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Economics > Y12 macroeconomics > Flashcards

Y12 macroeconomics Flashcards

1
Q

What are the components of AD?

A

Consumption, Investment, Government spending and net exports OR C + I + GS + (X-E)

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2
Q

How do you calculate MPC?

A

marginal propensity to consume / marginal…

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3
Q

A budget deficit is when…

A

government spending > tax receipts

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4
Q

A budget surplus is when…

A

tax receipts > govt. spending

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5
Q

What is inflation?

A

The sustained rise in the general price level of goods and services over a period of time

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6
Q

What does PPP do?

A

This equalises purchasing power between different economies or countries.
-> This involves adjusting GDP per capita to see differences between purchasing powers of different countries

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7
Q

Who sets the inflation target and who sets the interest rate?

A

Interest rate - MPC
Inflation target - Govt

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8
Q

Types of unemployment…

A
  • cyclical
  • structural
  • frictional
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9
Q

How do you calculate rate of increase in real GDP…

A

Rate of increase in Real GDP = rate of increase in nominal GDP - rate of price inflation

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10
Q

How do you calculate increase in real GDP…

A

increase in Real GDP = increase in nominal GDP - rate of price inflation

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11
Q

How do you calculate Current year real GDP?

A

Current year real GDP = current year nominal GDP x price lvl in previous year/price lvl in current year

changes in real GDP are expressed with index numbers.

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12
Q

How do you calculate current year economic growth?

A

Current year economic growth = current year real GDP - previous year real GDP / previous year nominal GDP x 100

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13
Q

What’s economic growth?

A

An increase in the productive potential of an economy.

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14
Q

What are the government’s main policy objectives?

A
  • low and stable inflation
  • satisfactory BoP
  • low unemployment
  • Income equality
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15
Q

What are some possible trade-offs/conflicts?

A
  • Economic growth and inflation.
  • Economic growth and the environment.
  • *Inflation and BoP deficit.
  • Economic growth and wealth inequality.
  • Inflation and unemployment.

*This is due to high prices deterring other countires from exchanging, which may lose a country’s competitiveness/more impressive imports bought due to demand-pull inflation.

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16
Q

What are supply-side policies?

A
  • They intend to increase the economy’s trend growth rate, or its productive potential.
  • They can cause efficiency within markets.
  • They can aid achieving policy objectives.
  • Trade-offs can be prevented - due to lower costs from better efficiencies.
  • However, there’s a risk of unintended consequences, and things like benefit cuts can lead to poverty.

They can right shift LRAS or increase trend growth rate.

e.g. tax cuts, privatisation, deregulation etc

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17
Q

What does fiscal policy involve?

Fiscal policy is used to influence the economy as a whole.

A

Govt. spending and taxation.

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18
Q

What do the two types of fiscal policy do?

(Expansionary and deflationary)

A

Expansionary - Boosts AD by increasing govt. spending and lowering taxation (can cause a budget deficit)
Contractionary - Lowers AD by lowering govt. spending and increasing taxation (can cause a budget surplus)

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19
Q

Pros and cons of expansionary and contractionary fiscal policy…

A

Expansionary - Boosts economic growth and reduces unemployment, HOWEVER, possible inflation and possible current account deficit, (may be used during a recession or a negative output gap).

Contractionary - Lowers economic growth and increases unemployment, HOWEVER, it will boost price levels and cause a current account surplus, (may be used during a positive output gap or a
boom).
-> For expansionary, a current account deficit can occur as with higher income, imports rise from more purchases.
-> For contractionary, a current account surplus can occur as with lower income, imports decrease from less purchases.

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20
Q

What do supply-side economists argue?

A
  • A rise in taxes cause a disincentive to work.

Can be displayed on a Laffer curve.

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21
Q

What does monetary policy involve or use?

A

This uses interest rates, the money supply and exchange rate.

This is a demand-side policy!

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22
Q

Lo

What are the two types of monetary policy?

A

Expansionary - Boosts AD by lowering interest rates, less restrictions on money supply and a weak exchange rate, (may be used during a negative output gap or a recession). -> To combat a BoP deficit, due to more imports bought.
Contractionary - Lowers AD by boosting interest rates, more restrictions on money supply and a strong exchange rate, (may be used during a boom or positive output gap). -> Can combat inflation

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23
Q

Why can’t monetary policy help to achieve all four macroeconomic objectives?

A
  • Due to trade-offs.
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24
Q

What does the BoP entail?

A
  • The current account, the capital account and financial account.
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25
Q

What are the four sections of the current account?

A
  • trade-in goods, trade-in services, investment income and transfers.
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26
Q

When might a country experience a current account deficit?

A

-> high levels of consumer spending, low competitiveness and external shocks.

