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Econ 2 Macro Flashcards

(61 cards)

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1
Q

What does the AD curve show?

A

The relationship between the level of real planned expenditure and the general price level in an economy

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2
Q

AD =

A

C + I + G + (X-M)

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3
Q

What’s the real income effect? (Wealth effect?)

A

As P falls, real value of income rises, consumers can buy more, higher consumption

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4
Q

Balance of trade effect

A

Fall in relative price level of a country can make foreign export goods more £
- rise in exports
- fall in imports

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5
Q

Interest rate effect

A

Low price inflation can lead to reduction in interest rates
- less incentive to save ( low MPS)
- increased consumption ( high MPC)
Exchange rate could depreciate and improve net exports (X-M)

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6
Q

Factors that shift AD curve

A

Changes in:
- real income and employment
- consumer and business confidence (Keynes animal spirits)
- wealth effect
- monetary policy
- fiscal policy
- exchange rate could depreciate

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7
Q

What does the SRAS show?

A

The total planned output when GPL can change but prices and productivity of factor inputs are held constant
- upward sloping

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8
Q

What does the LRAS show?

A

Total planned output when both prices and average wage rates can change
- measure off country’s potential output
- vertical

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9
Q

Factors that shift SRAS

A

Changes in:
- wage costs
- productivity
- unit labour costs (labour cost per unit of output)
- commodity, energy and raw material costs
- education/skills
- indirect taxes and subsidies
- exchange rate
- regulation

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10
Q

Factors that shift LRAS curve

A
  • change in quantity and quality of resources
  • technology
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11
Q

Difference in shape between classical AS and the Keynesian AS?

A

It’s curved
- no distinction between LR and SR

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12
Q

Shifts in Ks AS curve
- with no change in full employment income Yfe

A

Any change that causes costs of production to fall/rise ( same factors that cause SRAS to shift)
- no increase in productive potential of economy

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13
Q

Shifts in Ks AS curve
- where full employment income Yfe increase

A

Any change that causes productive potential of economy to rise will shift AS right and vice versa
- same factors that cause LRAS to shift

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14
Q

What do classical economists believe?

A

In the self-adjusting nature of markets
- wages and prices are flexible
- economy naturally tends towards full employment
- gov intervention is counterproductive

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15
Q

What do Keynesian economists believe?

A

Emphasise role of AD
- argue that markets wont always self-adjusting efficiently especially during recessions
- advocate for gov intervention, eg. Fiscal policies to manage demand and stabilise economy

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16
Q

Key factors that shift LRAS

A

Factors that increase economy’s productive potential or full employment level of output ( same factors that shift PPF right)
- technological advances
- changes in productivity
- changes in education/skills
- changes in gov regulations
- demographic changes and migration
- competition policy

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17
Q

What is the multiplier effect?

A

Occurs when an initial injection into the circular flow causes bigger final increase in real national income

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18
Q
A
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19
Q

Why does the multiplier effect arise?

A

One agents spending is another agents income
- eg. When a spending project creates new jobs, this creates extra injections of income and demand into circular flow

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20
Q

When does the negative multiplier effect occur?

A

Initial withdrawal or leakage of spending for circular flow leads to knock on effects and a bigger final drop in real GDP

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21
Q

Multiplier coefficient calculation

A

Final change in real GDP / initial change in AD

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22
Q

Multiplier formula

A

1 / MPS

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23
Q

Other multiplier formulae

A
  • closed Econ with no gov: k = 1/MPS
  • closed Econ with gov: k= 1/(MPS + MPT)
  • open Econ with gov: k = 1/MPW
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24
Q

When would there be a high multiplier value?

