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Flashcards in macro Deck (55)
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1
Q

A government’s budget

A

is an annual statement of projected outlays and

receipts during the next year

2
Q

Government’s budget balance

A

Budget balance = Receipts – Outlays
 budget surplus: receipts > outlays
 budget deficit: receipts < outlays
 balanced budget: receipts = outlays

3
Q

Four sources of receipts

A
  • Taxes on income and wealth
  • Taxes on expenditure
  • National Insurance contributions
  • Other receipts and royalties
4
Q

Three categories of outlays

A
  • Expenditures on goods and
    services
  • Transfer payments
  • Debt interest
5
Q

𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑑𝑒𝑏𝑡 =

A

𝐺𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡 𝑑𝑒𝑏𝑡 = 𝑝𝑎𝑠𝑡 𝑑𝑒𝑓𝑖𝑐𝑖𝑡𝑠 − 𝑝𝑎𝑠𝑡 𝑠𝑢𝑟𝑝𝑙𝑢𝑠𝑒𝑠

+ 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑡𝑜 𝑏𝑢𝑦 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑟𝑒𝑐𝑒𝑖𝑝𝑡𝑠 𝑓𝑟𝑜𝑚 𝑡ℎ𝑒 𝑠𝑎𝑙𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠

6
Q

The effects of the income tax

A
- The income tax decreases the
supply of labour and create a
new labour market equilibrium
- The before-tax wage rate rises,
the after-tax wage rate falls and
employment decreases
7
Q

The Laffer curve

A
- The relationship between the
tax rate and the amount of tax
revenue collected
- a higher tax rate rises pre-tax
wage rate but reduce labour
hours
 so it does not always bring in
more revenue
8
Q

Autononmous spending

A
  • Autonomous expenditure is the sum of investment, government
    expenditure, and exports, which does not vary with GDP
9
Q

Aggregate expenditure

A

𝐴𝐸 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋
• where AE is aggregate expenditure, C is consumption, I is investment, G is
government spending, NX is net exports.

10
Q

Fiscal stimulus

A

is the use of fiscal policy to increase

production and employment.

11
Q

ways to stimulate economy fiscally

A
an increase in government outlays or a
decrease in government receipts can
stimulate production and jobs
- an increase in expenditure on goods and
services directly increases aggregate
expenditure
- lower tax also strengthen the incentives
to work and invest
12
Q

Monetary policy objectives

A

The Bank of England Act of 1998 sets out the objectives of UK monetary
policy:
 To maintain price stability
 subject to that, to support economic growth and employment.
The act also establish the Monetary Policy Committee
 is the committee of nine members in the Bank that has the responsibility for
setting monetary policy.

13
Q

monetary policy: Price stability objective

A

The operational definition of price stability since the beginning of 2004
has been:
 An inflation target of 2 per cent a year as measured by the 12-month increase in
the CPI.
 target range is from 1 per cent to 3 per cent.
Government economic policy objectives
• The government’s economic policy objectives are to achieve high and
stable levels of economic growth and employment.
Price stability is a major contributor to achieving the other goals of
government economic policy.
 price stability provides the best available environment for households and
firms to make the saving and investment decisions that bring economic growth

14
Q

Rationale for an inflation target

A

First, the Bank of England’s policy actions are more clearly understood by
financial sector.
 A clear understanding leads to fewer surprises and mistakes on the market
rates
 i.e., rises interest rate when inflation is high
Second, the target provides an anchor for expectations about future
inflation.
 firmly held (and correct) inflation expectation help individuals and firms to
make better economic decisions, which in turn help to achieve a stable
economic growth.

