Macro Book 2 - Macroeconomic Performance Flashcards
(171 cards)
1
Q
What is inflation?
A
A sustained rise in the price level across the economy.
2
Q
What is hyperinflation?
A
Periods of extremely high inflation that can cripple economies.
3
Q
What is deflation?
A
A sustained fall in the price level.
4
Q
Why is low and stable inflation important?
A
- Reduces uncertainty for investment and consumption
- Keeps domestic producers competitive
- Prevents arbitrary redistribution of income
5
Q
What is the government’s target inflation rate?
A
2%
6
Q
Why is the inflation target not zero?
A
It allows firms to achieve real wage flexibility despite nominal wage rigidity.
(also Indicator of growth)
7
Q
What is disinflation?
A
A decrease in the rate of inflation.
8
Q
How is inflation measured?
A
Using index numbers and a basket of goods.
(new-old)/old
9
Q
What is the Consumer Price Index (CPI)?
A
A measure for inflation calculated from a basket of goods and services.
10
Q
What is the formula to calculate the inflation rate?
A
(new price level - old price level)/old price level
*100
11
Q
What is the Retail Price Index (RPI)?
A
A measure used for adjusting pensions and other benefits to account for inflation.
12
Q
What is RPIX?
A
RPI minus mortgage interest payments.
13
Q
What is core inflation?
A
A measure excluding cyclical or seasonal energy and food price changes.
14
Q
What is one difficulty in measuring inflation?
A
Same goods and services are not consistently compared each year.
15
Q
What does the basket of goods refer to?
A
The selection of goods and services used to measure inflation.
16
Q
What is one reason for changes in the basket of goods?
A
To reflect changes in consumer spending habits.
17
Q
What was the peak inflation rate in the UK in 2011?
A
5%
18
Q
What is the significance of the base year in index numbers?
A
It is assigned a value of 100 - basis for comparison.
19
Q
How does the CPI differ from the RPI?
A
- CPI excludes housing costs
- RPI includes mortgage interest payments
20
Q
How is the index number for a base year set?
A
It is assigned a value of 100.
21
Q
What are the weights in the CPI based on?
A
Spending patterns of households in the UK economy.
As proportion of income spent of good
22
Q
What does a rise in the CPI index number indicate?
A
An increase in the average price of goods and services.
(Increase in inflation)
23
Q
What does it mean if inflation is measured at 4.8%?
A
The rise in the general price level from one year to another.
24
Q
What is the implication of ‘greedflation’?
A
Companies may increase prices more than necessary under the guise of high inflation.
25
no
26
Why might high food prices be a misleading cause of inflation?
Food and energy are weighted heavily in the basket of goods and services measuring inflation
27
What might provide a more accurate reflection of inflation?
Core/underlying inflation as it excludes food and energy
28
What is the difference between real and nominal values?
Real values are adjusted for inflation whereas nominal values are current monetary values
29
If nominal GDP rises by 2% but inflation is 8%, what is the increase in real GDP?
-6%
30
no
31
What’s the significance of real interest rates?
Adjusted for inflation so real IR is negative when inflation is greater than IR
32
Who benefits if the base rate is greater than the rate of inflation?
Savers benefit
33
Who benefits if the base rate is less than the rate of inflation?
Savers lose out
34
What is the significance of using real vs nominal to judge the impact of increases in government spending?
Increases in G are only beneficial if adjusted for inflation
35
What is the Multiplier Effect?
The process by which any change in a component of aggregate demand results in a greater final change in real GDP.
36
What is a Negative multiplier?
When an initial fall in spending causes a greater final fall in real GDP.
37
Who suggested the concept of the multiplier and when?
Keynes in the 1930s.
38
What does Keynes suggest about injections of new demand?
They will stimulate further rounds of spending, leading to a bigger final impact on output and employment.
39
What is the Marginal Propensity to Withdraw (MPW)?
The proportion of the change in income that leaks out of the circular flow of income.
Influenced by saving, taxing, and importing
40
How is MPW calculated?
MPW = Marginal Propensity to Save (MPS) + Marginal Propensity to Tax (MPT) + Marginal Propensity to Import (MPM).
41
What factors affect the multiplier's impact on the economy?
* Propensity to save
* Propensity to tax
* Propensity to import
* Amount of spare capacity in the economy.
42
What is the formula for calculating the multiplier?
1/1-mpc (where mpc = marginal propensity to consume) OR 1/mpw (where mpw = marginal propensity to withdraw).