A
  • lots of spare capacity
  • low propensity to import and tax
  • high MPC
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25
When would there be a low multiplier value?
- economy close to full capacity - rising demand causes inflation - higher inflation causes rising interest rates
26
Main factor in determining size of multiplier?
The size of the withdrawals from the circular flow
27
Evaluation of multiplier
- hard to measure - Time lag - economists disagree over it’s size - LR multiplier effect is likely to be higher for developing countries as infrastructure projects often have higher MEs
28
Define long run growth
An increase in potential output
29
Define SR growth
Increase in real GDP - driven by increase in AD that draws unemployed resources into use
30
Factors that cause SR growth
any event/policy that increases components of AD - stimulates extension in AS - uses up some unemployed resources
31
Factors that cause LR growth
When the productive potential increases - better quality FOPS - more FOPs - tech advances
32
What is actual output?
The current level of production (real GDP) in an economy - some resources may be unemployed
33
What is potential output?
Economy’s productive capacity/ largest output that could be produced - given state of tech and stock of available resources
34
Factors that constrain growth
- economic shocks (pandemic) - political instability - poor productivity growth - lack of investment - bad infrastructure - shortage of human capital
35
What is export led growth?
Injections into circular flow (exports) may stimulate more injections (investment)
36
What is balanced growth?
When output and capital stock grow at same rate
37
Negative output gap
Actual GDP is below potential GDP - spare capacity - resources not fully employed - unemployment - not enough demand for all resources to be fully utilised
38
Positive output gap
Actual GDP above potential - resources under strain - demand growth exceeds supply growth - firms compete for resources - upwards pressure on wages and costs, ay lead to inflation - consumers buy more imports if suppliers can’t meet demand, increase trade deficit
39
What is the output gap influenced by?
Evolving factors - tech changes - demographic shifts
40
What is sustainable growth?
- Growth that can continue in LR - Doesn’t use up non-replaceable resources - environmentally friendly - doesn’t compromise future generations
41
What is inclusive growth?
- all citizens experience increase in income/living standard - income inequality doesn’t cause some groups to miss out on benefit of growth
42
What’s the trade cycle?
Refers to the fluctuation of economic activity in an economy overtime - alternating periods of expansion and contraction in real output,employment etc.
43
Key phases of trade cycle
- rapid expansion = boom - slowdown - peak - recession - trough - economic recovery
44
What is a boom in the trade cycle?
Period when rate of growth of real GDP is fast and higher than LR trend
45
What is a slowdown in the trade cycle?
Weakening of rate of growth - real GDP still rising but at slower rate
46
What’s a recession in the trade cycle?
Period of at least 6 months when economy suffers a fall in real GDP
47
What is recovery in the trade cycle?
Phase after recession when real GDP starts to rise and unemployment begins to fall
48
What is a depression in the trade cycle?
A prolonged downturn where real GDP falls by at least 10%
49
Causes of economic slowdown
- increased interest rates - tighter fiscal policy - slowdown in global growth; trade tensions - global geopolitical events
50
Causes of recession
- lower confidence - higher unemployment - negative demand/supply-side economic shocks ; trade shock, sudden rise in energy prices - poor choice of macro policy; keeping interest rates too high for too long
51
Causes of recovery
- cuts in interest rates (stimulate AD) - fiscal stimulus; tax cuts, increase gov spending - business and consumer confidence - positive demand/supply-side shock; fall in energy prices - more rapid global growth; boosts exports
52
Causes of boom
- overconfidence; animal spirits cause rapid increase in AD when little/no spare capacity - loose fiscal and/or monetary; AD grows too fast
53
Features of recession
- falling real GDP - rising unemployment - disinflation - reduced business investment - risk to gov finances
54
What does economic scarring do?
Reduce medium/long run potential output of Econ
55
What does economic scarring cause?
- businesses scrap unused/obsolete capital - workers who lose jobs also lose skills; reducing productivity - increase in business failures - fall in financial capacity to lend
56
Why is an economic depression worse than a recession?
- can persist for several years - unemployment rates very high for long time Examples of depressions: - severe banking and financial crises - disruptions to financial system
57
Define economic shock
Unexpected and significant events that lead to a sudden and substantial impact on key indicators Such as: - GDP growth - inflation - unemployment - interest rates - exchange rates
58
Negative demand-side shocks
- unexpected tax increases/ cuts in welfare - financial crisis causing credit crunch - bigger than expected rise in unemployment
59
Negative supply-side shocks
- steep rise in energy and/or raw material prices - pandemic - natural disasters - unexpected breakthroughs in production tech
60
Examples of shocks IRL
- global financial crisis 2007-2009 - covid pandemic - climate change and extreme weather events
61
Eval of shocks
Impact of shock depends on: - size and scale of shock (regional/global) - likely multiplier effects - how temporary/permanent - who the winners/losers are - how effectively gov responds to shock - opportunities v threats created by

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