Macro L7 + 8

Question 1

Multiplier Effect (who originated it?)

Answer 1

• Initial change in the injection/withdrawal can have a greater final impact on equilibrium national income
• Keynesian

Question 2

Value of multiplier is known as…

Answer 2

Multiplier ratio

Question 3

Calculation for multiplier ratio:

Answer 3

Change in injection or withdrawal/Change in income

Question 4

Calculation for MPS:

Answer 4

Change in savings/Change in income

Question 5

How does an increase in MPS affect national income and why?

Answer 5

• Multiplier ratio decreases
• Savings increase, which is a withdrawal
• Withdrawals increase
• Less spending
• Lower National income

Question 6

Calculation for MPC:

Answer 6

Change in consumption/Change in income

Question 7

What do MPS and MPC sum to?

Answer 7

1 (as they are oppositional processes)

Question 8

Calculation for MPT:

Answer 8

Change in taxation/Change in income

Question 9

Calculation for MPM:

Answer 9

Change in import spending/Change in income

Question 10

Calculation for MPW:

Answer 10

MPS + MPM + MPT

Question 11

All equations learnt in multiplier effect topic: (6)

Answer 11

1/1-MPC = multiplier
1/MPS = multiplier
1/MPS + MPM + MPT = multiplier
1/ MPW =multiplier
MPC + MPS = 1
MPanything = change in ……./change in income

Question 12

How is inflation calculated using CPI?

Answer 12

• Every yr, couple thousand household asked to record their expenditure for one month to create avg basket of around 700 goods
• Prices of these goods are tracked and averaged through the Living Costs & Food Survey
• Calculate avg inflation rate w/ weighting of each item
• Index number is given

Question 13

When prices are tracked how is it ensured that this is fair?

Answer 13

They are tracked in different areas of the country and different types of retail outlets

Question 14

Why are goods weighted?

Answer 14

A larger proportion of income are spent on some goods than other so this must be considered

Question 15

How is RPI value different to CPI value, why is this the case and therefore conclude whether CPI or RPI is more accurate?

Answer 15

• Tends to be above CPI
• Uses Carli index (arithmetic mean) to average diff prices
• ONS said CPI is more accurate as the use of the Carli index meant inflation was consistently overstated

Question 16

To solve the issue of RPI, what was created, by who and how is this different to RPI?

Answer 16

• ONS produced RPIJ measure
• Use same data but w/ Jevons index (type of geometric mean)

Question 17

In what other ways do RPI and CPI differ?

Answer 17

• CPI excludes a number of items eg. housing, council tax whereas RPI doesn’t (another reason for apparent lower CPI levels)
• RPI excludes top 4% of income earners and low income pensioners (not typical households), whereas CPI covers everyone

Question 18

What are redistribution effects and what is it caused by?

Answer 18

• Redistribution effects are when certain groups lose some purchasing power and become worse off, whereas others gain purchasing power and become better off
• Inflation

Question 19

What two factors can cause inflation?

Answer 19

• Too much demand
• Rising costs

Question 20

In what situation is demand-pull inflation likely to occur and what is caused by?

Answer 20

• If AD rises w/ no increase AS
• Excess demand

Question 21

Reasons for excessive increases in AD:

Answer 21

• Excessive consumer spending
• Low interest rates (lots of borrowing)
• Rising consumer confidence (due to rising house prices)
• Increased gov spending
• World demand for UK exports (due to boom in world economy)
• Growth of money supply
• Cutting taxes

Question 22

How does money supply grow and how does it cause inflation?

Answer 22

• If banks increase lending, this happens
• As a result, consumption and AD increases
• Causing inflation

Question 23

Wage-price spiral

Answer 23

Workers continue to demand high wages

Question 24

What inflation may occur as a result of rising costs?

Answer 24

Cost-push inflation

Question 25

5 major sources of rising costs:

Answer 25

- Increase in wages increase costs of production (wages account for about 50% of NI) - Boom in world economy mean higher import prices for UK - Producers raise price to improve profit margins - Raise indirect taxes - Increase subsidies

Question 26

In a stable, growing economy what is inflation likely caused by?

Answer 26

Mix of rising costs and excess demand

Question 27

Groups who lose from inflation:

Answer 27

- People who receive fixed incomes/wages - People who receive incomes/wages that increase at a slower rate than rate of inflation - Holders of cash - Savers - Lenders

Question 28

Why do people who receive fixed incomes/wages lose from inflation?

Answer 28

As the general price level increases, people become worse off

Question 29

Give examples of people who receive fixed incomes/wages

Answer 29

- Wage contracts - Fixed pensions - Fixed rental income - Fixed welfare payments

Question 30

Why do people who receive incomes/wages that increase at a slower rate than rate of inflation lose out and which groups of people does this usually include?

Answer 30

- Causes a fall in real incomes - Includes all groups above w/ fixed incomes/wages & any kind of income receiver

Question 31

Why do holders of cash lose out from inflation?

Answer 31

Real value of cash falls as general price level increases

Question 32

In order to maintain the real value of savings, what must be equal for savers and why is this?

Answer 32

- Savers must receive a rate of interest equal to the rate of inflation - Purchasing power lost through inflation is regained through interest

Question 33

Why do some savers lose out from inflation?

Answer 33

If the rate of interest is lower than the rate of inflation, the real value of savings would fall

Question 34

Groups who gain from inflation:

Answer 34

- Borrowers - Payers of fixed incomes/wages - Payers of incomes/wages that increase at a slower rate than that of inflation

Question 35

How do borrowersq gain from inflation?

Answer 35

If they borrow at a lower interest rate than the rate of inflation, the real value of money that has been given back falls

Question 36

Why do some lenders lose out from inflation?

Answer 36

They lend at an interest rate lower than inflation, which means they receive less.

Question 37

How do payers of fixed incomes/wages gain from inflation?

Answer 37

Real value of payments fall so they do not have to give as much money

Question 38

How do payers of incomes/wages increase at a slower rate than inflation gain?

Answer 38

They benefit due to falling real value of payments

Question 39

How does uncertainty affect economic growth?

Answer 39

- Firms become more cautious as they are unable to make accurate forecasts of costs and revenues - Leads to fewer investments - Lower economic growth

Question 40

How are menu costs affected by inflation?

Answer 40

- Higher rate of inflation - More often firms have to change their prices - Higher menu costs

Question 41

How does money illusion have negative consequences?

Answer 41

- When nominal incomes increases, people feel better off even when their purchasing power has not changed - Leads to wrong spending decisions

Question 42

How does international competitiveness create problems?

Answer 42

- As inflation occurs more rapidly compared to other trading countries, exports become more expensive, whereas imports become cheaper - International competitiveness of country is reduced - Difficulties for country's balance of payments

Question 43

What is an appropriate rate for inflation and why is this preferred rather than zero inflation?

Answer 43

- 2 to 3% - Zero is dangerously close to deflation, which can create serious issues