional unemployment

A

regions can be at full employment, leaving the rest isolated unemployed

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40
Q

sectoral unemployment

A

sectors in the economy may shrink, like a steel company, leaving people undmployed

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41
Q

classical unemployment

A

same as real wage unemployment
when wages get too high for firms to run, so they don’t hire, leaving people unemployed

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42
Q

Cyclical unemployment

A

When economy is not booming, economic growth is less leading to demand-deficient unemployment
So theres insufficient AD for workers to get a job in recessions and decreases of growth

43
Q

What are the 4 types of unemployment?

A

Frictional unemployment
Seasonal unemployment
Structural unemployment
Cyclical unemployment
All frictional, seasonal, and structural are supply side facotors
but cyclical is caused by lack of demand

44
Q

What does cyclical employment do to LRAS-AD diagrams?

A

If theres cyclical unemployment, theres a lack of demand, so it will not be in equilibrium with SRAS and LRAS.
Also shows on a PPF, as it won’t be on the productive potential curve
supply-side employment can still occur at ‘Full Employment’

45
Q

4 ways how economies become more interconnected

A

Proportion of international trade of an economy increases
ever-increasing ownership of assets (shares or loans) owned by foreign actors
increased migration
tech interconnection increasing

46
Q

The current account

A

Where payments for buying and selling are recorded

47
Q

what is the balance of payments account 2 components?

A

the current account
capital and financial assets

48
Q

primary income

A

net flow of profits, interest and dividends from production abroad

49
Q

dividends

A

profit to shareholders

50
Q

secondary income

A

mainly gov transfers to and from overseas organisations
consists of all transfers which are not capital, so invisibles

51
Q

What are the governments macroeconomic objectives?

A

T rade
I nflation
G rowth
E mployment
R edistrution of income (income inequality)
S ustainability

52
Q

right-wing economists/ politicians

A

(the racists)
Argue inequality is positive, as it increases competition
so they reduce taxes on the rich, so theres a greater inequality of income

53
Q

left- wing economists/ politicians

A

argue they want equality in economy
everyone should have a certain living standard
gov intervenes as they believe free markets lead to inequalities
leads to higher taxes, but economy is more equal

54
Q

What are the 3 injections into the economy?

A

Government spending (G)
Investment (I)
Exports (E)

55
Q

What are the 3 withdrawals out of the economy?

A

Savings (S)
Taxation (T)
Imports (M)

56
Q

Who believes in the multiplier and what is it?

A

Its Keynesian ideology. In John Maynard Keynes argued in his famous book that national income will increase more than what is invested, due to the multiplier.

57
Q

What effects the multiplier?

A

the higher the MPC, the higher the multiplier
as multiplier = 1/(1-MPC)
and = 1/MPW

58
Q

Marginal Propensity to Withdraw (MPW)

A

The proportion of the withdraws in the economy.
MPW = MPS + MPT + MPM
MPW + MPC = 1

59
Q

Gross Domestic Product (GDP)

A

The total market value of all goods and services produced within the nation’s borders, over a period of time
at market prices, so includes VAT, so GDP will be higher than actual national income

60
Q

Gross Value Added (GVA)

A

GDP - indirect taxes on products
So the overall what they add to the value of the product

61
Q

Gross National Income (GNI)

A

GDP + net overseas income through primary income

62
Q

Gross National Product (GNP)

A

The total value of all goods and services produced by the country’s residents, no matter where they are making this money.
Excludes money made by foreigners in the country

63
Q

Net National Income

A

National Income - depreciation

64
Q

Why might national income be inaccurate?

A

statistical inaccuracies
the hidden economy
the public sector is hard to calculate

65
Q

Purchasing power parties (PPP)

A

Money exchanged, even at the market exchange rate, will buy you different amounts of stuff in different countries.
E.g you could survive off £2 in Kenya
So there are purchasing power parties, that allow different currencies to buy the same amount of goods.
E.g if a €2 basket = £1 basket, then the purchasing power parties exchange rate is €2:£1

66
Q

Actual growth

A

‘short term growth’
the real growth in quantity of goods and services
expands AD and ppf point

67
Q

Potential growth

A

‘long term growth’
change in productive potential of economy
expands LRAS and ppf curve

68
Q

Hysteresis

A

when economy doesn’t fully recover from a recession
shifts trend rate of growth, due to permanent loss of human and physical capital
as people who lost their jobs may not of got them back etc.
GDP still rises overtime, but slows down the rate

69
Q

Privatisation

A

allows selling gov-owned businesses to be privately owned
allows the companies to move goods quicker and be more efficient

70
Q

Deregulation

A

removing regulations to allow firms to grow easier

71
Q

Sustainable growth

A

growth in the productive potential that doesn’t use non-renewable resources
growth that can sustain without having to finance growth with additional equity or debt

72
Q

Quantitive easing

A

a monetary policy where a central bank prints money electronically that is used to buy financial assets, like gov bonds or shares from financial institutions.
so they take these assets off them and give them money
the price of these assets increase and interest rates are lower
so people have more money to spend and its cheaper to borrow
increases C and AD

73
Q

Whats the coupon rate of a bond?