15
Q

The monetary policy instrument

A
The Bank of England choose
 quantity of reserve supplied
 Bank Rate (i.e., price)
- The Bank’s choice is Bank Rate, which
is the target for the repo rate (the
overnight interest rate at which banks
borrow reserves from central bank)
- The market for bank reserves.
• banks’ demand for reserves is a derived
demand
• repo rate is closely related to market
interest rates
• the lower the repo rate, the higher the
demand for money, thus the higher
banks’ demand for reserve
16
Q

The Bank of England can use open

market operation

A
to control the quantity of reserve
supplied in the market, and thus
move the repo rate to its target
level, i.e., Bank Rate.
• to decrease reserves in the market
 the Bank conducts an open
market sales (sell bonds and buy
reserves)
• to increase reserves in the market
 the Bank conducts an open
market purchases (buy bonds
and sell reserves)
17
Q

Money policy transmission: bank lowers bank rate

A
  • bank of england lowers bank repo rate
  • other short term interest rates fall and the exchange rate
  • the quantity of money and supply of loanable funds increase
  • long term interest rate falls
  • consumption expenditure, investment and met exports increase
  • aggregate demand increases
  • real gdp growth and the inflation rate increae
18
Q

Money policy transmission: bank raises bank rate

A
  • bank of england raises bank rate
  • other short term interest rates rise and the exchange rate rises
  • quantity of money and supply of loanable funds decrease
  • long term interest rates rise
  • consumption expenditure, investment and net exports decrease
  • aggregate demand decreases
  • real gdp growth and the inflation rate decreases.
19
Q

Real GDP

A

is the value of final goods and
services produced in a given year
at the prices of a reference year

20
Q

Potential GDP

A
is the quantity of real GDP at full
employment – when the
economy’s labour, capital, land
and entrepreneurial ability are
fully used.
• data is not collectable
21
Q

Economic growth

A

is the growth rate of potential GDP that measures the pace of movement
of production possibilities

22
Q

Real GDP per person

A

the standard of living depends on real GDP per capita
-𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 =
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜n�
- if ∆ 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 > ∆ 𝑝𝑜𝑝𝑢𝑙𝑎𝑖𝑜𝑛 ⇒ 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 ↑
 if ∆ 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 < ∆ 𝑝𝑜𝑝𝑢𝑙𝑎𝑖𝑜𝑛 ⇒ 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 ↓

23
Q

What determines potential GDP?

A

Potential GDP is when an economy is produced at its full capacity, when
the economy’s labour, capital, land and entrepreneurial ability are fully
use.

24
Q

A two-sector model

A

Assume fixed quantity of capital, land, entrepreneurs, and productivity.
- To determine potential GDP we use a model with two sectors:
 An aggregate production function
 An aggregate labour market

25
Q

Aggregate production function

A
shows how real GDP changes as
the quantity of labour changes
when all other factors remain
the same.
An increase in labour increases
real GDP but by successively
smaller amount
26
Q

Aggregate Labour Market

A
The real wage rate
 is the nominal wage rate divided by the
price level
• Labour market equilibrium
 if there is a shortage of labour, the real
wage rate rises to eliminate it
 if there is a surplus of labour, the real
wage rate falls to eliminate it
 when there is neither a shortage nor a
surplus, the labour market is in
equilibrium, i.e., a full-employment
equilibrium.
27
Q

Labour productivity

A

is the quantity of real GDP
produced by an hour of labour.
 equals real GDP divided by
aggregate labour hours.

28
Q

what happens when labour become more productive

A
- If labour become more
productive, firms are willing to
pay more for a given number of
hours so the demand for labour
increases.
- the real wage rate rises and the
equilibrium quantity of labour
increases
29
Q

Why Labour Productivity Grows

A

The growth of labour productivity depends on:
• Technological advances
 the discovery and the application of new technologies
and new goods
• Physical capital growth
 such as machines, buildings, or factories
 The accumulation of new capital increased capital per
worker and increased labour productivity
• Human capital growth
 such as skills and experience
 Human capital acquired through education, on-the-job
training, and learning-by-doing

