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Economic A Level > Macro Economics 2 > Flashcards

Macro Economics 2 Flashcards

(78 cards)

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1
Q

What is the circular flow of income diagram

A

It is a model of what happens in a basic economy

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2
Q

What are the two boxes in the diagram

A

Households
Firms

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3
Q

What are the two movements from firms to households

A

Income
Output (goods and services)

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4
Q

What are the two movements from households to firms

A

Factors of production
Expenditure

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5
Q

What are firms

A

Companies who pay wages to workers and produce output

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6
Q

What are households

A

Individuals who consume goods and services and receive wages from firms

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7
Q

What is national output

A

The total value of output produced by firms

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8
Q

What is national income

A

This is the total income recieved by people in the economy

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9
Q

What is national expenditure

A

The total amount spent on goods and services

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10
Q

What are the injections

A

Investment (I) - Capital spending by firms
Government spending (G) - money spent by the government
Exports (X) - Money spent by foreigners on UK G+S

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11
Q

What are the withdrawals

A

Taxes - Money paid to the government to fund its spending
Imports - Money that flows out the UK for foreign G+S
Savings - Any income that is not spent by households

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12
Q

What is the equation for Aggregate Demand

A

C + I + G + (X-M)

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13
Q

What is consumption

A

Spending by households on consumer goods

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14
Q

What is aggregate demand

A

It refers to the total value of expenditure on goods and services in the economy at any particular price level

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15
Q

What are the main spending groups in an economy

A

Consumers - consumption
Firms - investment
The public sector - government spending
Foreign consumers - Net Exports

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16
Q

What are the axis for an AD curve

A

Y axis - Price level
X axis - Real GDP

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17
Q

What happens when there is a change in price level

A

It causes a movement along the AD
A rise in price level - contraction in output
A fall in price level - Extension in output

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18
Q

Why is the AD negatively sloped

A

The real income effect
The interest rate effect
The international trade effect

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19
Q

What is the real income effect

A

A rise in price level reduces the real income of spenders so they can buy less G+S

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20
Q

What is real income

A

Money income adjusted to remove the impact of rising prices

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21
Q

What is the interest rate effect

A

When prices rise it reduces the value of money owed
To combat this, banks increase interest rates during inflation
This reduces AD

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22
Q

What is the international trade effect

A

Rising prices means that exports decrease and imports increase
This decreases AD

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23
Q

What causes AD to move outwards and inwards

A

AD rises
AD falls

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24
Q

What factors affect AD

A

Changes to monetary policy
Changes to fiscal policy
Changes to income and wealth levels
Changes in foreign income - Exports
Changes in expectations - Consumer confidence

