L1 - What are Macroeconomic Studies?

Question 1

How should you structure a 10 mark mathematical type question?

Answer 1

Introduction (2/10)
Working (3/10)
Explanation (3/10)
Final answer (2/10)

So essentially working and explanation take up the biggest portion of the marks

Question 2

How should you structure a 10 mark theoretical type question?

Answer 2

Introduction (3/10)
Explanation (4/10)
Final answer (3/10)

So essentially the explanation take up the biggest portion of the marks here

Question 3

What is the difference between micro and macroeconomics?

Answer 3

Microeconomics studies the economic choices of individuals and firms (economic agents)

Macroeconomics studies how the interaction between many economic agents leads to aggregate economic outcomes

Macroeconomics looks at aggregate measures (information pooled together) e.g. GDP (aggregate output/income), unemployment, inflation, inequality etc

Question 4

What are the 2 timescales we will look or have looked at in macroeconomics?

Answer 4

Long run and short run

Question 5

What do long run models look at/what is their time scale?

Answer 5

They look at what happens with the economy over decades

Question 6

What is long run growth determined by?

Answer 6

1) Capital accumulation (the pursuit of profit and investment in a financial asset for monetary gain)
2) Productivity growth (output per unit of input)

Question 7

What you of policies are typically associated with/cause long term growth?

Answer 7

Supply side polices typically cause long term growth (e.g. government spending in building a new hospital - creates new jobs - doctors, nurses, admin staff etc - they then go and spend their incomes in the economy leading to the increase in incomes of shopkeepers, supermarkets, etc … the effect of an initial injection by the government is exaggerated by the multiplier effect)

Question 8

What are prices like in the long run?

Answer 8

Prices are fully flexible in the long run

Question 9

What do short run models look at/what is their timescale?

Answer 9

They look at quarters (3 months) to several years

Question 10

What do short run models study?

Answer 10

They study business cycle fluctuations (booms and recessions)

Question 11

What is important in short run models?

Answer 11

Demand fluctuations are important - affect short run growth greatly

Question 12

What you of policies are typically associated with/cause short term growth?

Answer 12

Demand side policies (includes both monetary and fiscal policy) - … QE/interest rates and government spending/taxation respectively

Question 13

Why is demand important for short term growth?

Answer 13

Changes in demand lead to changes in output as firms adjust supply to the quantity demanded

Question 14

How does macroeconomic analysis work? List the steps

Answer 14

1) Document the facts
2) Develop a theory to explain the facts (build a model)
3) Test the theory (is the model consistent with the facts)
4) Use the model to make predictions and give policy advice

Question 15

What is the challenge when using models in macroeconomics?

Answer 15

Macroeconomic phenomena are typically very complex … difficult to represent all forces in the economy in a model

Question 16

How do economists use models?

Answer 16

Economists use models to understand the complex reality of the economy

Question 17

What is a model?

Answer 17

A simplified, theoretical representation of reality

Question 18

What are the features of a good model?

Answer 18

A good model:
- dispenses (omits or leaves out) irrelevant details
- focuses on the main forces/mechanisms

Question 19

How does a macroeconomist decide which features/mechanisms are relevant?

Answer 19

It depends on the question being answered the by the model (being asked by the macroeconomist and being explained by the model)

Question 20

What is an example of irrelevant details being omitted from a model?

Answer 20

The London Underground map - early maps contain/show irrelevant details like hills, valleys, parks etc as well as up to scale distances between stations and accurate directions of the lines (all of these are irrelevant and actually make the map harder and more confusing to read) - by dispensing these details you make the map more fit for purpose which is to help people find the best way to travel by tube from station A to station B

… here the purpose of the map is important as it helps to distinguish between which details to include and which to omit

Question 21

What do modern economic models consist of?

Answer 21

They consist of mathematical equations that represent relationships between economic variables (basically what you find is that better and more modern models tend to include mathematics)

Question 22

What is the structure of economic models?

