Macro Flashcards
(182 cards)
1
Q
What are the macroeconomic objectives?
A
- balance of payments
- full employment
- low inflation
- economic growth
2
Q
What is the trade off between unemployment and inflation?
A
An increase in AD causes higher real GDP therefore firms can employ more workers and unemployment falls. However, this can lead to an increase in inflationary pressure due to demand pull inflation
3
Q
What does the Phillips curve show?
A
The trade off between inflation and unemployment
4
Q
What is an unemployed person?
A
A person of working age, out of irk who is actively seeking work
5
Q
What is the claimant count?
A
Measures unemployment by recording everybody claiming benefits
6
Q
Why might the claimant count not be an accurate measurement of unemployment?
A
Generally underestimates unemployment as not everyone claims benefits
7
Q
What is the labour force survey?
A
A way to measure unemployment by asking a selection of people if they feel they are unemployed
8
Q
What does economically active mean?
A
People who are in work plus those seeking and available to work
9
Q
What is economically inactive?
A
People of working age who have stopped an active search for paid work in the labour market
10
Q
What is the natural rate of unemployment?
A
The rate of unemployment when the labour market is in equilibrium
11
Q
What is real wage unemployment?
A
If wages are kept artificially high or are not able to fall the market equilibrium then the supply of labour would exceed the demand of labour therefore there would be more unemployment
12
Q
What is cyclical unemployment?
A
The unemployment which is caused by changes in the economic cycle, economic upturn or downturn
13
Q
What is seasonal unemployment?
A
Where workers are unemployed at certain times of the year when demand has decreased
14
Q
What is frictional unemployment
A
The unemployment experienced by workers between leaving one job and starting another
15
Q
What is structural unemployment?
A
Caused by a decline in a certain industry or occultation - usually, due to a change in consumer preferences or technological advances, or the availability of cheaper alternatives
16
Q
How can a perfect labour market be achieved?
A
- greater quality and availability of job information
- increasing the flexibility of the labour market
- increasing the level of skills and education amongst the unemployed
- lowering benefits /reducing income tax
- increase labour mobility (occupational and geographical)
17
Q
What are the costs of unemployment?
A
- less consumption
- extra demand on the nhs
- lower GDP
- more spending on benefits
- budget deficit
- Less tax revenue
- Welfare benefit tendency
- high poverty
18
Q
Benefits of unemployment?
A
- increase in self-employed startups as an alternative to being unemployed
- increased leisure time
- pool of unemployed labour available to growing firms
- encouragement to gain skills + education
19
Q
What factors affect consumption?
A
- amount of disposable income
- wealth effect
- household composition
- inflation
- interest rates
- consumer confidence
- availability of credit
20
Q
What are sudden changes in the savings ratio an indicator of?
A
- future changes in spending and AD
- can indicate future inflation or deflation
- a rise in the savings ratio may indicate a fall in consumer confidence
- a fall in the savings ratio may indicate a rise in confidence and spending, which can trigger a rise in the price level
21
Q
What is investment?
A
Spending by firms on capital goods
22
Q
What is replacement investment?
A
Replaces capital goods that have been worn out
23
Q
What is net investment?
A
New investment
24
Q
What factors affect investment?
A
- tax
- interest rates
- business confidence
- availability of credit
- relative prices of capital compared to labour
- technology
25
What is the accelerator theory?
when there is a rise in national income, firms will spend more on investment. They do this in order to meet higher demand
26
What are the implications of the accelerator effect?
- investment tends to be more volatile than economic growth
- if GDP falls, investment spending can fall very significantly
- investment spending can fall even when GDP is rising
27
What is the multiplier?
When an initial injection in an economy causes a bigger final increase in national income
28
What determines the value of the multiplier?
- determined by the size of the savings ratio
29
what determines the value of the multiplier?
- determined by the size of the savings ratio
30
What is the downward (or reverse)multiplier?
A withdrawal of income from the circular flow which will lead to a downward multiplier effect
31
What factors affect government spending?
- Increasing tax means that the government has more money to spend
- if the economy is in a recession government spending increases to generate more output
- governments targets and political viewpoint can influence where the government spending is
32
What is an export?
Goods and services sold to foreigners
33
What are imports?
Goods and services bought from foreigners
34
What are the factors affecting exports and imports?
- income in the UK economy
- relative price/inflation of goods and services
- the exchange rate
- non-price factors / uk productivity
-degree of protectionism
- state if the world economy / trading partners
35
Where can disposable income come from?
