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Zak copy econ > Macro year 1 > Flashcards

Macro year 1 Flashcards

1
Q

what are the macroeconomic objectives

A
  • strong, sustained, sustainable economic growth
  • low unemployment, full employment
  • low and stable inflation (2% ±1%)
  • Balanced trade
  • Fair distribution of income
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2
Q

remebreing macro obj

what does TIGERS stand for

A
  • trade
  • Inflation
  • Growth
  • Employment
  • redistribution of income
  • stability
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3
Q

What are the non-core macro objectives

A
  • sound goverment finanices (making sure the economy can pay its way in the future)
  • Environmental sustainability
  • Productivity growth (making sure its rising in the long-run)
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4
Q

draw the full circular flow of income diagram

A
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5
Q

What are the 2 fundimental economic agents found in the circular flow of income model

A
  • Households & firms
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6
Q

what do households provide to firms in the ciruclar flow of income model

A
  • Factors of production (CELL)
  • Consumer expenditure
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7
Q

What do firms provide households within the ciruclar flow of income

A
  • Factor incomes (wages, salary, rent, profit, intrest)
  • goods/services (made from combination of factors of production)
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8
Q

what is meant by leakages in the circular flow of income model, what are examples

A
  • Leakages are withdrawals of incomes from the economy
  • Examples of these could be savings, taxation, import spending
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9
Q

What are injections in the circular flow of income, what are some examples

A
  • external economic activities that introduce money into the economy
  • investment (spending by firms on capital goods), goverment spending, exports
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10
Q

How can we determine if the economy is growing or not from the circular flow of income model

A

comparing the value of leakages and injections

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11
Q

what are the 3 outcomes that are possible in terms of economic growth for the circular flow of income model

A

I+G+X > S+T+M (increasing growth)
I+G+X < S+T+M (decreasing growth)
I+G+V = S+T+M (macroeneconomic equilibirum)

I= investment
G= goverment spending
X= export spending
S= savings
T= taxation
M= import speing

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12
Q

What are the 3 methods of measuring GDP from the circular flow of income model

A
  • output method
  • income method
  • expenditure method
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13
Q

How is the output method calculated

A
  • it adds up the final value of all goods/services produced in an economy in a year
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14
Q

How is the income method measure of GDP calculated

A
  • by adding up all the factor incomes earned in an economy in a year
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15
Q

How is the expenditure method calculated

A
  • adding up the total expenditure on a countries goods/services in a year
  • ^C+I+G(X-M)
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16
Q

How are the output, income and expenditure methods linked

A
  • outcome = income = expenditure
  • as they are all trying to indicate the same number
  • your spending on a good/service is going to be equal to the value of that good/service which is going to be equal to the price of the good/service and so therefore equal to the income of the shop owner
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17
Q

what are some examples of where index numbers could be used

A

GDP data, house prices, exchange rates, inflation

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18
Q

Why do we use index numbers

A
  • to simplfy hard numbers in to easier numbers
  • to allow for quick and easy data comparison
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19
Q

what is the value of a base year in therms of index numbers

A

the base year always has an index value of 100, year 1

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20
Q

what is the formula for potential difference

A

difference/original x 100

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21
Q

what is the formula for index numbers

A

raw number / raw number of base year x 100

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22
Q

What are the different measures of economic growth

A
  • GDP
  • GDP/per capita
  • GNI (per capita)
  • Green GDP
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23
Q

Why are national income statistics so useful for a goverment

A
  • allows the goverment to see how their economies are doing,
  • measure of economic performance (in both the SR & LR)
  • Allows goverments to see wether they are meeting their objectives for economic growth
  • Allows goverments to evaluate policys
  • It allows econonmic agents to ‘forecast’ expected demand or growth going forward
  • can act as a measure of living standards
  • Allows for a comparison of domestic anf foreign economies
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24
Q

What is real GDP

A

GDP adjusted for inflation

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25
Q

What is the definition of GDP

A

The value of all final goods/services produced in an economy in a year

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26
Q

What is the benfits of using GDP/real GDP

A
  • gives a measure of growth
  • Gives a measure of living standards
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27
Q

