Macro Flashcards
(41 cards)
3 determinants of consumption in AD
- Level of disposable income (e.g. income tax)
- Interest rates (cost of borrowing falls, consumers more willing to spend)
- Consumer confidence (job prospects, level of unemployment)
What is investment
When firms spend money on capital to increase their productive capacity
4 determinants of investment
- Interest rates
- Business confidence (expected profit or demand - increase MPI to meet demand in future)
- Spare capacity (if there is a lot then no need to invest)
- Accelerator (increasing rate of GDP encourages I)
Types of government spending
Current (on public services and public wages)
Capital (infrastructure)
Welfare (benefits, pensions)
THESE ARE ALL INJECTIONS
What is national debt
Total stock of debt over time
An accumulation of budget deficits (which is where G>T in a FISCAL YEAR)
How does disposable income affect net exports
- If disposable income abroad increases, demand for X increases
- If disposable income at home increases, demand for M increases
- SPICED and WPIDEC
What is protectionism and how does it affect net exports
Shielding a country’s domestic industries from foreign comp by taxing M
- Strong prot abroad decreases vol of X
- Strong prot home decreases vol of M
How does inflation affect net exports
If inflation in the UK is higher than others, X are less price comp which reduces revenue
4 factors which shift SRAS (costs of production in the economy)
Wages, Raw material prices, Business taxes (VAT), Import prices
These are all supply side shocks
4 factors which affect LRAS
- Labour productivity
- Investment (into tech, R&D etc)
- Infrastructure (pipes, roads)
- Quantity of labour (size of labour force e.g. migrants)
What happens when there is plenty of spare capacity
If economy is in deep recession, production increases with no inflation.
Because of mass unemployment of FOPs
Can use up excess FOP without having to pay more (no cost push inflation)
How does an increase in AD affect the trade position
Inflation increases, X is less comp
More demand for M as people are richer
Labour is a what?
Derived demand
(derived from demand for goods and services)
How does demand pull inflation work
Increase in DP inflation puts pressure on existing FOPs
Therefore prices of FOPs increase
2 demand side shocks
Sudden increase in investment
Sudden cut in gov. spending
Benefits of economic growth
- Higher disposable income
- Higher employment
- Higher profit
- Higher VAT, Income taxes etc
Costs of economic growth
- Inflation (DP) (erodes PP so standard if living may not increase to preferred lvl)
- Income inequality
- Env costs (pollution, deforest, desert) = welfare loss
- Current account deficit (sucking in M)
What is a disadvantage of the LFS
Only contains a small sample of the overall population - costly to do the full population
What is cyclical unemployment and when does it occur
Demand deficient unemployment
Occurs in a recession when there is a lack of AD
Examples of structural unemployment and why it occurs
- Occupational (skills mismatch) and Geographical (not willing to relocate)
- Tech advancement (automates physical labour) and Modernisation
- Loss of comparative advantage
3 Costs of unemployment
- Lost output
- Social costs
- Gov spending (crime, mental and physical health etc)
3% —> 4%—> 1% —> -2%
Inflation, Disinflation, Deflation
4 Costs of inflation
- Lower PP which affects living standards (can drive into poverty)
- Erosion of savings (interest < inflation)
- Lower export comp
- Wage spiral
2 Benefits of inflation
- Workers ask for higher wages which boosts morale and productivity
- Firms are encouraged to increase output
