Year 2 Macro Flashcards

1
Q

Why are the accelerator and multiplier causes of macroeconomic instability

A

Both exacerbate booms and slumps of the trade cycle

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2
Q

What is the multiplier effect

A

The subsequent effects on national income from changes in AD

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3
Q

Multiplier formula

A

1/(1-MPC)

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4
Q

When is multiplier large

A

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

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5
Q

Problems with the multiplier

A

Difficult to estimate the size of the multiplier - making fiscal policy difficult to predict changes.
Multiplier takes time to feed through the economy

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6
Q

Accelerator effect

A

When an increase in national income results in a proportionally larger rise in capital investment spending

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7
Q

Capital:Output ratio

A

Tell us how much a firm needs to invest to increase output by one unit

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8
Q

When will accelerator be strongest

A

High consumer spending increases when national increases
Low spare capacity in the capacity
Available supply of investment funds is high

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9
Q

What is the SR Phillips curve

A

Shows the trade off in the short run of inflation and unemployment

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10
Q

What happens in the long run in relation to the Phillips curve

A

The economy tends towards the natural rate of unemployment. Thus in the long run, there is no trade of between unemployment and inflation

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11
Q

Inflation

A

The general increases in prices measured by CPI and RPI

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12
Q

Deflation

A

A fall in price over time

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13
Q

Disinflation

A

A slow down in the rate of inflation - despite prices still increasing

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14
Q

Stagflation

A

A period of rising inflation, but falling output and rising unemployment

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15
Q

What are the causes of inflation

A

Demand pull and costs push

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16
Q

Demand pull infllation

A

Inflation caused by rising AD

17
Q

Cost push inflation

A

Inflation caused by increasing business costs and a fall in SRAS

18
Q

Causes of cost push inflation

A

Increasing wage demand, rise in price of raw materials and commodities, increase in corporation and VAT tax, depreciation in exchange rate

19
Q

Costs of inflation

A

Increased inequality
Falling real incomes
Negative interest rates
Risk of wage inflation
Reduced competitiveness

20
Q

Benefits of inflation

A

Rising wages for employees
Reduces cost of debt

21
Q

What is bad (malign) deflation caused by

A

A fall in AD

22
Q

What is the problem with malign deflation

A

Long term and anticipated leading to reduced business and consumer confidence

23
Q

What is good deflation (benign) caused by

A

A fall in the costs of production

24
Q

What are the costs of deflation

A

Delayed expenditure
Falling wages
Fall in value of wealth due to growing value of debt
Saving over spending

25
Q
A