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A Level Economics (AQA) Kapi > just all macro > Flashcards

just all macro Flashcards

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1
Q

What are the main macroeconomic objectives?

A
  1. Economic growth
  2. Low and stable inflation
  3. Low unemployment
  4. Balance of payments stability
  5. Balanced government budget
  6. Income equality
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2
Q

What are injections and leakages in the circular flow of income?

A

Injections (add income into the flow): Investment, Government spending, Exports

Leakages (take income out): Savings. Taxation, Imports

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3
Q

What are the three ways of measuring GDP?

A
  1. Output Method: value of all goods/services produced
  2. Income Method: total incomes earned from production
  3. Expenditure Method: total spending on final goods/services

output=income=expenditure

its all equal to each other

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4
Q

Define Aggregate Demand

A

The total demand for goods and services in an economy at a given price level and in a given time period (a measure of spending)

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5
Q

What is the formula for Aggregate Demand?

A

AD = C + I + G + (X - M)

C - Household Consumption
I - Business Investment
G - Government Spending
(X - M) - Net exports (exports minus imports)

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6
Q

What causes a shift in AD?

A

When there are changes in C, I, G, or (X-M)

eg. interest rates, taxes, confidence

Its independent of the price level (nothing to do with changes in price level)

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7
Q

What shifts short-run aggregate supply (SRAS) ?

A

Changes in production costs like wages, oil prices, taxes…

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8
Q

What shifts long-run aggregate supply (LRAS) ?

A

Productivity, investment, education, technology, efficiency

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9
Q

What is the multiplier effect?

A

When a initial Injection into the economy (gov spending or investment) leads to a larger final increase in national income (GDP)

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10
Q

What is the accelerator effect?

A

When rising consumer demand leads firms to increase investment in capital goods

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11
Q

What is MPC?

A

Marginal Propensity to Consume - the proportion of extra income spent

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12
Q

What does YFE represent on a AD/AS diagram?

A

The full employment level of output (no spare capacity)

The level of real GDP where all factors of production are being used efficiently and sustainably

It represents the economy’s maximum sustainable output in the long run

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13
Q

What is a negative output gap?

A

A negative output gap happens when actual GDP is below potential GDP

  • the economy is not fully using its resources (eg labour and capital)
  • there is spare capacity, meaning unemployment is likely to be high
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14
Q

What is economic growth?

A

An increase in real GDP over time

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15
Q

How do we show short-run growth on a diagram?

A

AD shifting to the right

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16
Q

How do we show long-run growth on a diagram?

A

Rightward shift of LRAS or PPF

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17
Q

Define unemployment

A

People willing and able to work but unable to find a job

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18
Q

What are the causes of short-run and long-run economic growth?

A

Short-run (actual growth):
↑ AD → caused by lower interest rates, lower taxes, higher confidence, more gov spending, weaker exchange rate

Long-run (potential growth):
↑ LRAS → caused by better education/training, more investment, improved tech, immigration (more labour)

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19
Q

What are the benefits and costs of economic growth on living standards?

A

✅ Benefits:

↑ Incomes → ↑ Consumption and material living standards

↓ Unemployment → More opportunities and stability

↑ Tax revenue → Better public services (NHS, education)

↓ Poverty (if growth is inclusive)

❌ Costs:

↑ Inflation (demand-pull) → Prices rise faster than wages

↑ Inequality if growth is uneven

↑ Pollution / resource depletion (negative externalities)

↑ Current account deficit (from higher imports due to higher income)

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20
Q

What are the main types of unemployment?

A

🔄 Cyclical → Lack of demand (↓ AD) → happens in recessions

🔧 Structural → Workers’ skills don’t match jobs (e.g. coal industry dies)

⏳ Frictional → In between jobs (short-term)

☀️ Seasonal → Jobs only at certain times (e.g. ski instructor, farm worker)

💰 Real Wage → Wages too high → firms can’t afford to hire (above equilibrium)

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21
Q

How is unemployment measured in the UK?

A
  1. Labour Force Survey (LFS):

A survey of 40,000+ people

Counts anyone actively seeking work and able to start

  1. Claimant Count:

Number of people claiming Jobseeker’s Allowance (JSA) or Universal Credit

Easy to collect, but excludes some unemployed people

LFS > Claimant Count for accuracy, but it’s more expensive and slower to update.

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22
Q

What is the NRU?

A

Natural Rate of Unemployment consistent with stable inflation

(unemployment when labour market is in equilibrium)

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23
Q

What are the costs and benefits of unemployment?

A

❌ Costs:

↓ Incomes and living standards

↑ Poverty and inequality

↑ Gov spending on benefits, ↓ tax revenue

Wasted resources → lower GDP

Hysteresis: long-term unemployment leads to skill loss, making it harder to re-enter work

Social issues (e.g. crime, mental health)

✅ Benefits:

Less pressure on inflation

Firms can hire from a larger labour pool

Time to reallocate or retrain in changing industries

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24
Q

How is inflation measured in the UK?