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25
What are changes to monetary policy
Changes in interest rates Changes in exchange rates - effects Imports and Exports Changes in money supply
26
What are changes in fiscal policy
Changes to government spending Changes in taxation Government borrowing
27
What are changes in income and wealth levels
Real disposable income Assests
28
What is aggregate supply
It is a measure of total volume of goods and services produced within the economy at a given average price level
29
What are the two types of AS
Short run aggregate supply Long run AS
30
What determines SRAS
Price level Cost of production
31
What affects LRAS
Quantity of resources State of technology Quality of resources The incentives by the factors of production
32
What affects the cost of production
Labour costs Commodity prices Exchange rates Taxes and subsidies Price of imports
33
What are the macro objectives
Sustainable economic growth High employment Low and stable inflation Broad balance on Balance of trades Sustainable use of environmental resources Fair distribution of income
34
What are fiscal policies
Government spending Taxation Government borrowing
35
What are monetary policies
Interest rates The money suply Exchange rates
36
What are supply side policies
Policies aiming to improve the efficiency or productivity of resources
37
What is macroeconomic equilibrium
AD = AS Injections = withdrawals
38
What is inflationary growth
Growth caused by increase in AD and causes a rise in price level
39
What is non inflationary growth
Increase in AS Price level decreases
40
What is stagflation
Decrease in output Increase in Price level
41
What affects consumer spending
Disposable Income Changes in Wealth Changes in consumer confidence Changes in interest rates Availability of credit Price level
42
What is consumer spending
Spending by individuals or households on goods and services to gain utility
43
What is autonomous consumption
Consumption that happens when income is 0 This is done by borrowing or dis-saving
44
What is induced consumption
When consumption rises because of a rise in income
45
What happens near the end of the consumption function
Consumption slows down as income reaches a certain level
46
What is the marginal propensity to consume equation
= Change in Consumption/Change in income
47
What is saving
It is part of disposable income that is not spent Income can either be spent or saved
48
What effects saving
Disposable income Interest rates Consumer confidence Tax rate charged on interest Saving targets Expectations of future price levels
49
What does the saving function look like
Negative saving at 0 income - Dis saving Saving then increases as income increases
50
What is the propensity to save
Change in saving/ Change in disposable income MPC + MPS = 1
51
What is the relationship between interest rates and saving
Postive
52
What is the Paradox of Thrift
People saving to prepare for difficult times can cause negative outcomes for the economy and make it worse
53
What are the forms of govt spending
Current spending - e.g. wages for NHS workers Capital spending - e.g. building roads Transfer payments - e.g. Child benefits
54
What are the 3 main parts of govt spending
Social protection Healthcare Education
55
What is the role of govt spending
Provide public goods Increase output of merit goods Redistribute wealth and income Manage AD and AS
56
What is taxation
Any compulsory transfer of money from the private sector to the public sector
57
What are the types of tax
Indirect - levied on expenditure Direct - Income, Wealth, Profit
58
What are the 3 biggest taxes
Income National Insurance VAT
59
What are the main principles of taxes or Canons
Economy - cheap to collect Equity - Fair Efficiency - Hard to avoid Flexibility - Easy to change Convenience - Easy to pay Certainty - Know how they are taxed
60
What is the laffer curve
Line which shows the relationship between tax collected and tax rate Line increases positively until the optimal point and then tax collected decreases from there This is because people are more willing to avoid or evade taxes, work less and leave the country - brain drain
61
What is the amount of money of income not taxed
Personal allowance
62
What is average rate of tax
How much tax they are paying on average Total tax paid / Total income earned x100
63
What is marginal rate of tax
The percentage of tax on the highest income band of a persons income
64
What is investment
It is spending on capital goods as well as spending to improve the human capital workforce through education
65
What is infrastructure
Spending on new sewers or roads for example
66
What is gross investment
The total amount spent on new capital
67
What is depreciation
Value of capital decreasing from use
68
What is net investment
The overall change in capital including gross investment and depreciation
69
What does investment affect
The AD and AS It affects the AD first Long term it moves the PPF out but short term there is a shift to a less productive point below the PPF
70
What are the 3 C's of investment
It causes Increased capacity Increase in productivity which causes a decrease in costs More able to compete with lower prices
71
What factors affect investment
Interest rates Expected profits from investment Corporation taxes Tech change and degree of market competition Business confidence The rate of growth of consumer demand
72
What is a progressive tax
It is one in which the proportion of income paid in tax rises as income rises
73
What is a proportional tax
It is one in which the proportion of income paid in tax remains the same as income rises. This is because the tax paid on the last pound earned is the same as the tax paid on the average pound
74
What is a regressive tax
It is one in which the proportion of income paid in tax falls as income rises. This is because the tax paid on the last pound earned is lower the tax paid on average pound
75
What are examples of direct taxes
Income Corporation Capital gains Inheritance National insurance Council Business
76
What are examples of indirect taxes
VAT Excise
77
What is the multiplier
It is the process by which an initial change in AD leads to a greater final impact on national income Developed by Keynes in the 1930s
78
How does the multiplier work
That spending by one individual creates an income for another individual who can then spend it and create more income

Economic A Level (22 decks)

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