43
If the MPC is 0.8, what is the multiplier?
5.
44
If there is an injection of £50 million into the economy, what is the final income generated?
£250 million.
45
What is Steve's Marginal Propensity to Save if he saves £25 out of £100 earned?
0.25.
46
What is Steve's Marginal Propensity to Tax if he is taxed £30 out of £100 earned?
0.3.
47
What is Steve's Marginal Propensity to Import if he spends £15 on imports out of £100 earned?
0.15.
48
What is Steve's Marginal Propensity to Withdraw?
0.7.
49
What effect can fiscal austerity have on an economy with a multiplier of 2?
An initial government expenditure reduction of 1 percent of GDP reduces real output by 2 percent.
50
If the multiplier is 2.5, how much must the government raise spending to increase real GDP by £150 billion?
£60 billion.
51
What is the significance of the multiplier, MPC, and MPW to the UK economy?
They help the government make decisions about spending and borrowing.
52
What is the Accelerator in economic terms?
Investment levels are related to the rate of change of GDP.
53
When do firms tend to invest according to the accelerator effect?
When they see an increase in demand that is sustainable.
54
During which economic conditions will the accelerator effect be low?
During recessions.
55
What does the Actual Rate of GDP Growth measure?
Short term changes in the level of output measured by changes in real GDP.
56
What does the Trend Rate of GDP Growth measure?
Long term changes in the productive capacity of the economy.
57
What is a Positive Output Gap?
When the actual rate of GDP growth is greater than the trend rate.
58
What is a Negative Output Gap?
When the actual rate of GDP growth is less than the trend rate.
59
What can an economy produce in the short run that may lead to a positive output gap?
More than its productive capacity.
60
What are the consequences of a Negative Output Gap?
* Unemployment
* Possible deflation.
61
What are the consequences of a Positive Output Gap?
* Inflation
* Possible Wage price Spiral.
62
What is the share of total exports from the UK to the United States?
15%
63
What is the share of total exports from Germany to the United States?
9%
64
Which country is the second largest export destination for the UK?
Germany
65
What percentage of total exports does Germany send to France?
6.5%
66
What is the share of total exports from the UK to France?
6.5%
67
Which country appears in the UK export list but not in Germany’s?
Irish Republic
68
What percentage of trade do the top 5 export destinations account for in the UK?
44.5%
69
What percentage of trade do the top 5 export destinations account for in Germany?
37.5%
70
True or False: The USA is an important trading partner for both the UK and Germany.
True
71
What was the US GDP in 2016?
$18,569,100 million
72
What was China's GDP in 2016?
$11,199,145 million
73
Which country has consistently had a higher GDP growth rate since 2006, the USA or China?
China
74
Fill in the blank: The gap between US and China GDP will take a long time to fill due to the size of the ______.
difference currently
75
What was the trend in inflation in the UK between 1970-1992?
Fluctuates wildly
76
What major event in the 1970s contributed to inflation in the UK?
Opec oil crises
77
What economic conditions in the 1980s led to high levels of inflation in the UK?
Economic boom and increases in the money supply
78
What caused stable prices in the UK between 1992-2007?
Low expectations and monetary policy
79
What are the two main factors that can lead to economic growth?
An increase in aggregate demand or aggregate supply.
80
In the short run, how can an economy with spare capacity experience economic growth?
Through increased aggregate demand.
81
What was the average annual growth rate of the Indian economy between 2003 and 2007?
8%.
82
What sector accounts for more than half of India's output?
The service sector.
83
What is the employment status of the service sector in India?
It employs less than a third of the country’s labour force.
84
True or False: The Indian economy is currently operating at full capacity.
False.
85
What are the benefits of economic growth?
* Rise in material living standards
* Rise in the welfare of the population
* Reduced unemployment and increased tax revenue
* Reduction in poverty
* Increased power on the international stage
86
What does the accelerator effect describe?
An increase in national income resulting in a proportionately larger rise in capital investment.
87
What environmental costs are associated with economic growth?
Increased pollution and road congestion.
88
What is a potential negative impact of economic growth on quality of life?
People may work longer hours without an improvement in productivity.
89
How does economic growth typically affect wealth and income inequality?
High growth rates are associated with increased inequality.
90
What type of inflation can occur when aggregate demand increases faster than aggregate supply?
Demand-pull inflation.
91
What factors determine whether economic growth is beneficial?
