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economics macro > macro theme 2 2.2 > Flashcards

macro theme 2 2.2 Flashcards

1
Q

what is AD

A

the total amount of demand in an economy

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2
Q

what is AD formula

A

C+I+G+(X-M)

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3
Q

why does the AD curve slope downward

A
  1. real balance effect- all changes lead to an opposite change
  2. interest rates- high/ low
  3. trade effect - low price= higher demand
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4
Q

the factors of AD support the what notion (2)

A

when prices are high, consumption will be low
when prices are low, consumption will be high

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5
Q

what causes shifts in the AD curve

A

changes in the components of aggregate demand

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6
Q

what causes a movement in the AD curve

A
  • when the price level of an economy changes without changes in any component of aggregate demand
  • interest rates have an impact on the PVL
  • VAT
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7
Q

what are the economic agents (4)

A
  • household(consumers),
  • firms,
  • governments,
  • net trade
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8
Q

what percent is each component of aggregate demand

A
  • consumption-60%
  • investment-14%
  • gov spending-25%
  • net balance (X-M) -1%
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9
Q

factors which determine the levels of consumption within an economy (6)

A
  1. disposable income
  2. wealth
  3. interest rates
  4. ease of borrowing
  5. levels of taxation
  6. confidence levels
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10
Q

what is income and what concept is it

A

is a flow concept; it is the amount of money that has been received over some time

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11
Q

what is wealth and what concept is it

A

is a stock concept; it is the total of someone’s assets, including shares, cash and property

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12
Q

what is disposable income

A

it is the amount left after taxes

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13
Q

what is discretionary income

A

the amount of money a household/person has to spend after they have paid all their bills and taxes

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14
Q

what is a boom

A

is when GDP has increased for 6 months or 2 quarters

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15
Q

what is a recession

A

when GDP has fallen for 6 consecutive months or 2 quarters

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16
Q

what occurs during a recession

A

people have less disposable income and there is an increase in unemployment levels

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17
Q

what occurs during a boom

A

people have more disposable income and there is a decrease in unemployment levels

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18
Q

what is the wealth effect

A

when a person’s wealth increases, because of many reasons such as an increase in shares or house prices

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19
Q

what is the main source of household borrowing

A

is a mortgage (interest rates)

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20
Q

What tax do consumers have to pay

A

income tax

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21
Q

What tax do firms/businesses have to pay

A

corporation tax

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22
Q

what are the positives of an increase in tax?

A

government have more tax revenues, to reduce debt/ or can be spent in education/ hospitals

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23
Q

what are the negatives of high tax

A

consumption will decrease so GDP decreases leading to economic growth decreasing

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24
Q

what is consumer confidence

A

a measurement of how optimstic/ pessimistic consumers feel about the state of the economy

25
what does SPICED stand for
strong pound imports cheaper exports dearer
26
what is the definition of hot money flows
Hot money flows refer to capital flows (money) moving to countries with higher interest rates and/or expected changes in exchange rates.
27
what is the definition of investment
the expenditure that is undertaken by firms on capital goods to increase output
28
what is gross investment and an example
the total amount of investment before any account of depreciation of the assets machines become redundant as new production methods are invented (these types of investments will not have a significant impact on the economy (replacing))
29
what is net investment classed as and what will they help to improve
is classed as new forms of investments by firms on capital investments these types of investment will hellp to improve the firms potential productive capacity.
30
what factors impact investment by firms (8)
1. interest rates 2. profits of business 3. levels of confidence 4. taxation 5. government policy 6. exchange rate 7. access to credit 8. new technology
31
what is 'animal spirits'
the forces that make markets more in large booms and busts, as people buy and sell impulsively rather that calmly, using purely rational behaviour suggests humans have 'herd' instincts humans buy when they see prices rising and sell when we see prices falling
32
what is the accelerator effect stages what does the diagram looks like (brief)
1. an economy is entering a period of economic growth 2. an increase in consumer demand for goods and services 3. firms get close to full capacity 4. firms invest to help meet the rising demand 5. demand meets the demand shifting more than once
33
what is the accelerator effect definition
firms are confident with the state of the economy so they invest hoping consumers continue buying goods and services
34
what percent is gov spending of the total uk economies spending
40% totals around £590 billion a year only 25% of AD
35
what is the welfare payment
classed as a movement of spending power, absorbed in the form of consumption
36
what are the 4 periods of the business cycle
* boom * recession * slump * recovery
37
what occurs in the 4 periods of the business cycle
* in a boom GDP is high so theres a positive output gap= producing more than the economy thought * in a recession GDP is decreasing for 2 consecutive quarters (6 months) * in a slump GDP stays the same so there is a negative output gap- producing less than the economy thought reducing interest rates * In recovery- GDP rises as people borrow more to then spend more
38
what does the government spend during the 4 periods of the business cycle
boom- gov spends income on healthcare, education slump- gov spends on benefits recession- gov starts spending on benefits and decrease spending on education and healthcare recovery- starts decreasing spending on benefits and increase spending on education and infastructure and healthcare
39
what is the fiscal policy and what are the 2 parts
is a policy governments can use to try and manipulate aggregate demand government spending and taxation
40
what can the fiscal policy be used for
to slow down growth and also stop markets from getting too big
41
what is tax revenues
how much tax government gets from consumers and firms. if it is positive is a surplus if negative is a deficit
42
whats the formula to calculate whether the economy is in a surplus or deficit
tax revenues- government spending
43
what is a loose (expansionary) fiscal policy what happens to AD
is when the gov spending is greater than taxation is receives (deficit) AD increases
44
what is a tight fiscal policy what happens to AD
is when the gov spending is less than the tax it receives (surplus) AD is decreasing
45
what are the effects of loose policy
deficit, could cause inflation, increase in taxes, people in debt, borrowing
46
what are the effects of tight policy
surplus, could caused a decrease in inflation
47
what is the multiplier effect
when an initial increase in an injection (eg consumption, investment, government spending) leads to a bigger overall effect on the economy
48
what is the muliplier effect stages (9)
1. real GDP increases 2. employ more workers 3. spend their income 4. firms sales + profit increase 5. firms expand 6. hire more workers 7. spend their income 8. government receive more income tax, more VAT, more corporation tax 9. government spending increases
49
what does an increase in gov spending cause
the multiplier effect
50
what is the UKs imports and exports like
the UK imports more goods than it exports but exports more services than imports overall the UK is in a trading deficit= runs a deficit on the current account
51
what impacts values of net trade (5)
1. changes in real income 2. changes in the exchange rate 3. changes in the state of the world economy 4. the degree of protectionism 5. non-price factors
52
what would occur if the value of the pound depreciated
then exports would increase as it would be cheaper for other countries
53
if UK incomes increase what happens to the demand for imported goods and what goods are demanded what occurs to the net trade deficit
demand will increase consumers demand more electrical, clothing and oil (power cars), most imported will drastically increase the net trade deficit
54
what is a high marginal propensity to import and eg
the next unit of money earned will result in a high chance of importing when mpm is high 1= high mpm (eg UK)
55
if there are other countries going through a strong period of economic growth how does it affect other countries
they will demand more goods from other countries. so imports increase for that country and will be more exports for other countries
56
what is the degree of protectionism impact the net trade balance
methods to protect domestic firms: tariffs, subsidies, quotas (a limit of exports and imports to a country)
57
what are non-price factors and how they affect net trade balance
these are factors that make the good/ services unique or help to gain an advantage eg: advertising accessibility- location quality aftersales services
58
What is a quota
Is a limit of exports and imports to a country

economics macro (4 decks)

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