Answer 22

Parameters (measurable factor) and exogenous (external to model) variables (independent variables) are inputted into a model to find values for your endogenous (internal to model - being investigated) variables (dependent variables)

Question 23

What are the inputs of a model and give examples of what these may be

Answer 23

The inputs of a mode are parameters and exogenous variables which are external to the model e.g. government policies like taxes and interest rates

So you would essentially being seeing the effect of a certain government policy like a change in interest rates on a particular endogenous variable

Question 24

What is the difference between parameters and exogenous variables?

Answer 24

A similarity is that they’re both inputs to a model
A difference is that parameters are fixed whereas exogenous variables can change over time

Question 25

Consider the following 2 models:
1) Qd = aY - bP
2) Qs = cP - dPm

Where Qd is the quantity demanded, Y is consumer income, P is price of good, Qs is the quantity supplied and Pm is price of materials

State what the 2 models are respectively and label each model’s equation

Answer 25

a, b, c and d are model parameters
Y and Pm are exogenous variables (independent variables being manipulated to see effect on dependent variables and are external to the model)
P and Q are endogenous variables (dependent variables being measured by manipulating the independent variables and are internal to the model)

Question 26

Consider the following 2 models:
1) Qd = aY - bP
2) Qs = cP - dPm

Describe what they would look like when drawn graphically

Answer 26

A standard downwards sloping demand a upwards sloping supply curve
Their intersection marks the market equilibrium
The price at the intersection is known as the equilibrium price
The quantity at the intersection is known as the equilibrium quantity
Price on the y-axis and quantity on the x-axis

Question 27

Consider the following 2 models:
1) Qd = aY - bP
2) Qs = cP - dPm

How useful is the model market above?

Answer 27

Useful to explain how consumer income and cost of supplies affects quantity demanded and supplied respectively but not why areas with greater firms in the same market (more competition) have more cheaply priced goods

… not all models can be used to explain several things - models are normally built with a purpose in mind and can typically only be used for that purpose only

Question 28

What are one of the functions of theoretical economics?

Answer 28

Theoretical economics provides a clear, artificial economic system that can serve as a laboratory in which policies that would be expensive to experiment with in actual economies can be tested out at a much lower cost - without harming the actual economy - any issues with a policy can be identified in the economic system rather than in reality for the first time

Question 29

How can macroeconomic policy be implemented?

Answer 29

It can be implemented through 2 sets of tools:

1) Fiscal policy - government spending and taxation
2) Monetary policy - interest rates and Quantitative Easing (controlling the money supply - by buying gilts and government bonds, the central bank injects money into the economy which increases the reserves of banks meaning banks have more liquidity which encourages banks to lend which further increases investment in the economy leading to growth)

Question 30

What additional role do governments have in a macroeconomic environment?

Answer 30

They set the legal and regulatory environment that economic agents face (laws they need to abide by) e.g. competition and markets authority

Question 31

Give a recent example of fiscal and monetary policy at play in the UK economy

Answer 31

1) Fiscal policy - announcement of mini budget - UK’s biggest tax cuts since 1972 - 45% additional rate income tax band to be scrapped entirely, reducing basic rate income tax by 1% from 20% to 19% and other tax cuts - package cost £161 billion - economists say measures will add to inflation and debt

2) Monetary policy - simple announcement triggered a crisis which caused the Bank of England to intervene with an emergency £65 billion bond buying programme (QE)

Question 32

What was the impact/proposed impact (if the budget went through) of the Liz Truss and Kwasi Kwarteng mini budget on the UK economy?

Answer 32

1) richest households gain from tax cuts massively (£9,187) whereas lowest income households save £22.12
2) London stock prices fell sharply
3) pound fell against the dollar (currency weakened overall)
4) Labour have the largest lead in the polls against the Conservatives since 1990s

Question 33

What is the economic outlook of the UK economy?

Answer 33

1) Econmic inactivity rate has increased in most regions in the UK since pre-COVID times
2) Labour shortages in high skilled industries
3) Labour productivity has remained low since the 2008 crisis and hasn’t returned since pre 2008 crisis levels
4) Borrowing is has reached levels last seen in the 1960s but not as high as Second World War time borrowing