What are the key issues of using GDP/real GDP as a measure of economic growth

A
  • there is a risk of double counting (especially if output method used)
  • informal activity (black markets, unregisted shops, DIY work, subsistence agriculture)
  • Errors given vast data collection
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28
Q

What is meant by double couting in reference to GDP

A

we include the value of output in the primary sector and then we include it again when that primary commodity has been manufactured into something in the secondary sector

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29
Q

What are the key issues of using GDP/real GDP as a measure of living standards

A
  • the neg externalities of production have not been included
  • Income inequality (distribution is of income is ont taken into account)
  • The kind of output produced (if capital is produced, not immeditantly good for consumers)
  • There are many other quality of life aspects that it does not take into account
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30
Q

what are the benefits of using real GDP per capita

A
  • it gives us an average measure of individual incomes in the economy
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31
Q

What are the issues with GDP per capita

A
  • the same issues as GDP
  • It will not take into account any factor income earned abroad (remittances)
  • Remittances will be taken into account in the forgien country where the income is not spent
  • FDI could distort the final figure as a lot of profit made is repatriated by these firms
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32
Q

what are remittances

A

domestic workers leave the country and work abroad to earn higher incomes, this income is then sent back to their home country

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33
Q

what is GNI

A

defined as the total income generated by a countries factors of production regardless of where those factors of production are located

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34
Q

what are the benefits of using GNI

A
  • factor incomes (as long as its domestic factors of production) will be included in the GNI figure
  • ^remittances are more likely to be taken into account giving a truer reflection of living standards (especially in developing countries)
  • Will not be influenced by FDI repatriated profits
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35
Q

what is the formula for GNI

A

GNI=GDP + net factor incomes

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36
Q

What are some issues with using GNI

A
  • ## FDI income will not be account for
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37
Q

What is the formula for net factor income

A

income earned by domestic workers/firms - income earned by foreign workers/firms at home

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38
Q

what is economic growth

A
  • an increase in real GDP in an economy in a year caused by an increase in AD or LRAS
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39
Q

what is short-run/actual growth

A
  • an increase in AD
  • ^caused by using spare capacity to increase real GDP
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40
Q

what is the formula for aggregate demand

A

C(consumer spending) + I(investment spending) + G(goverment spending) + (X(export spending)-M(import spending)

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41
Q

what graphs can you use to show an increase in short run growth

A
  • a PPF cruve with the point of production moving further towards the frontier
  • a AS AD diagram (keynesian or classical) and show a shift to the right for AD
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42
Q

what are some causes of short run/actual economic growth

A
  • lower intrest rates (C↑, I↑, X-M↑)
  • lower income/corporation tax (C↑, I↑)
  • higher consumer/business confidence (C↑, I↑ more likely to spend or invest)
  • higher goverment spending (G↑)
  • weaker exchange rate (X-M↑)

↑

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43
Q

how do lower intrest rates increase short run economic growth

A
  • makes it cheaper for consumers to borrow and spend
  • makes it cheaper for firms to borrow and invest
  • low intrest rates can weaken the exchange rate and so boost X-M
    ^gonna take their money out of UK and so supply is gonna sky rocket and make £ worth less hence weakend exchange rate
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44
Q

what is long-run/potential economic growth

A
  • an increase in LRAS
  • ^increase in the productive capacity of the economy
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45
Q

what graphs can you use to show an increase in long run growth

A
  • a PPF with a shift of the curve to the right to show an increase in productive potential
  • a AD AS diagram (classical or keynesian) with a shift of LRAS to the right
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46
Q

what are the causes of long run economic growth

A
  • increase in quantity in FoP’s
  • increase in quality of FoP’s
  • increase in productive efficency (a reduction in long run cost of production for firms)
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47
Q

what are some examples of things that could cause an increase in long run growth

A
  • increase labour productivity (↑quality of FoP)
  • increase in workforce size (immigration) (↑ quantity of FoP)
  • investment (depending on type could be ↑ quality and quantity of FoP and ↑ in labour productivity)
  • infrastructure improvements (↑productivity of labour)
  • increase in competition (force costs to be lower to become more competitve so ↑ productive efficency)
  • new resource discoveries (↑quantity of FoP)
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48
Q

what causes the economic cycle

A
  • fluxuations in GDP caused by shocks
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49
Q