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27
Q

Cons of a BoP surplus and BoP deficit

A
  • A BoP surplus may be a result of an overeliance on exports, or may cause inflationary pressures.
  • ## A BoP deficit may cause high unemployment and can show a country being uncompetitive.

BoP imbalances can be combated via supply-side policies, devaluing currencies etc.

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28
Q

What’s cost-push inflation?

A

Inflation caused by rising costs of input to production.
-> These rising costs are passed on to consumers during purchases.
-> Reasons involve rising costs of raw materials, rise in indirect taxes and a if wages amount for a big proportion for a firm’s total costs.

This causes a left shift in AS.

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29
Q

Whats demand-pull inflation?

A

This happens due to excessive AD growth.

Causes a right AD shift.

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30
Q

Whats a bottleneck shortage?

A

->When demand grows when labour and resources are being fully used
-> Increasing output may lead to shortages
-> This may cause rising prices for consumers and firms.

Can cause inflation.

31
Q

What’s Fisher’s Equation of Exchange?

A

money supply x velocity of money = price level x aggregate transactions.

MV = PT

The quantity theory of money by monetarists.

32
Q

Some cons of inflation…

A

-> falling living costs.
-> A BoP deficit, due to high export costs and cheap import costs, (imports > exports).
-> May discourage saving as saving value falls, which could lead to demand-pull inflation.

33
Q

Pros and cons of deflation…

A

— Indicates falling AD
— Indicates rising unemployment.
— Consumers may save more due to speculation of further low pricing.
+++ Low firm costs may be passed onto consumers
HOWEVER, high consumer spending can lead to bottleneck shortage!

34
Q

How is GDP per capita calculated?

A

GDP per capita = Total GDP / population size

35
Q

Why may GDP per capita be better than GDP?

A

-> GDP per capita may indicate people’s living standards.
-> This aids comparing figures with different countries of different population sizes.

36
Q

Why may high GDP per capita may not always mean high living standards?

A
  • GDP per capita does not take into account quality of life of individuals or the population.
  • e.g. High GDP per capita but long hrs may be worked.
37
Q

What do index numbers indicate?

A

These represent percentage changes.

1st year is called the base year, which starts at 100.

38
Q

What does the GPI measure?

A

This measures effects of economic growth, and takes into account GDP, and things that effect quality of life.

GPI is useful as it can enhance overall welfare, rather than just GDP.

39
Q

What is the HDI?

HDI figure is measured from 0 to 1.

A

This takes into account health, education and standard of living.
- GDP and GDP per capita do not account for the hidden economy or public spending.

0.8 - high development and 0.5 - low development

40
Q

Some of cons of unemployment…

A
  • Unemployed will have less incomes, meaning less AD, etc
  • Criminal activity
  • Less tax revenue for the govt.
41
Q

What’s economic growth?

A

The increase in the productive potential of the economy.

42
Q

How are booms and recessions displayed?

A

With positive or negative output gaps.
-> Due to AD rising and decreasing

43
Q

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What are the two measurements of unemployment?

A

Claimant Count - Easy and free to obtain but can be maniuplated and it excludes those seeking work but are ineligible for benefits.
LFS - More accurate than the Claimant Count, globally agreed, but is expensive.

44
Q

How can short-run and long-run economic growth be shown on a PPF curve?

A

Short-run - PPF movement
Long-run - PPF shift

45
Q

What are the two main measurements of inflation?

A
  • CPI and RPI
  • They help to determine wages and state benefits.
  • ## RPI uses a basket of goods, and inflation measurement uses this.
46
Q

What causes SRAS shifts?

A

Changes in costs of production

47
Q

What causes LRAS shifts?

A

Changes in factors of production.

48
Q

What are the two main types of exchange rates?

A

Floating and fixed

Both have their pros and cons,

49
Q

Pros and cons of a fixed exchange rate…

A

+++ Creates certainty encouraging investment
+++ Competitive pressures on firms to keep costs low and to keep productivity up.
— Difficult to maintain
— Speculators can sell the currency if they feel it isnt sustainable.

50
Q

Pros and cons of a floating exchange rate…

A

+++ Govt doesn’t need to use monetary policy to maintain the exchange rate
+++ Less neeed for foreign currency reserves
+++ A BoP deficit can be corrected if exports and imports are price elastic.
— Falls in exchange rate can create inflationary pressures.
— Wide fluctuations possible
— Speculation can strengthen an exchange rate, making goods over-priced, making goods lose competitiveness.

51
Q

How can supply and demand affect exchange rates?

A

-> A rise in currency supply and a drop in currency demand will lower currency value.
-> Other factors may entail inflation rates, interest rates etc.