- wages
- salary
- benefits
- renting
- savings
- investments
36
What are the issues with comparing GDP over time?
- technology change makes it difficult to compare GDP over time
- due to technology some items may be higher quality but cost less than previous years
- some economic activity may not be measured
37
What are limitations of GDP / GDP per capita?
- no indication of how income is distributed in a country
- hard to measure shadow economy
- no indication of what money is spent on
- different countries include different things in GDP
- some goods and services are not given a financial value because they are done by volunteers
38
What is aggregate supply?
The total value of goods and services produced in an economy
39
What causes shifts in SRAS?
- cost of raw materials
- level of tax
- cost of labour
- productivity
- the exchange rate
40
What is long run aggregate supply?
The maximum output that an economy can produce when using all its factors o production
41
What factors shift LRAS?
- productivity
- institutional structure of the economy
- economic attitudes and incentives
- quantity and quality of factors of production
- enterprise
- factor mobility
- technology
42
Which government policies boost productivity?
- privatisation
- deregulation
- reducing the power of trade union
- increasing funding to schools and universities
-giving subsidies to firms to produce more
- improved healthcare means workers will take less time off
- improved telecommunications infrastructure
43
What causes an increase in short run economic growth?
- increased disposable income
- increase in government spending
- increase in consumption
- increase in investments
- decrease in tax
- increase in consumer confidence
- fall in interest rates
- rising house prices
- fall in value of currency
- increased real wages
44
What factors impact long run growth?
- increase in productivity
- advancements in technology
- factor mobility
- increased capital
- discovering new raw materials
- low inflation
- increased investment
- greater confidence in the future of the economy
- increased working population
- low inflation
45
Benefits of economic growth
- potential environmental benefits
- higher living standards
- the accelerator effect of growth on capital investment
- less unemployment
- growing income and consumption
- greater business confidence
-
46
Costs of economic growth
- environmental degradation
- income inequality
- potential for economic instability
- growing trade deficit
47
What are the causes of cyclical instability?
- volatile commodity prices
- exchange rate shocks
- political issues
- natural disasters/ impacts
- many demand side shocks
48
What are demand side causes of a recession?
- less disposable income due to unemployment
- falling consumer confidence
- lack of credit
- high interest rates
- contractionary fiscal policy
49
What is economic growth?
An increase in the production of goods and services in an economy
50
What is inflation?
A sustained increase in the average price level of a country
51
What is disinflation?
A slowdown in the rate of inflation
52
What is demand pull inflation?
Occurs when there is excess aggregate demand in the economy or market
53
What are the main cause of demand pull inflation?
- lower interest rates
- exchange rate going down
- higher wage rates
- high growth in uk export markets
- rising consumer confidence
54
What is cost push inflation?
Occurs when costs of production are rising
55
What are the main causes of cost push inflation?
- Higher capital costs
- higher taxes
- Increased labour costs
- increased cost of raw materials
56
What are the consequences of inflation?
- more unemployment
- real value of debt decreases
- interest rates increase to combat inflation
- wages unlikely to increase at the same rate as inflation
- less disposable income
- value of assets will increase
57
What is the quantity theory of money?
Theory of inflation, state that inflation is caused by a persistent increase in the supply of money
58
What are the government’s macroeconomic objectives?
- low inflation
- economic growth
- full employment
- balance of payments
59
What is the UK’s inflation target?
2%
60
What are withdrawals in the circular flow of income?
- tax
- imports
- saving
61
What are the injections in the circular flow of income?
- governments
- exports
- investments
62
What is a negative output gap?
The difference between the level of actual output and trend output when actual output is below trend output
63
When in the economic cycle do negative output gaps occur?
During a recession
64
What is a positive output gap?
The difference between the level of actual output and trend output when actual output is above trend output
65
What is the difficulty in measuring output gaps?
Difficult to measure potential output
66
What is spare capacity?
When a business is not making full use of its available capacity
67
What is monetary policy?
Involves the central bank taking action to influence interest rates, the supply of money and credit and the exchange rate
68
What is expansionary monetary policy?
Uses lower interest rates to increase AD and shift it to the right
69
What is contractionary monetary policy?
Uses higher interest rates to decrease AD and to shift the AD curve to the left
70
What is forward guidance?
Attempts to send signal to financial markets, businesses and individuals, about the Bank of England’s interest rate policy in the months and years ahead, so that economic agents are not surprised by a sudden and unexpected change in policy
71
What is quantitative easing?
