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Flashcards in Macro Deck (36)
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1

4 phases of business cycle

1) boom (actual economic growth>potential economic growth, unemployment falling, negative output gap falling)
2) Slow down (growth rates fall towards 0 and then reaches 0, inflationary pressure reaches full capacity)
3) Recession (2 consecutive quarters of negative economic growth, real GDP falls, deflation or inflation occurs- because of fall in AD & increase in cyclical unemployment)
4) Recovery (real GDP grows, AD increases)

2

Determinants of consumption

1) Income
2) Interest rate
3) Wealth
4) Expectation / Consumer confidence

3

Determinants of Investment

1) Interest rates
2) Changes in the level of national income
3) Expectation /Business confidence
4) Technological change
5) Existing level of spare capacity

4

Determinants of Government spending

Gov. macroµ economic policies

5

Determinants of Net exports

1) Domestic average price level
2) Average price level abroad
3) real disposable income abroad
4) Real disposable income at home
5) Government trade policy
6) There exchange rate

6

Three things fixed in SRAS

1) quality and quantity of factors of production
2) state of technology
3) wage rate (causes shift in SRAS curve)

7

What causes a shift in SRAS?

1) change in the wage rate
2) change in cost of raw materials
3) change in price of imported raw materials
4) change in the overall level of indirect taxation/subsidies

8

Summary of neo-classical perspective LRAS

Market clears (market forces are efficient) the level of real output, therefore, depends upon the quality and quantity of the factors of production available and the state of technology.
In the long run the free market economy will operate on its PPC and represents the boundary of the PPC.

9

Summary of Keynesian perspective on LRAS

In the long run, wages and therefore prices are 'sticky', firms cannot produce below a certain level even if AD falls, in such examples firms respond by reducing real output (giving the Keynesian LRAS curve 3 parts)

10

Effect of decrease in AD in Neo-Classical model of LRAS

-AD shifts to left
-Real output decreases form YFE to Y1 and the price level therefore decreases form P to P1
-There is a deflationary gap indicating unemployment/ underemployment of resources.
-Wages falling means firms cost of production fall therefore -SRAS increases.
-SRAS shifts to SRAS 1
-Economy comes to a long run equilibrium in which real output is equal to the full employment level and the price falls from P1 to P2
-In the long run decrease in AD leads to no change in economic activity yet does lead to deflationary pressure in the average price level.

11

Examples of supply side policies

1) Gvt assistance to firms
2) Spending on r&d
3) Spending on education/training
4) Deregulation
5) Privatisation
6) Policies to reduce trade-union power
7) Introduce minimum wage (Keynesian)
8) Abolish minimum wage (Neo-Clasical)
9) Spending on infrastructure

12

Measures of unemployment

Claimant count (not good to compare between countries, false claimants and not every1 claims)
Labour force survey (based on sample [may or may not be representative] costly & takes time)

13

Hidden unemployment

The failure of a country ti use some of its factors of production.
Hidden unemployment may not appear in calculation because:
1. discouraged workers (unemployed for long period of time and stop looking for work [become economically inactive])
2. people working part-time who would like to work full time
3. people working in jobs for which they are overqualified

14

Real wage unemployment

Cause of unemployment supported by neo-classical economists
Trade union negotiations/minimum-wage-legislation-change pushes the real wage higher than the equilibrium wage rate causing a surplus of wooers leading to unemployment.
Solution = reduce trade union power (increasing wage flexibility) or reduce minimum wage

15

Demand deficient

a.k.a cyclical unemployment.
supported by Keynesian economists
reduction in AD leads to fall in real output meaning AD for labour falls, wage rates would fall but they are sticky downwards so wage rate can't fall meaning an increasing in unemployment.

16

Natural unemployment

a.k.a equilibrium unemployment
-unemployment exists even when wage rate clears because ASl is less than the labour force at each real wage rate because some workers who want jobs will be unable to get them.
-comes in 3 forms: seasonal unemployment; frictional unemployment; structural unemployment

17

Causes of unemployment

demand deficient
real wage/ disequilibrium unemployment
natural unemployment
technological unemployment
international unemployment
changing in consumer taste
structural unemployment

18

solutions to structural unemployment

1. free market policies
-reduce unemployment benefits
-deregulate labour market to improve l.m flexibility
2. Interventionist policies
-improve education & re-training programs
-subsidise firms that train workers
-provide subsidies + tax breaks to encourage peole to move geographically
-support apprenticeships

19

How to measure inflation

1. basket of products representative of consumer spending patterns is chosen
2. base year chosen
3. index set to 100 in base year
4. weights assigned to individual items n basket in accordance with proportion of income consumers spend on them.
5. % increase in price
6. the weighted average of these changes is calculated and the index is increased by this average
7. % increase in index over time gives inflation rate

20

Difficulties with measuring inflation

1. Basket of goods chosen want to be representative of a typical household's spending but it may not be representative for household and particular groups.
2. Need to update items in basket for it to stay representative
3. Quality of goods changes overtime and increase in prices may reflect this
4. Basket ignores fact consumers can switch spending to products outside basket if they notice increase in the price of products in basket is greater than substitute goods out of it.
5. different countries may measure in different ways
6. only sample of goods limiting accuracy of final goods
7.. some products may have particularly volatile prices
8. CPI only addresses prices consumers pay PPI addresses price prodders pay.

21

Costs of inflation

1. Administrative costs
2. Fiscal drag (tax brackets may not be adjusted in time)
3. Inflationary noise
4. Loss of intl. competitiveness
5. shoe leather costs ( consumers incentivised to use banks)
6. Menu costs
7. Fall in value of money
8. Random redistribution of wealth
9. Uncertainty (reducing Investment from firms)

22

Two forms of deflation

1. resulting from supply-side improvements (good)
2. from falling AD (bad -deflationary spiral)

23

Costs of deflation

1. Deflationary spiral
2. Less investment (because of less business confidence)
3. real value of debts rises making it harder for debtors to repay loans (esp. if deflation because of AD decrease)

24

Causes of inflation

1. Demand pull inflation (increase in AD when little/no spare capacity [Keynesian model LRAS])
2. Cost-Push inflation (increase in cost of f.o.p [rise in wages, rise costs of raw material or exchange rate depreciation] shifts SRAS left)
3. Excess monetary growth (more money increase AD leading to inflation [Classical LRAS])

25

Positive consequences of economic growth

1. An increase in material living standards
2. Increase in employment (in some cases)
3. reduction in poverty
4. Increase in tax revenue (if tax system progressive) which allows for provision of merit goods.
5. greater power in into organisations

26

Negative consequences of economic growth

1. May have come about because workers work longer hours (meaning less leisure time) standards of living may, therefore be reduced.
2. May lead to further income inequality
3. Lower standards of living may arise because production has been switched form consumer goods to capital goods (leads to economic growth quicker)
4. Can result in structural change and therefore structural unemployment
5. rapid economic growth not sustainable because negative externalities of production arise

27

Most common form of representation of inequality

Lorenz curve

28

Lorenz curve

The most common method to represent Income inequality. It does this by comparing the "cumulative percentage of total population" (x axis) against the "Cumulative percentage of total income" (y axis)
The curve for each country is compared to the Line of absolute inequality (gradient 1).

29

Gini index

Ratio of the area between the line of inequality and a country's lorenz curve and the total area under the line of inequality.
The higher the gini index the higher the income inequality is.

30

Linear demand function

Qd=a-bP