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MacroEconomics > 10 - How the Macroeconomy Works > Flashcards

10 - How the Macroeconomy Works Flashcards

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1
Q

When is the Economy in equilibrium?

A

When savings and investments are equal.

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2
Q

Why can investment never exceed savings?

A

Banks use the money that households deposit to provide investment.

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3
Q

Is investment an injection or a leakage?

A

Injection.

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4
Q

What are the transactions between banks and firms?

A

Banks can provide business investment, and small business loans.

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5
Q

Do savings represent a leakage, or an injection?

A

Leakage.

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6
Q

Do Savings and Injections represent real or money flows?

A

Money Flows.

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7
Q

What are the transactions between banks and households?

A

Banks provide loans to households, and households have savings accounts with banks.

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8
Q

What is the third economic agent?

A

Banks/Financial Sector.

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9
Q

How is income created through households?

A

Through the purchase of goods and services.

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10
Q

Do banks represent real or money flows?

A

Both.

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11
Q

How do firms benefit households?

A

They provide goods and services, and pay wages to workers.

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12
Q

Do firms and households represent real or money flows?

A

Real Flows.

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13
Q

How do households benefit firms?

A

They purchase goods and services, which generates revenue.

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14
Q

What are the two main economic agents?

A

Households, Firms.

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15
Q

What is the fourth economic agent?

A

Government.

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16
Q

What are the transactions between households and government?

A

Households pay taxes to government, households receive public services such as the NHS, and transfer payments, such as universal credit.

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17
Q

Do government decide Fiscal or monetary policy?

A

Fiscal Policy.

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18
Q

What are the transactions between government and firms?

A

Firms pay taxes to the government, such as corporation tax. Government can give subsidies, or purchase things from firms.

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19
Q

What are government grants?

A

Money that the government gives to businesses that doesn’t need to be paid back, in order to reduce unemployment.

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20
Q

What are the transactions between government and banks?

A

The government rely on banks to enforce the monetary policy, which is decided by the Bank of England. Government can bail out banks if necessary.

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21
Q

Why is it the governments’ responsibility to keep the banking system stable?

A

To ensure consumer can access the system, and the money they have tied up in it.

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22
Q

What is an example of the government bailing out banks?

A

After the 2008 Financial crisis, the banking system was at risk of collapse, so the government bailed out RBS.

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23
Q

What is a balanced budget?

A

One where spending is equal to taxation.

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24
Q

What are the three injections into an economy?

A

Investment, Government Spending, Exports.