Is when the Bank of England buys assets, usually government bonds, with money that the Bank has created electronically
72
What is credit?
The ability of an individual or organisation to obtain goods or services before payment, based on an agreement to pay later
73
Money multiplier =
1/reserve ratio
74
What is a bank’s reserve ratio?
The percentage of deposits they hold
75
What is a commercial bank?
A bank that offers services to the general public and to companies
76
What are the functions of commercial banks?
- ensuring that its customers’ money is kept safe
- offer loans to individuals, businesses and homeowners
- providing consumer interest on their deposits to hedge against inflation
77
What are the objectives of commercial banks?
- profitability
- security: the level of risk of an investment is low
- liquidity: measures the ease with which an asset can be converted into cash without loss of value
78
Liquidity ratio =
Current assets / current liabilities
79
What is the liquidity ratio?
The ratio of a bank’s cash and other liquid assets to its deposits
80
What is balance sheet?
Financial statement that contains details of a company’s assets and liabilities at a specific point in time
81
What is a liability?
Things the bank owes (e.g long-term borrowing, short-term borrowing, deposits)
82
What is an asset?
Things the bank owns (e.g cash, share capital, investments, reserves)
83
What is systemic risk?
The risk of a breakdown of the entire financial system rather than the failure of an individual bank
84
What are investment banks?
Advise businesses, organisations and governments on achieving financial goals and implementing financial plans
85
What are the functions of investment banks?
- trading on capital markets
- help businesses and governments to procure financing
- advise businesses and governments on how to meet their financial challenges
86
What is fiscal policy?
Government spending, taxation and borrowing. Usually aimed at affecting AD
87
What can fiscal policy be used for?
- Financing government spending
- managing the economic cycle
- changing the pattern of spending in the economy
- changing output gap
- redistributing income + wealth
- tackle market failure
- improving long run competitiveness
88
What is expansionary fiscal policy?
Fiscal policy aimed to increase AD
89
How do governments use expansionary fiscal policy?
- increase spending
- reduce taxation
90
What are the drawbacks of expansionary fiscal policy?
- can lead to demand pull inflation due to the inflation due to the increased AD
- may lead to worsening of the government budget deficit, increased government borrowing
91
What is contractionary fiscal policy?
Aims to reduce the levels of AD
92
What is supply-side fiscal policy?
Aims to increase the economy’s ability to produce and supply goods through tax cuts increase aggregate supply
93
What is crowding out?
A situation in which an increase in government or public-sector spending displaces private-sector spending with little or no increase in aggregate demand
94
What are supply side policies?
Government policies aimed at increasing the productive potential of an economy
95
What are supply side improvements?
Reforms undertaken by the private sector to increase productivity so as to reduce costs and to become more efficient and competitive
96
What are interventionist policies?
Government intervention to overcome market failure
97
What are examples of interventionist policies?
- public sector investment in infrastructure
- increased funding in education
- higher government spending on public goods
98
What are free market policies?
Policies to increase competitiveness and free-market efficiency
99
What are examples of free market policies?
- reduced power of trade unions
- privatisation
Deregulation
- lower income tax rates
100
How do supply side policies affect inflation?
More AS, means consumption can rise without causing inflationary pressure
101
How do supply side policies impact economic growth?
High productive possibility = high long run economic growth
102
How do supply side policies impact the balance of payments?
More production means more exports so there will be an improvement in the balance of payments
103
How do supply side policies impact unemployment?
Unemployment decreases because more workers are needed due to higher supply/ output
104
What supply side policies are there in the labour market?
- lower rates of income tax
- reducing state welfare benefits relative to average earnings
- changing employment laws to reduce the power of trade unions
- more flexible pension arrangements
- repealing legislation which limits employers’ freedom to employ
105
Benefits of supply side reforms?
- lower inflation rates due to lower costs of production
- lower unemployment rates due to flexible working
- increased economic growth due to rising productivity
- attracts FDI both in the short and the long run
- improved export performance due to improved competitiveness
106
What are the problems of supply side reforms?
- lack of security for firms that workers will stay leading to a loss of investment in human capital and growth
- instability for individuals on low real wage
- welfare benefits cut leading to a lack of consumption, meaning lower AD and negative economic growth
107
What is globalisation?
The interdependence of economies globally
108
What are the causes of globalisation?
- technological advancement
- specialisation
- rising labour migration
- less regulation of trading
- liberal governments
- improved transport
109
What are the disadvantages of globalisation?
