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Flashcards in A Level Year 1 Deck (62)
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1

What are the 5 Macroeconomic Indicators?

Economic Growth, Unemployment, Inflation, Balance of Payments & Income Distribution

2

Definition of Macroeconomics

The study of the economy as a whole and is concerned with the total amount of G&S produced by the national economy and the problems associated with them

3

How do we know if we've allocated scarce resources efficiently and equitably?

We look at the 5 macro indicators

4

How do you measure Econ. Growth?

You measure it in Gross Domestic Produce = value of all G&S produced within national borders by FOPs

5

How do you measure GDP?

You use the Circular Flow Model

6

What 3 lines do you use?

1. Rent, Wages, Interest & Profit
2. Goods and Services
3. Consumer expenditure on Goods & Services

7

What are the 2 agents in the Circular Flow Model and what are their jobs?

2 Agents - Households & Firms
Households own and supply FOPs in return for rent, wages, interest and profit
Firms use the FOPs to produce G&S which are then bought by households using the income

8

In an open Circular Flow Model, what are the injections and leakages?

Injections = Govt. spending, Exports, Investments
Leakages = Imports, Savings, Taxes

9

What is the difference between Nominal and Real GDP?

Nominal GDP is with inflation while Real GDP is without

10

What's the equation for Real GDP?

Nom. GDP * (Pr. index Base Yr / Pr. Index Current Yr) = Real GDP
Important as we need to remove inflation to compare

11

What's the formula for Gross National Product?

GDP + (Overseas income, investment & assets owned by UK citizens) - (Income & investment owned by foreign nationals)

12

What's the formula for GDP per Capita?

GDP / Population

13

What's the formula for Green GDP?

GDP - Environmental costs of production

14

What's the definition of Aggregate Demand?

Total demand for all G&S in the economy by households, firms, govt. and overseas consumers at a given Pr. lvl

15

What's the formula for AD?

C + I + G + (x-m)

16

What is Real Output?

Output without inflation

17

What is Price Level?

Average price for a whole macro economy

An increase in Pr. lvl will lead to a fall in Real Output

18

Why does AD shift?

It shifts as there is a change in the value of Real Output demanded but Pr. lvl stays the same.
It only shifts due to non-price determinants

19

Why does consumption increase when disposable income increases?

As you have a higher income after tax, you'll consume more luxury goods, but there wont be a change in consumption of necessities

20

Why does consumption increase when interest rates fall?

As cost of borrowing has declined, loans are now more affordable, therefore more people will borrow. This now means more people can consume.
Also, the opportunity cost of saving compared to consuming will fall so more likely to consume

21

Why does consumption fall when wealth and consumer confidence also fall?

Declining wealth will psychologically lead to a fall in consumer confidence so less people will consume luxury goods

22

Why does investment increase when interest rates fall?

Projects will become more profitable as cost of borrowing has decreased so investment will increase

23

Why does lower corporation tax increase investment?

Retained profits will increase and as these profits aren't given to shareholders, they can be used to finance investment (cheapest)

24

What is the Marginal Propensity to Consume?

Willingness to spend extra income

25

Why do different governments influence Govt. spending?

Left-wing govt. will intervene more in the market while a right wing govt. will do the opposite

26

Why does low economic growth change Govt. spending?

Low econ. growth will in turn lead to lower tax revenue and therefore a lower budget

27

Why do external influences like war or natural disasters influence Govt. spending?

As they need to please the population and therefore may or may not help

28

What are some influences on Exports?

- Quality of Goods (research and development)
- Innovation
- Marketing
- Exchange Rates (weaker rate = more sales)

29

What are some influences on Imports?

- Quality of Goods (research and development)
- Standard of living
- Trade restrictions
- Exchange Rates

30

What's the definition of Aggregate Supply?

The total value of output that firms are willing and able to supply at a given Pr. lvl

31

Why causes a movement along the SRAS curve?

If Pr. lvl increases, firms will desire to make more profits and therefore will produce more. Thus causing a movement along the curve

32

What's the main difference between SRAS & LRAS?

In SRAS, all FOPs are fixed (labour semi) while in LRAS, all FOPs are variable

33

Why does SRAS shift?