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25
What are the three leakages to an economy?
Savings, Taxation, Imports.
26
What is the relationship between households, firms, and the rest of the world?
Households and firms purchase goods and services from the rest of the world, and the rest of the world purchase goods from firms within a country.
27
Give three countries within the EU.
France, Germany, Italy.
28
What are the economic benefits of the EU?
Largest trade bloc in the world, free trade with other members, world's biggest exporter of manufactured goods. Shared resources in R and D.
29
What are the economic drawbacks of the EU?
Cost of membership, Being tied to the Euro, Financial pressure from Brussels.
30
Give three Commonwealth countries.
India, Canada, Australia.
31
What are the economic benefits of the commonwealth?
The UK has a trade surplus of £3 Billion with the commonwealth.
32
What is the equation for Aggregate Demand?
AD = Consumption + Investment + Government Spending + (Exports-Imports).
33
Which Letter Denotes Aggregate Demand?
AD.
34
Which Letter denotes Consumption?
C.
35
Which letter denotes Investment?
I.
36
Which letter denotes Government Spending?
G.
37
Which letter denotes exports?
X.
38
Which letter denotes Imports?
M.
39
What is the largest component of AD?
Consumption.
40
What % of GDP is Consumption?
60%.
41
What is the level of consumption primarily affected by?
Income Levels.
42
What else is consumption affected by?
Interest rates, Wealth, Expected Income, Consumer confidence, Tax rates, Job security, Level of Savings.
43
Why does an increase in Income lead to higher consumption?
People have higher levels of disposable income, which they can spend.
44
Why does an increase in interest rates lead to lower consumption?
There is a larger reward for saving, so people save more, which represents money leaked from the economy.
45
Why does high consumer confidence lead to more consumption?
Consumers are more likely to make bigger purchases, as they're more confident of their ability to repay.
46
Why might an inflation expectation affect consumption?
It may increase spending now to prepare for a decrease later on.
47
What will the expectation of redundancy do to consumption?
Present consumption will decrease, with the hope of finding another job, which would increase consumption in the future.
48
Which changes increase consumption?
Wage growth, Lower taxes, Low interest rates, High levels of wealth, Credit availability, Job security.
49
Which changes decrease consumption?
High inflation, Wage freeze, Higher taxes, High interest rates, Low level of wealth, Redundancy.
50
What is the second biggest component of AD?
Investment.
51
What is the Multiplier effect?
An initial change in spending leading to a larger, more widespread final impact on the economy.
52
What are the effects of the government injecting money into house building?
Provides jobs for local builders, as government purchase their services. Expands the capacity of the town, expands the local economy.
53
What is an example of expansionary fiscal policy?
Building Homes.
54
What does growth of the local economy mean for local people?
People have more disposable income, meaning shops and restaurants in the area have more demand.
55
What does the multiplier ratio show?
The increase in GDP following an initial injection.
56
What is the difference between savings and capital investment?
Savings are a leakage from the circular flow of income, as money which is saved can't be spent on consumption.
57
Which factors influence planned investment?
Actual and expected demand for goods and services, expected profits and taxes, interest rates, and availability of finance.
58
What happens if businesses aren't confident for the future?
They won't invest, as they won't expect a profit from their investment.
59
What is the accelerator effect?
The relationship between increased GDP and capital investment.
60
How may firms respond to a growing economy?
Intensifying existing capacity, increasing spending on machinery.
61
What does falling business confidence lead to?
Less business investment - business confidence was 102 before 2008, 93 following.
62
What is government spending?
The government spending money on state provided goods and services.
63
What are the three types of government spending?
Transfer payments, Current spending, capital spending.
64
What is current spending?
Spending on current goods and services, such as wages of public sector workers.
65
What is capital spending?
Spending on improvements to infrastructure.
66
What is the equation for total government spending?
Transfer payments + Current spending + capital spending.
67
What is net trade?
The difference between imports and exports.
68
Does the UK have a trade surplus or a trade deficit?
Trade deficit.
69
Which factors increase the savings ratio?
Rise in interest rates, expectation of future job losses, restriction of credit availability.
70
Which factors decrease savings ratio?
Rising consumer confidence, Taxes on savings, Lower interest rates, Job security.
71
What does the AD/AS model show?
Shows the performance of the economy.
72
What is an example of British industry investment?
British Volt - Building a new gigafactory to manufacture car batteries, in an area where unemployment is well above national average.
73
What are the statistics around British Volt's Investment?
£2 Billion investment, 3000 jobs, Open in 2024, Capacity to produce 300,000 batteries per year.
74
What is the equation for marginal propensity to consume?
Change in consumption/Change in income.
75
What is the equation for marginal propensity to save?
Change in saving/Change in income.
76
What does the aggregate supply curve illustrate?
The level of supply in the whole economy at any given level of average prices.
77
What may businesses be affected by in the short run?
Wage rates, Raw materials, Taxes, Subsidies.
78
What effect does a rise in wage rates have on SRAS?
Increased costs, as workers are paid more. SRAS curve shifts leftward.
79
What does a rise in raw material prices mean for SRAS?
Increased costs, as it costs more for the same product, SRAS curve shifts leftward.
80
What does a decline in the value of sterling mean for SRAS?
Increased costs, as imported goods become more expensive. SRAS curve shifts leftward.
81
What does an increase in corporation tax mean for SRAS?
Less profit for businesses, as more goes to tax. SRAS shifts leftward.
82
What does a fall in interest rates mean for SRAS?
Decreased costs, as borrowing becomes less expensive. SRAS curve shifts right.
83
Why does a section of the SRAS curve become steeper?
At low levels of production, there is excess capacity, meaning there are unemployed resources. As production increases, towards full capacity, further increased may result in rising costs.
84
Which factors affect LRAS?
Technology, Productivity, Worker attitudes, Factor mobility, economic incentives.
85
How do increases in the use of capital equipment affect LRAS?
Increase in output, outward shift in LRAS.
86
Which other factors cause an outward shift in LRAS?
New technology, Increasing number of business start ups, policies intended to increase incentives to work, productivity improvements.
87
Why is the LRAS curve vertical?
All factors of production are fully employed, a change in price doesn't change LRAS.
88
What do Keynesian economists believe in?
The importance of influencing aggregate demand through monetary and fiscal policy.
89
How does a cut in interest rates affect an AD/AS diagram?
The LRAS curve shifts outwards.
90
Why does the LRAS curve shift outwards in response to interest rates?
A cut in interest rates will encourage firms to invest more, in more expensive capital goods, which they may need for the expansion of their business.
91
What are examples of supply side policies which can increase LRAS?
Deregulate financial markets, Privatisation, Reduce power of unions, Reducing income tax.
92
What is the universal credit system?
A means-tested system which combines six benefits for working age households with low incomes.
93
What have changes been to child benefit since 2010?
Child benefit was frozen for three years from 2011/12. Child tax credit reduced for those who earn more than £40,000.
94
What is the housing benefit cap?
Limits the total amount of benefits you can receive to £486.90 per week.
95
How can supply side policy reduce the amount of income tax paid by individuals pay?
Lower income tax rates, Increase in income tax thresholds, Tax credits - supplementing income for those on low pay.
96
What is the current threshold for income tax?
£12570.
97
What are the different bands of income tax, and what are they taxed at?
Basic Rate - 20%. Higher Rate - 40%. New Higher Rate - 45%.

MacroEconomics (15 decks)

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