* Type of growth
* Source of growth (technology)
* Balance of growth
* Distribution of benefits
* Inflationary pressure
* Balance of payments
* Savings ratio
92
What is the definition of a recession?
Two quarters or more of negative economic growth.
93
What are typical impacts of a recession on citizens?
* Increased unemployment
* Decreased real disposable income
* Lower material standards of living
94
What can cause recessions?
* Falling aggregate demand
* Supply-side shocks (e.g., rising oil prices)
95
What are some features of a recession?
* Fall in real GDP
* Rising unemployment
* Falling business/consumer confidence
* Decrease in spending and investment
* Falling tax revenue
96
How does a recession impact government finances?
* Increased unemployment benefits
* Decreased tax revenue from income tax and VAT
* Reduced corporation tax revenue
97
Which types of businesses are most affected during a recession?
Firms selling products with high income elasticity of demand.
98
What causes inflation?
An increase in demand or a decrease in supply.
99
Define Demand Pull Inflation.
Occurs as a result of aggregate demand in the economy increasing at a faster rate than aggregate supply.
100
What happens when the economy is producing at or near its productive capacity?
Increases in aggregate demand are likely to push up the price level.
101
Define Cost Push Inflation.
Occurs as a result of an increase in costs of production.
102
What are some examples of costs that can lead to Cost Push Inflation?
* Wages
* Raw materials
* Rising indirect taxes
* Removal of subsidies
* Falling productivity
103
How can economic growth in other countries lead to Cost Push Inflation?
It increases demand for raw materials and commodities, raising their prices in international markets.
104
What is the definition of inflation?
Sustained increase in the general price level.
105
What type of inflation was Venezuela experiencing in 2012?
Demand pull.
106
What effect does a fall in the interest rate have on consumption?
Reduces opportunity cost of spending, lowers mortgage interest repayments, and makes borrowing cheaper.
107
What are Shoe leather costs?
Costs incurred from reducing cash balances, requiring more frequent bank visits.
108
What are Menu costs?
Costs associated with adjusting prices, such as changing menus or capital equipment.
109
What is the impact of high inflation on individuals with low fixed incomes?
Their income may fail to keep up with price rises.
110
What does uncertainty in inflation lead to for firms?
Reluctance to invest due to unpredictability in costs and pricing.
111
What happens to the competitiveness of exports when domestic inflation is higher than international inflation?
Exports become more expensive, leading to a potential trade deficit.
112
What is fiscal drag?
When inflation pushes incomes into higher tax brackets without adjustments to tax brackets.
113
What are the benefits of a moderate level of inflation?
* Encourages economic growth
* Provides real wage flexibility
* Reduces the real value of debt for borrowers
114
What factors determine whether inflation is harmful to an economy?
* The rate of inflation
* The cause of inflation
* Stability of the inflation rate
* Anticipation of inflation
* Comparison with international inflation rates
115
What is deflation?
A fall in the general level of prices.
116
How can supply-side effects cause deflation?
Can be beneficial as it allows consumers to enjoy more goods and services.
117
How can demand-side effects cause deflation?
Can lead to a harmful deflationary spiral with reduced production and higher unemployment.
118
What defines unemployment?
When people of working age who are willing and able to work are without jobs.
119
Who is considered economically inactive?
Individuals of working age who are not participating in the labor force.
120
Why is low unemployment a macroeconomic objective?
It prevents loss of output, reduces fiscal costs, and mitigates social issues.
121
What is the government’s target for unemployment?
Full employment, typically around a 4% unemployment rate.
122
What is the ILO measure of unemployment?
An individual is unemployed if they are out of work, want a job, have sought work in the last 4 weeks, and are available to start work.
123
What group of unemployed individuals would not be counted using the ILO measure?
The long-term unemployed who have stopped seeking work.
124
What is the Claimant Count measure?
A monthly count of individuals claiming unemployment benefits.
125
What was happening to unemployment prior to the financial crisis of 2008?
Unemployment was low in the boom years.
126
What is the Claimant Count measure?
A monthly count of those claiming unemployment benefits, requiring claimants to declare they are out of work and seeking employment.
## Footnote
Claimants must be capable of, available for, and actively seeking work.
127
What was the unemployment rate in the UK prior to the financial crisis of 2008?
Unemployment was low, getting down towards 4.5%, indicating near full employment.
128
What was the peak unemployment rate in the UK after the financial crisis?
The unemployment rate reached as high as 8.4% (2.7 million) in February 2012.