SRAS shifts due to changes in costs associated with production = Business Costs

e.g. Wages up -> Labour cost up -> Business cost up -> Less profits -> Production down -> SRAS shifts in

34

What's the definition of Productivity?

Output per hour per worker

35

Why does LRAS shift?

LRAS shifts due to changes in the quantity or quality of FOPs

36

What is the definition of Macro Equilibrium?

It is when the value of G&S willing and able to be supplied by firms at a given Pr. lvl is exactly equal to the value demanded by consumers, firms and overseas consumers

37

Why do you show the SRAS curve on a LRAS diagram?

You need it in case you go out of sync

38

What process do you use to remember what causes each curve to shift?

WCS, WYPM
1. Which curve is affected?
2. If AD, which components?
3. If AS, is it SR or LR?
4. Which way will it shift and why?
5. What happens to real Y?
6. What happens to the Pr. lvl?
7. What does this mean for our Macro Obj.?

39

What is Actual Econ. Growth?

Actual economic growth is measured by the annual change in a country's real GDP or national output.
You can use a PPF diagram or a shift of AD to show this

40

What is Potential Econ. Growth?

Potential economic growth is the estimated growth when all FOPs are utilised.
You can use a PPF diagram or a shift of LRAS to show this

41

What is the Business Cycle?

It is the regular fluctuations in the lvl of economic activity around the productive potential of an economy

42

In the Business Cycle, what is a Boom?

It's a period where the rate of GDP growth is fast and higher than the long-term trend

43

In the Business Cycle, what is a Slowdown?

Opposite of a Boom where GDP growth decreases and unemployment rises

44

In the Business Cycle, what is a Recession?

A period where the economy suffers from a fall in output and unemployment rises

45

In the Business Cycle, what is a Depression?

A long period of economic downturn where the GDP falls

46

In the Business Cycle, what is a Recovery?

A period after a recession/depression that shows a sign of improvement in an economy. GDP increases and unemployment falls

47

What is the problem with forecasting Real GDP growth?

Due to the volatility of key indicators, no macroeconomic model can cope accurately.
These key indicators being:
- Uncertain business & consumer confidence
- Fluctuations in exchange rate
- Uncertain reactions to macro policy changes
- External events

48

What is the Output Gap?

It is the difference between the actual lvl of GDP and its estimated potential lvl

49

What is a Positive Output Gap?

It occurs when the lvl of National Output is greater than the long-run Potential Output.
This means that some resources are working beyond usual capacity.
e.g. people working overtime shifts
Economy likely to be in Boom

50

What is Negative Output Gap?

It occurs when the lvl of National Output is below the long-run Potential Output.
This means some FOPs are being underutilised
Economy likely to be in Recession

51

What is a Hysteresis?

It's a sharp fall in Real GDP which then leads to structural unemployment, deskilling, demotivation and therefore a fall in the LR potential of the economy

52

What are the 2 types of Govt. policy?

1. Demand Side Policies
2. Supply Side Policies

53

What are the 2 parts of Demand Side Policies?

1. Fiscal Policies
2. Monetary Policies

54

What is the definition of Fiscal Policy?

It is the management of govt. spending funded through taxation and/or borrowing

55

If the govt. spends more than it gains in revenue, what it called?

This is a budget deficit.
This means that the govt. has had to borrow to subsidise the extra spending

56

How else can the govt. generate money?

They can sell G&S and also privatise state owned enterprises

57

What are the 2 types of govt. spending?

1. Current Spending (day to day e.g. wages)
2. Capital Expenditures (public investments on physical capital e.g. roads)

58

Why do we put net borrowing in percentages of GDP?

It makes it easier to compare with other nations e.g. EU.
Normally, we should worry if it is above 60%. So while we're over 100% at the moment, due to the context of other economies being in similar positions, we aren't in a totally horrible position.
It is also not near in relation to the past: WWI (175%) & WWII (225%)

59

Why will countries be more willing to lend to Japan rather than Italy?

Japan has a more reliable economy

60

What is a Tightening of Fiscal Policy?

It is when the Budget Deficit decreases or Budget Surplus increases

61

What is a Loosening of Fiscal Policy?

It is when the Budget Deficit increases or Budget Surplus decreases

62

What factors effect Fiscal Policy?

- Party in power
- Business Cycle e.g. More spending in recession
- Wars