What are the 4 stages/phases of the economic cycle

A
  • boom, when actual growth is at its peak
  • recession, when growth starts to fall after a boom
  • trough, worst positino from a recessin
  • recovery, when growth starts to rise after a trough
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50
Q

definition of recession

A

2 successive quarters of falling growth

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51
Q

when does a positive output gap occur

A

when actual growth is greater than potential/trend growth

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52
Q

when does a negative output gap occur

A

when actual growth is less than potential/trend growth

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53
Q

characteristics of economy in a boom

A
  • positive output gap in the economy
  • firms going to be producing a lot and selling them easily to make high profits
  • low unemployment
  • high consumer and business confidence as economy is doing well
  • high demand for imports as incomes rise
  • rising tax revenues
  • demand pull inflation
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54
Q

characteristics of a recession and trough

A
  • declining AD (negative output gap)
  • high unemployment ( e.g. getting rid of workers to maintain profit margins)
  • sharp fall in consumer/business confidence so less spending/investment
  • de-stocking (halt production) & discounting
  • fall in house prices and construction
  • lower demand pull inflation
  • macro policys to stimulate growth
    ^lower intrest rates
    ^higher goverment spending
    ^ lower taxation
  • low demand for imports
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55
Q

charcteristic of recovery

A
  • rising consumer/business confidence
  • higher house prices
  • higher consumer spending and investment spending
  • increase in construction
  • macro policys to stimulate growth
  • employment rises
  • increase in demand pull inflation
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56
Q

what are the types of shocks that cause the economic cycle

A

demand side and supply side shocks

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57
Q

what is a demand side shock
what are examples

A

shocks to aggregate demand that reduce it

E.g.
- a sudden increase in intrest rates
- sudden cut in goverment spending
- sudden strengthening of the exchange rate
- sudden housing market crash
- sudden banking sector/financial market crash (like what happened in 2008-10) caused less consumption and investment
- sidden increase in income and corporation tax

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58
Q

what is a supply side shock
what are examples

A

shocks that affect LRAS

E.g.
- natural disasters
- wars
- sudden increase in raw material price
- sudden increase in wages
- sudden increase in businesses taxes (VAT)
- sudden weakening of exchang rate (imports of raw materials more expensive)

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59
Q

what are the benefits of economic growth

A
  • higher disposable income (potentially higher wages and salaries,promotions, more productive demand higher income)
    ^higher living standards for those households
  • higher employment
  • higher profits for firms
  • fiscal dividend for goverment
    ^increase in tax revenue, can spend on country to improve it
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60
Q

what are the costs of economic growth

A
  • higher demand pull inflation
    ^ erode purchasing power, could limit living standards
  • lead to higher income inequality
  • environmental costs
    ^could limit living standards
  • current account deficit
    ^as incomes rise purchasing more imports
    ^ macro objective conflict
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61
Q

how could economic growth lead to income inequality

A
  • one sector dominance
    ^high incomes might be contained to that sector
  • capital intensive production
    ^higher incomes going to be contained to owners of capital not whole population
  • if growth is coming from urban areas instead of rural areas there is going to be an income divide
  • could be worsened if lack of welfare state
    ^ no income redistrubuting policy will not fix problem
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62
Q

what are some points for judgement/evaluation for economic growth

A
  • sustainable growth
    ^growth without inflation and environmental costs
  • inclusive growth
    ^everybody benefits from growth, not parts of society
  • balanced growth
    ^growth from multiple different sources, so that growth can come from else where if a sector goes into decline
  • role for the private sector
    ^pay workers well, look after environment, good investing
  • role for the goverment
    ^make sure tax rev used correctly, ensure policys and regulations to minimise costs
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63
Q

what is meant by unemployed

A

those of working age who are willing and able to work, actively seeking out work but do not have a job