- Deindustrialisation
- trade imbalances
- potential labour exploitation by MNCs and TNCs
- potential cost to the environment
- rising inequality / relative poverty
- higher structural unemployment caused by deindustrialisation especially in developed countries
110
Benefits of globalisation to more developed countries
- expanded choice and higher consumer surplus
- effects on retail prices and the rate inflation
- impact of UK firms relocating to lower-wage economies
- impact of net inward migration on real wages and on UK government spending/ tax revenue
- impact of inward investment into UK on employment
X- impact of share prices and profits of UK companies
111
Advantages of globalisation to a less developed country
- higher standards of living
Access to more knowledge / research and technology
112
What is a MNC?
A multinational company is a company that operates in multiple countries
113
What is an example of how MNCs can have positive impacts in countries?
Chevron oil company and shell provides homes for workers in Nigeria
114
What is an example of the negative impacts of MNCs?
BP’s oil spill in the Carribean
115
What are trading blocs?
Groups of countries who form trade agreements between themselves
116
What are free trade areas?
No tariffs between members, no standard external tariff, members set their own trade deals
117
What is a customs union?
Free trade area + a common external tariff with non- members, no border checks, trade deals for whole of union
118
What is the eurozone?
Currency union of 20 member states of the EU that have adopted the euro as their primary currency
119
What is an ad valorem tariff?
A tariff rate charged as a percentage of the price
120
What is a trade barrier?
Any regulation or policy that restricts international trade
121
What is foreign direct investment?
Investment in capital assets in a foreign country
122
What is a export quota?
Limits the number or monetary value of goods that a country can export
123
What is bilateral trade agreement?
Agreements between countries to promote trade and commerce
124
What is a closed economy?
A country that produces all of its own goods and services and doesn’t participate in international trade
125
What is trade diversion?
When member countries shift their trade from non-member countries to member countries
126
What is the world trade organisation (WTO)?
Responsible for dealing with the rules of trade between nations at a global or near-global level
127
What are the benefits of specialisation and trade?
- more efficient resource allocation
- more employment
- increased revenues
- utilisation of surplus produce
- greater variety of goods available
- consumption at a cheaper price
- increased output
Lower unit costs
128
What is absolute advantage?
When a producer can provide a good or service in greater quantity for the same price, or the same quantity at a lower cost, than its competitors
129
What is comparative advantage?
An economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners
130
What are the disadvantages of specialisation and trade?
- over reliance of other countries
- finite resources
-transportation costs
- communication costs
- legal regulatory costs
- exchange rate costs
- increase in structural unemployment
- An increase in imports causes a decline in domestic producers
131
What are the reasons countries restrict free trade?
- protect domestic industries
- national security
- environmental and health concerns
- balance of payments
132
What are the features of a customs union?
- remove trade barriers
- reduce or abolish customs duty
- Eliminate quotas
133
What is the balance of payments?
All flows of money into and out of a country
134
What three components are the balance of payments made up of?
- current account
- capital account
- financial account
135
What is the capital account?
Includes the sale and transfer of things such as patents and copyrights and capital transfers of ownership of fixed assets
136
What is the financial account?
includes the flows of financial capital into and out of the country
137
What is the current account?
A record of all payments for trade in goods and services plus income flow.
138
What are the causes of a current account deficit?
- poor price/ non-price competition
- recession in other countries
- economic growth
- overvalued exchange rates
- financial flows to finance current account deficit
- borrowing
139
What are expenditure reducing policies?
When the government takes measures to reduce the amount of consumer’s disposable income meaning they will fewer imports
140
Examples of expenditure reducing policies?
- deflationary fiscal policy
- deflationary monetary policy
141
What is expenditure switching policies?
Policies that try to encourage a switch away from imports and towards buying more home produced goods
142
What are examples of expenditure switching policies?
- higher interest rates
- protectionist policies
- devaluation
143
What is an exchange rate.
The rates at which one country’s currency can be exchanged for other currencies in the foreign exchange market
144
What is a free-floating exchange rate?
The exchange rate is determined solely by the interplay of demand for, and supply of, the currency
145
Advantages of a free-floating exchange rate?
- automatically achieving balance of payments equilibrium
-making it easier to control inflation
- ability to pursue an independent Monet policy
- improving resource allocation
- freedom to achieve domestic policy objectives
- automatically achieving balance of payments equilibrium
146
Disadvantages of a free-floating exchange rate?
- international trading uncertainty
- - may cause cost- push inflation
- may cause demand pull inflation
147
How do free floating exchange rates cause cost push inflation?