A

Consumer Price Index (CPI)

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25
How does the CPI measure inflation in the UK?
A basket of goods and services is created (based on typical household spending). Prices are collected monthly from across the country. Each item is weighted by how important it is in household budgets. The average price change is calculated to find the CPI inflation rate.
26
What is demand-pull inflation?
Inflation caused by rising AD
27
What is cost-push inflation?
Inflation caused by rising costs (SRAS shifts left)
28
What causes demand-pull inflation?
Occurs when AD increases faster than AS (too much demand, not enough supply). Causes: ↑ Consumer confidence ↓ Interest rates ↑ Government spending ↑ Exports ↓ Income or corporation tax 🧠 Happens when the economy is close to or at full capacity (YFE).
29
What causes cost-push inflation?
Occurs when costs of production rise, shifting SRAS left. Causes: ↑ Wages ↑ Raw material prices (e.g. oil) ↑ Import prices (from weaker exchange rate) ↑ Business taxes (e.g. VAT or corporation tax) 🧠 Firms pass higher costs onto consumers via higher prices.
30
What are the main costs/downsides of inflation?
↓ Real incomes → households can buy less ↑ Business uncertainty → ↓ investment ↓ International competitiveness (exports more expensive) Risk of wage-price spiral Menu costs (changing prices) & shoe leather costs (time spent managing money)
31
Are there any benefits of inflation?
Yes — mild inflation (around 2%) can be beneficial: Encourages consumer spending now (avoids delay in purchases) Reduces real value of debt (e.g. mortgages easier to repay) Helps avoid deflationary spiral (which can lead to lower growth) Gives firms flexibility to adjust real wages
32
What is fiscal policy?
Fiscal policy is when the government changes its own spending or taxes to influence AD
33
What is deflation and what causes it?
Deflation = A fall in the general price level over time. Causes: ↓ AD (e.g. falling confidence, incomes, investment) ↑ SRAS (e.g. lower oil prices, improved tech = lower costs) 🧠 Can be demand-side or supply-side.
34
Why is deflation considered harmful?
Consumers delay spending (expecting prices to fall more) ↓ Business revenue → ↓ Investment & ↑ Unemployment Real value of debt rises → bad for borrowers Risk of deflationary spiral
35
Can deflation be beneficial?
✅ If caused by rising productivity (↑ SRAS), prices fall while output grows. → Living standards rise. ❌ But if caused by falling AD, it’s usually harmful. → Recession risk.
36
What are the three main types of government spending?
Current – Day-to-day (e.g. wages, equipment) Capital – Long-term investment (e.g. roads, schools) Welfare – Transfers, no output (e.g. benefits, pensions)
37
Give Reasons for Government Spending
Provide public goods (e.g. defence) Reduce inequality (e.g. benefits, pensions) Stimulate AD (e.g. during a recession) Invest in long-run growth (e.g. education, infrastructure)
38
What are the main types of taxation?
Direct taxes – on income/profits (e.g. income tax, corporation tax) Indirect taxes – on spending (e.g. VAT, excise duties): - Specific tax – A fixed amount per unit sold (e.g. 50p per litre of petrol) -Ad valorem tax – A percentage of the selling price (e.g. 20% VAT on goods)
39
What is a budget deficit?
Government spending is greater than tax revenue
40
What are progressive, proportional, and regressive taxes?
Progressive: Higher % paid as income rises (e.g. UK income tax) → reduces inequality Proportional: Same % of income for everyone Regressive: Lower % paid as income rises (e.g. VAT) → can increase inequality 🧠 Use in evaluation when discussing fairness or redistributive impact.
41
What is fiscal policy and how does it affect the economy?
Fiscal policy is the use of government spending and taxation to influence aggregate demand (AD). -Expansionary (↓ tax, ↑ spending) → ↑ AD → ↑ growth, ↓ unemployment -Contractionary (↑ tax, ↓ spending) → ↓ AD → ↓ inflation
42
What are the problems and limitations of using fiscal policy?
❌ Problems: Time lags (takes time to implement & have effect) May be politically unpopular (e.g. raising taxes) Crowding out – gov spending may reduce private sector activity Risk of budget deficit / rising national debt
43
What are automatic stabilisers?
Fiscal tools that smooth the economic cycle (e.g. benefits, progressive tax income and unemployment) In a recession: ↑ Unemployment → ↑ Benefit spending by gov ↓ Incomes → ↓ Tax revenue ➜ Helps support demand and reduce severity of downturn In a boom: ↑ Incomes → ↑ Tax revenue ↓ Unemployment → ↓ Benefit spending by gov ➜ Helps cool the economy and limit inflation
44
What are the problems with rising budget deficits and national debt?
Definitions: • Budget deficit = Gov spending > tax revenue • Cyclical deficit = Caused by recession (temporary) • Structural deficit = Exists even when economy is strong (long-term problem) • National debt = Total of all past deficits ⸻ ✅ Benefits: • Can support growth in a recession (expansionary fiscal policy) • Funds public investment (e.g. infrastructure) ❌ Costs: • ↑ Interest payments → ↑ opportunity cost • May lead to austerity (spending cuts) • ↓ Investor confidence • Risk of crowding out