A

the set interest rate of a bond

74
Q

Whats the yield of a bond?

A

Yield = (coupon rate/ market price)x100
so if the market price goes up, the yield goes down, so its actual interest on the bond decreases.

75
Q

The base rate

A

Central banks, like Bank of England, have a headline rate of interest that influences other interest rates

76
Q

What are the 2 types of demand-side policies?

A

Monetary policies - manipulation of the gov using monetary variables, through interest rates, quantitive easing
Fiscal policies - use of taxes, gov spending and borrowing

77
Q

Monetary Policee Committee (MPC)

A

from the Bank of England
makes the most important decisions about the monetary policy
they set the Bank of England base rate and manages QE

78
Q

Public Sector Net Borrowing (PSNB)

A

The borrowing from the gov when in fiscal deficit

79
Q

Expansionary fiscal/ monetary policy

A

Increases AD

80
Q

Contractionary fiscal/ monetary policy

A

Decreases AD

81
Q

Neutral fiscal/ monetary policy

A

keeps AD the same

82
Q

Bottlenecks

A

supply-side constraints that prevent the economy from growing
E.g a senior manager is slow at approving of tasks

83
Q

The 2 types of supply-side policies

A

Market based policies - policies designed to remove barriers to make working more efficient
Interventionist policies - policies designed to correct market failure, so by the gov intervening, so gov spending

84
Q

Effects on incentives in the market

A

Taxes on income
Welfare benifits
Poverty/ earnings trap
Unemployment trap
Subsidising workers
Research and development made cheap to do for firms

85
Q

Earnings trap

A

when a low income worker gets paid a tiny bit more, or even less due to more taxes and less benifits

86
Q

Unemployment trap

A

when a worker is a little or worse off by getting a job instead of benefits

87
Q

Ways of increasing competition

A

Privitisation
deregulation
competition policies - reduces power of monopolies
industrial policy - gov policy to support firms which are important for growth

88
Q

Improving labour market flexibility benifits

A

Supply and demand responds quicker to external changes in labour market
lower unemployment

89
Q

Types of labour market flexibility

A

geographical flexibility
external numerical flexibility
internal numerical flexibility
functional flexibility
wage flexibility

90
Q

geographical flexibility

A

willingness of workers to move area to get a job
if housing is too expensive where jobs are needed, theres less incentive to work

91
Q

external numerical flexibility

A

ability of firms to adjust workforce for their needs
eg sacking workers ay be hard

92
Q

internal numerical flexibility

A

ability of firms to adjust working hours of staff
eg using zero hour contracts so they are flexible

93
Q

functional flexibility

A

when a firm can redeploy a worker from one job to another
worker has to be multi-skilled
costs of training will be needed

94
Q

wage flexibility

A

where firms can adjust wages reacting to demand in labour market

95
Q

Trade unions

A

organisation of workers into one bargaining unit
helps people within their jobs
if they raise their wages that they give to people getting jobs, then employment and output will be lower in other markets, so the gov intervenes to restrict their power

96
Q

Market-based policies

A

supply-side policy
Reduce competition:
- Privitisation
- deregulation
- competition policies
- industrial policies
Labour reforms:
- Improving labour flexibility
Trade unions
Taxes, like min wages

97
Q

Interventionist policies

A

supply-side policy
all down to gov spending:
education
infrastructure
subsidies

98
Q

Macroeconomic conflicts

A

Economic growth vs inflation
unemployment vs inflation
economic growth vs Balance of payments
budget deficit vs economic growth
economic growth vs environment

99
Q

Philips curve

A

shows the trade off between unemployment (x axis) vs inflation (y-axis)
higher unemployment = lower the wages, so low inflation
higher the inflation, the higher wage rates are, so lower unemployment

100
Q

What are the simplified demand and supply policies you need to know?

A

Demand-side policies:
Monetary policies
-Interest rates
- Quantitive easing
Fiscal policies
-Taxation
- Gov spending to increase AD, like subsidising firms, benefits, public sector pay/ spending

Supply-side policies:
Market-based policies
- Privatisation
-Deregulation
- Labour flexibility
- Trade unions
Interventionist policies
- Gov spending to increase supply, so on:
-infrastructure
-education
-subsidies

101
Q

Disinflation

A

a decrease in the rate of inflation

102
Q

What are the 3 limitations of using CPI to measure inflation?

A

Substitution Bias
- due to fixed baskets, consumers changing habits take a while to be taken into consideration
Quality adjustment instead of price adjustment
Consumer representation
- CPI is based on urban consumers, not reflecting all groups like rural and specific demographic groups

103
Q

What does withdrawals mean?

A

‘Leakages’ of national income in the circular flow

104
Q

What are the 2 types of inflation?

A

Demand-pull inflation
- When demand rises for a product, so equilibrium shifts price higher, leading to inflation
Cost-push inflation
- When costs increase, so firms put it on consumers, increasing price, leafing to inflation

🔱Microeconomics (11 decks)

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