Year 2 Macro Flashcards
Why are the accelerator and multiplier causes of macroeconomic instability
Both exacerbate booms and slumps of the trade cycle
What is the multiplier effect
The subsequent effects on national income from changes in AD
Multiplier formula
1/(1-MPC)
When is multiplier large
Propensity to spend extra income on domestic g/s is high
High consumer confidence in the economy
Marginal rate of tax on extra income is high
Problems with the multiplier
Difficult to estimate the size of the multiplier - making fiscal policy difficult to predict changes.
Multiplier takes time to feed through the economy
Accelerator effect
When an increase in national income results in a proportionally larger rise in capital investment spending
Capital:Output ratio
Tell us how much a firm needs to invest to increase output by one unit
When will accelerator be strongest
High consumer spending increases when national increases
Low spare capacity in the capacity
Available supply of investment funds is high
What is the SR Phillips curve
Shows the trade off in the short run of inflation and unemployment
What happens in the long run in relation to the Phillips curve
The economy tends towards the natural rate of unemployment. Thus in the long run, there is no trade of between unemployment and inflation
Inflation
The general increases in prices measured by CPI and RPI
Deflation
A fall in price over time
Disinflation
A slow down in the rate of inflation - despite prices still increasing
Stagflation
A period of rising inflation, but falling output and rising unemployment
What are the causes of inflation
Demand pull and costs push
Demand pull infllation
Inflation caused by rising AD
Cost push inflation
Inflation caused by increasing business costs and a fall in SRAS
Causes of cost push inflation
Increasing wage demand, rise in price of raw materials and commodities, increase in corporation and VAT tax, depreciation in exchange rate
Costs of inflation
Increased inequality
Falling real incomes
Negative interest rates
Risk of wage inflation
Reduced competitiveness
Benefits of inflation
Rising wages for employees
Reduces cost of debt
What is bad (malign) deflation caused by
A fall in AD
What is the problem with malign deflation
Long term and anticipated leading to reduced business and consumer confidence
What is good deflation (benign) caused by
A fall in the costs of production
What are the costs of deflation
Delayed expenditure
Falling wages
Fall in value of wealth due to growing value of debt
Saving over spending