45
What is contractionary fiscal policy and what are its pros and cons?
Definition: Used to reduce AD when inflation is high or the economy is overheating. Tools: • ↑ Taxes • ↓ Gov spending ⸻ ✅ Pros: • Controls demand-pull inflation • Helps reduce budget deficit and national debt • May restore confidence in government finances ❌ Cons: • May lead to lower growth and higher unemployment • Can widen income inequality (esp. via spending cuts) • Time lags — may take months to have full effect
46
What is monetary policy and how does it affect the economy?
Monetary policy = Use of interest rates, money supply, and exchange rates to control AD and achieve macroeconomic goals. Main tool: • Interest rates, set by the Bank of England (BoE) • ↑ Interest rates → ↓ C and I → ↓ AD • ↓ Interest rates → ↑ C and I → ↑ AD
47
What are the problems or limitations of monetary policy?
❌ Key Problems: • Time lags – takes months to affect spending and investment • Liquidity trap – very low interest rates may not boost spending • Depends on consumer/business confidence – lower rates won’t help if people are pessimistic • May worsen inequality (e.g. helps borrowers more than savers) • Less effective when interest rates are already low or near zero 🧠 Also harder to target specific sectors (unlike fiscal policy)
48
What is contractionary monetary policy and what are its pros and cons?
Definition: Used to reduce AD and control inflation by raising interest rates or tightening the money supply. ⸻ ✅ Pros: • Helps reduce demand-pull inflation • Encourages saving • May reduce housing market bubbles • Helps maintain confidence in the currency and economy ⸻ ❌ Cons: • ↓ Consumption and Investment → ↓ Growth • ↑ Unemployment (less business activity) • May hit mortgage holders and lower disposable income • Depends on confidence — may not be effective if expectations are sticky
49
What are supply-side policies and what are some examples?
Definition: Policies aimed at increasing LRAS and improving the productive potential of the economy. ⸻ Examples: Market-based (private sector-led): • Cut income/corporation tax (↑ incentives) • Reduce trade union power • Deregulation • Privatisation • Lower welfare benefits (↑ work incentives) Interventionist (gov-led): • Investment in education/training • Infrastructure projects • Subsidies for R&D • Apprenticeship schemes ⸻ 🧠 Aim: Shift LRAS right, improve efficiency, and support long-run growth without inflation.
50
What policies can increase economic growth and improve living standards?
Demand-side policies: (short run growth(AD)) • Expansionary fiscal policy (↑ G, ↓ tax) → ↑ AD • Expansionary Monetary policy (↓ interest rates) → ↑ C and I → Can reduce unemployment and boost incomes Supply-side policies: (long run growth (LRAS)) • Education/training → ↑ productivity • Infrastructure investment • Tax reform to improve incentives → ↑ LRAS → sustainable growth and long-term improvements in living standards
51
What are some Policies to Reduce Inflation?
1. Demand-Pull Inflation • Caused by excessive AD (too much demand) • Policy: Contractionary fiscal/monetary policy → ↓ G, ↑ T, ↑ i.r. • Eval: ↓ Investment, ↑ debt burden, strong currency → ↓ exports 2. Cost-Push Inflation • Caused by rising costs (e.g. wages, raw materials) • Policy: • Reduce VAT/subsidies to firms • Strengthen exchange rate • Eval: Hard to control costs, potential trade-offs 3. Long-Term High Inflation • Policy: Supply-side policies (SSPs) → e.g. education, deregulation • Goal: Stable inflation around 2%
52
Types of supply-side policies?
Interventionist (e.g. education, training). Market-based (e.g. deregulation, tax cuts).
53
Define budget deficit
When government spending is greater than tax revenue.
54
Define national debt
Total accumulated government borrowing
55
Define budget surplus.
When government tax revenue is greater than spending.
56
What is a current account deficit?
Imports are greater than exports in the balance of payments.
57
How does exchange rate affect the current account?
Stronger currency makes exports more expensive and imports cheaper.
58
What are automatic stabilisers?
Fiscal tools (e.g. progressive tax, benefits) that reduce economic volatility.
59
How does raising interest rates affect AD?
C and I AD shifts left
60
What is the transmission mechanism?
The chain of effects from an interest rate change to the economy
61
What are some drawbacks of free markets?
Inequality, market failure, price volatility, under-provision of public goods
62
What policies can increase long-run growth?
Supply-side policies like investment in education, infrastructure, deregulation
63
How can cyclical unemployment be reduced?
Expansionary fiscal/monetary policy to increase AD
64
How can structural unemployment be reduced?
Education, training, mobility schemes
65
How do we reduce demand-pull inflation?
Use contractionary fiscal/monetary policy to reduce AD
66
How do we reduce cost-push inflation?
Subsidies, VAT cuts, supply-side policies to shift SRAS right
67
What is a key trade-off in macro policy?
Stimulating growth may cause inflation or worsen the current account

A Level Economics (AQA) Kapi (2 decks)

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