30
Q

The financial markets

A

provide the channels through which saving flows to

investment in new capital

31
Q

Physical capital and financial capital

A

Physical capital
 is the tools, instruments, machines, buildings and
other items that are used to produce goods and
services
 an increase in the quantity of capital increases
production possibilities and shifts the aggregate
production function upward

32
Q

financial capital

A

the funds that firms use to buy physical capital

33
Q

Three main financial markets:

A

Loan markets
– loan lent on condition that it is repaid on agreed dates and an
agreed rate of interest
– usually are non-tradable
 Bond markets
– bond is a promise to make specified payments on specified dates.
– bonds are usually issued by firms and government.
 Stock markets
– a stock is a certificate of ownership and claim to the firm’s profits
– such as the London Stock Exchange, the New York Stock Exchange.

34
Q

The Loanable Funds Market

A

The market for loanable funds
• assumes a single financial market, which is the
aggregate of all the individual financial markets.
• in reality, the financial market is much more
complicated, as there is a large variety of financial
products.

35
Q

The nominal interest rate

A

is the number of pounds that a borrower pays and a
lender receives in interest in a year expressed as a
percentage of the number of pounds borrowed and
lent.

36
Q

The real interest rate

A

is the opportunity cost of borrowing (the alternative is consumption)
• is the nominal interest rate adjusted by inflation
• is approximately equal to the nominal interest rate minus the inflation
rate

37
Q

the market for loanable funds, supply and demand

A

The market for loanable funds • determines the real interest rate,
the quantity of funds loaned,
saving and investment.
• first ignoring the government
 The demand for loanable Funds • The real interest rate  the higher the real interest rate,
the smaller is the quantity of
loanable funds demanded
 The supply of loanable funds • The real interest rate  the higher the real interest rate,
the greater is the quantity of
loanable funds supplied

38
Q

An increase in the demand for

loanable funds

A
expected profit
 the greater the expected profit,
the greater is the amount of
investment and the greater the
demand for loanable funds.
• corporate tax rate
 a lower corporate tax increases
net profit and encourages
investment, thus increases
demand for loanable funds.
39
Q

An increase in the supply of

loanable funds.

A
disposable income  A household’s disposable income
is income minus net taxes
 when disposable income
increases, both consumption
expenditure and saving increases.
• expected future income  the lower a household’s expected
future income, the larger is its
saving today
• default risk  default risk is the risk that a loan
will not be repaid.
 the lower that risk, the larger is
the supply of loanable funds
40
Q

aggregate supply

A

is the relationship between the quantity of real gdp supplied and the price level

41
Q

aggregate demand

A

is the relationship between the quantity of real gdp demanded and the price level.

42
Q

price index formula

A

(cost of basket at current period / cost of basket at base period prices) *100

43
Q

inflation rate formula

A

(price index at t - price index at s)/price index at s

*100

44
Q

GDP deflator formula

A

(nominal gdp/real gdp) *100

45
Q

Income approach

A

Gross domestic income at factor cost

  • compensation of employees
  • gross operating surplus
  • Mixed incomes
46
Q

Expenditure Approach

A

Gross domestic product at market price

  • consumption expenditure
  • investment
  • govt expenditure
  • rotf
47
Q

employment rate formula

A

(employed/working age pop.)*100

48
Q

economic activity

A

(economic active/working age pop.)x100

49
Q

natural employmennt is frictional and structural

A

natural unemployment/economically active

50
Q

working age pop

A

16-64 years

51
Q

economically active

A

includes employed and unemployed

52
Q

economically inactive

A
  • in full time education or retired
53
Q

unemployment rate

A

( unemployed/aconomic active) x 100

54
Q

nominal gdp

A

is the value of goods and services produced durign a given year valued at the market price.

55
Q

What is the laffer curve?

A

Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments.

The curve is used to illustrate Laffer’s main premise that the more an activity — such as production — is taxed, the less of it is generated. Likewise, the less an activity is taxed, the more of it is generated.