52
Q

Impacts of exchange rates…

A

If currency value falls:
-> Cheaper exports and more expensive imports -> a BoP surplus
-> A current account deficit should fall, and a surplus could increase -> Dependent on Marshall-Lerner condition
If currency value rises…
- exports are more expensive and imports are more cheaper -> a potential rise in current account deficit or reduction in current account surplus
- AD falls + unemployment would rise
- inflation, but this may depend on PED for exports and imports

53
Q

What does the Marshall-Lerner condition state?

A

-> An economy can be successful on a current accounr deficit if the PED for imports and exports exceed 1.
-> This may hold in the long run, not the short-run, as switching to a cheaper substitute takes time.

Can be shown via a J-curve. (Current account and time axises).

54
Q

How do you calculate real exchange rate?

A

nominal exchange rate x price lvl in a country / price lvl abroad

55
Q

What’s quantitative easing?

A

Increasing the money supply to stimulate AD.

56
Q

What does CPI measure?

A

Inflation, with around 700 basket of goods

57
Q

What is cyclical unemployment?

A

Caused by general lack of spending within the economy.

58
Q

What does 1 mean on the Gini coefficient?

(Lorenz Curve)

A

Complete inequality.

59
Q

Define fiscal policy

A
  • Using govt. spending and taxation to manipulate AD within an economy.
60
Q

Define short-run economic growth…

A
  • When idle resources are being used up in an economy

(This may indicate economic recovery)

61
Q

Define long-run economic growth…

A
  • The rise in an economy’s productive potential level of output.
62
Q

Define full employment…

A
  • According to Beveridge, 3% or lessof the labour force unemployed.
62
Q

Define GDP…

A
  • The sum of all goods and services, or level of output produced in an economy over a period of time.
63
Q

Some things GDP measures…

(Including cons)

A
  • Growth + living standards
    Cons:
  • Double counting (When output is measured twice, during the primary sector and when its manufactured in the secondary sector) despite it being the same output
  • Hidden economy (black market)
  • Agriculture + DIY not in GDP
  • Errors during obtaining data
  • Negative exernalities not included
  • Potential income inequality not included
  • Type of output produced (e.g. if lots of capital produced, firms will benefit NOT consumers)
  • Level of INDIVIDUAL incomes not included
64
Q

Some things GDP per capita may measure…

A
  • Output per worker within the population.
    However:
  • Remittances occur
  • FDI can distort final figures, (as FDI profts may be sent back to THEIR home country). -> AKA repatriation of profit.

Same issues as GDP

(FDI is when foreign firms come to your home country and operate).

65
Q

Some things GNI measures…

(GNI may be better than GDP and GDP per capita in developing countries)

A
  • Enviromental costs of production (Green GDP)
  • Income by domestic workers/firms and foreign workers/firms
    However:
  • Putting monetary value on environmental costs very difficult
  • Green GDP can heavily reduce GDP figures (attempted by China) and didn’t work out very well.
66
Q

Define the multiplier effect…

A
  • a process by which any changes in the components of aggregate demand will lead to an even greater change in national output.
67
Q

Define the accelerator effect…

A
  • How changes in investment link to changes in the rate of GDP growth.
68
Q

How can deflation be identified?

A
  • If the inflation goes to a minus.
69
Q

How CPI measures inflation and its limitations

A
  • With a basket of good and a survey
  • Weighted prices added
    However:
  • Personal inflation rates may differ
  • Price fluctuations of certain goods
  • Housing costs may be an issue within itself regarding inflation, as this may have an underlying inflation rate.
  • Basket updates may be too slow.
70
Q

Pros of inflation…

A
  • Workers have higher wages
  • Incentivises firm to increase output
  • Reduces debt value (e.g. £50 in inflation would be easier to pay off as more money going around)
  • Can keep unemployment low in a recession (high skilled workers may keep jobs)
  • Govt. finances can improve (more govt. tax receipts from inflation) + may reduce real value of any of their debt
71
Q

Cons of inflation…

A
  • Lower purhcasing power
  • Savings’ value falls
  • Lower global competitiveness (exports made more expensive)
  • Inflationary noise (may cause speculation)
  • Fiscal drag (rising inflation means higher income BUT in line with inflation, so higher tax bracket, so consumers worse off) + menu costs
72
Q

Pros and cons of deflation…

A
  • Falling prices for consumers and firms
    HOWEVER…
  • Delayed spending, debt value rises (less money going around meaning people have less money) and positive real interest rates (even if I.R rates are cut, I.R rates will still remain positive as money value still rises from deflation). -> Lower AD, higher unemployment etc

(Deflstion rate always has a minus before value!)

Also a deflationary spiral can happen, not good!

73
Q

PPF things…

A
  • all points on the PPF curve are productively efficient
  • Points WITHIN the PPF curve means there are unemployed resources (unused resources)
  • Points OUTSIDE PPF curve not possible due to insufficient resources)
  • Finding allocative efficiency (perhaps welfare maximisation) JUST WITH PPF not possible

Economics (16 decks)

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