129
What is the current rate of unemployment in the UK?
The lowest since the 70s, although real wages are falling.
130
What type of jobs have been predominantly created in the UK recently?
Low skilled or part-time jobs, with an increase in zero hour contracts.
131
What was a prominent government policy to increase labour force participation before the recession?
Encouraging mothers back into the labour market through more affordable and better quality childcare.
132
Why did the government want to increase the labour force participation rate?
To improve productive capacity, increase tax revenue, and reduce costs of out-of-work state benefits.
133
What is underemployment?
When people who want to work full time cannot do so.
134
What are the advantages of the LFS measure of unemployment?
* Captures more of those who are unemployed
* Used by most OECD countries for international comparisons
135
What are the advantages of the Claimant Count measure?
* Relatively cheap to collect
* Based on existing records of benefit claims
136
What is frictional unemployment?
Short term unemployment caused by workers moving between jobs.
137
What is structural unemployment?
Unemployment caused by a decline in demand in an industry, leading to fewer jobs.
138
What is cyclical unemployment?
Unemployment arising from a lack of aggregate demand.
139
What is voluntary unemployment?
Unemployment caused by individuals choosing not to work.
140
What is the impact of hysteresis on unemployment?
The longer people are unemployed, the more difficult it becomes for them to find another job.
141
What are some costs of unemployment for the economy?
* Lost output
* Lower living standards
* Lost tax revenue
* Increased government spending on benefits
* Pressure on other forms of government spending
* Social costs
142
What are some potential benefits of unemployment?
* Time for job search
* Helps firms grow
* Can reduce inflation
143
What does full employment mean?
A situation where there is no demand deficient or cyclical unemployment.
144
What are some benefits of reaching full employment?
* Increased output
* More efficient resource utilization
* Reduced government spending on benefits
* Higher tax revenue
145
What are potential negative effects of reaching full employment?
* Supply constraints may lead to inflation
* Workers may become less motivated
146
What is the largest economy in the world?
USA - $19.3 trillion
147
What ranking does the UK hold in terms of national economies?
6th largest economy in the world ($2.62 trillion)
148
What percentage of the UK economy does the service sector account for?
79%
149
What percentage of the UK economy does manufacturing account for?
10%
150
What are some goods manufactured in the UK?
* Pharmaceuticals
* Luxury cars
* Military equipment
151
What is the rank of the UK in terms of economy size globally?
6th largest economy in the world
## Footnote
The UK's economy is valued at $2.62 trillion.
152
What percentage of the UK economy is accounted for by manufacturing?
10%
153
How many people does the aerospace industry in the UK employ?
100,000 people
154
What is short run economic growth?
An increase in output (real GDP)
155
What is long run economic growth?
An increase in the productive potential of the economy
156
What results in long run economic growth?
* An increase in the quality of factors of production
* An increase in the quantity of factors of production
157
Why is long run growth important for an economy?
Without it, short run growth will eventually halt due to supply constraints
158
What is GDP?
Gross Domestic Product = Total output produced by the factors of production
159
What is nominal GDP?
Total output measured in current prices, not adjusted for inflation
160
What is real GDP?
GDP adjusted for inflation, also known as GDP at constant prices
161
What is the formula to calculate percentage increase in nominal GDP?
(New GDP - Old GDP) / Old GDP x 100
162
Why is real GDP considered a better measure than nominal GDP?
It measures actual production rather than just price increases
163
What is GDP per capita?
Output per head of the population, calculated by dividing GDP by total population
164
What are the three methods to calculate GDP?
* Expenditure method
* Income method
* Output method
165
What is a major issue with measuring GDP accurately?
Underestimation of total output due to the black economy and non-marketed goods
166
What is sustainable economic growth?
Growth which does not harm future generations' ability to expand the productive capacity of the economy
167
What factors can affect quality of life beyond GDP?
* Income distribution
* Social investment
* Employment
* Health
* Education and training
* Housing quality
* Climate change
* Air pollution
* Transport
* Water quality
* Wildlife
* Land use
* Waste
168
What was the UK’s GDP growth trend between 1992 and 2007?
Longest period of continuous economic growth on record
169
What was the impact of the global financial crisis on the UK economy?
The economy entered recession in 2008/09
170
What does Gross National Happiness (GNH) measure?
The collective happiness and well-being of a nation
171
What could have caused a fall in happiness in recent trends?
* Covid
* Unemployment
* Media coverage
* Expectations about the economy