Trading competitiveness and the current account of the balance of payments both worsen, causing the exchange rate to fall in order to restore competitiveness. This may trigger a downward spiral of faster inflation and exchange rate depreciation
148
How may a free-floating exchange rate cause demand pull inflation?
If a large number of countries with floating exchange rate increase aggregate demand. This can lead to excess demand on a worldwide scale, which fuels global inflation
149
What is a fixed exchange rate?
An exchange rate fixed at a certain level by the country’s central bank’s intervention in the foreign exchange market
150
Advantages of a fixed exchange rate
- attempt to achieve certainty and stability in foreign exchange markets
- impose an anti-inflationary discipline on a country’s domestic economic management and on the behaviour of its workers and firms
151
What are the disadvantages of fixed exchange rate?
- if the fixed exchange rate is undervalued, price of imports will increase therefore increasing inflation
- an independent monetary policy cannot be implemented
- there may be recurrent balance of payments or currency crisis in a country whose currency is overvalued
- both overvaluation and undervaluation of the currency can lead to a misallocation of resources
- if the fixed exchange rate is overvalued it may impose the severe deflationary costs of lost output and unemployment
- may increase uncertainty rather than create certainty.
152
What what is a managed exchange rate?
Combine the characteristics of fixed and floating exchange rate systems so the currency fluctuates but it does not float on a fully free market
153
What is a currency union?
An agreement among members of that union to share a common currency, and a single monetary and foreign exchange policy
154
What are the advantages of joining a currency union?
- reduce transaction costs
- increases price transparency
155
What are the disadvantages of joining a currency union?
- loss of monetary policy independence
- vulnerability to asymmetric shocks
- potential cost of joking
156
What are the characteristics of less economically developed countries?
- low GDP
- high population growth
- widespread poverty
- very high unemployment
- poor or absent health care provision
- often endowed with rich natural resources
- poor nutrition, lack of access to clean, safe drinking water and a lack of sanitation
- low life expectancies
157
What is the HDI constructed by measuring?
- life expectancy at birth
- mean years of schooling and expected rate of schooling
- standard of living (measured by real GDP per capita)
158
What does the value of HDI mean?
0 means no development
1 means complete development
159
What is a country with low development and its HDI?
Yemen has HDI 0.455
160
What is a country with medium development and its HDI?
Kenya has HDI 0.575
161
What is a country with high development and its HDI?
China has HDI 0.768
162
What is a country with very high development and its HDI?
Czech Republic has HDI 0.889
163
What is the UK’s HDI?
0.929
164
What are the advantages HDI over GDP to measure development?
- This is a much more accurate measure of both the standard of living and quality of life in a country
- looks at both the economic and social welfare in a country
165
What is the humans poverty index?
An index created by the UN development program to measure national and global poverty. The HPI measures poverty using income, education and health
166
What is the gender related development index?
The gender inequality index provides insights into gender disparities in health, empowerment and the labour market. Higher values indicate worse achievements
167
What are government bonds?
Investment securities where an investor lends money to the government, in the change for regular interest payments.
168
What is the equation for yield on bonds
Yield = coupon/market price x 100
169
What are corporate bonds?
Debt security issued by a company and sold to people who lend long- term to the company
170
What is broad money?
The part of the money supply made up of cash or other liquid assets
171
What is the capital ratio?
The amount of capital on a bank’s balance sheet as a proportion of its loans
172
What is an economic shock?
An unexpected event hitting the economy
173
What is the financial policy committee?
The part of tepee Bank of England charged with the primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system
174
What is narrow money?
The part of the stock of money made up of cash and liquid bank and building society deposits
175
What is moral hazard?
When someone is more willing to take risks because they know that someone else will have to pay the consequences if anything goes wrong
176
How does economic growth decrease poverty
Jobs are created and unemployment is reduced, higher wages meaning government will get more tax revenue, which can be used to provide services.
177
What is cyclical instability?
A stage in which the economy is going through a recession or an unhealthy expansion associated with an increase in the price level
178
What is debt?
People’s financial liabilities or money they owe
179
What is the money market?
Used to lend and borrow money in the short run
180
What is the capital market?
Medium to long term borrowing.
There are two sections primary (where new bonds are issued) and secondary (where bonds and shares can be bought + sold)
181
What is the foreign exchange market?
Global markets for the trading of currencies
182
What is hot money
Short term investments or funds that are rapidly moved between countries or financial markets in search of the highest short term return or interest rates