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64
Q

what are the 2 main methods of measuring unemployment

A
  • Labour force survey (LFS)
  • claimant count
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65
Q

what is the labour force survery

A
  • conducted by ONS in uk (office for national statistics)
  • around 100,000 people given questionnaire
  • from data ONS work out no. of employed, unemployed and economically inactive
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66
Q

formula for unemployment rate

A

unemployed / economically active (x100)

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67
Q

what is the claimant count

A

measure of the total number of people claiming unemployment benefits

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68
Q

what are some issues with the claimant count

A
  • difficult to compare between countries
    ^some countries might not have these benefits, could have different conditions to claim benefits
  • not everyone eligible for them will claim them
    ^embarrased or no need
  • not everyone is eligible for them
    ^large amount of savings, assests not eligible
  • could be subject to fraud
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69
Q

what are some issues with the labour force survey

A
  • sampling size
    ^tiny fraction of population
  • sampling errors
  • disparities
    ^regional unemployment, youth vs age, racial rates
  • under-employed
    ^only need to work an hour a week to be ‘fully employed’ in UK,
  • discouraged workers
    ^people that have working potential but no longer want to work (hidden unemployed)
  • expensive to conduct
    ^high admin costs, calculating, interpreting
  • inactive groups
    ^full time student, early retired, rich partners, still have working potential
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70
Q

what are the types of unemployment

A
  • cyclical/demand deficent unemployment
  • structural unemployment
  • frictional/search unemployment
  • seasonal unemployment
  • casual unemployment
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71
Q

what is cyclical unemployment
What can cause it

A
  • when there is a lack of demand there is less derived demand for labour
  • any thing that can shift AD to the left would increase this unemployment
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72
Q

what is structural unemployment
give all details

A
  • the immobility of labour
  • ^ocupational immobility & geographical immobility
  • ocupational immobility is when workers dont have skills (loss of skills or skills are worthlesso can’t transfer jobs)
  • geographical immobility is when workers are not willing to move to find work
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73
Q

what is frictional unemployment

A
  • unemployment that occurs when workers are between jobs
    ^when searching for a new job
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74
Q

what is casual unemployment

A
  • when workers like actors and builders that have contracts that end at random times
  • they are casually unemployed until they find a new contract
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75
Q

what is inflation

A

persistent increase of prices in an econonmy in a year

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76
Q

what is rising inflation

A
  • when the rate of inflation is rising
  • e.g. in year 1 inflation rate is 3% then in year 2 the rate is 4%
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77
Q

what is disinflation

A
  • when prices are still rising but at a slower rate than before
  • e.g. year 1 inflation rate is 5% then year 2 rate is 2%
    ^inflation is still positive but the inflation rate has decreased
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78
Q

what is deflation

A
  • when prices in the economy are actually falling
  • the inflation rate is negative
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79
Q

what is the main method to measure inflation

A
  • A CPI/CPIH
  • ^consumer price index/housing
  • calculates annual rates of inflation
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80
Q

why is the consumer price index a good method of measuring inflation

A
  • the inflation rates we get will tell us about rising in prices of goods/services that consumers are buying
  • inflation rate we get is applicable to households
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81
Q

how do you carry out a consumer price index

A

1) expenditure survey carried out
2) A ‘consumer basket’ of most popular goods/services is formed with average prices attached
3) Prices of these goods/services are weighted based on % of income (0-1) (if take 10% of income 0.1)
4) weighted prices are added to give total weighted price of the basket
5) Base year selected with index value 100
6) weighted basket prices converted into index numbers
7) % △ calculations done to work out annual inflation rates
8) Basket is updated yearly

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82
Q

what is the expenditure survey

A
  • issued by ONS (office of national statistics)
  • over 14 days
  • what they buy
  • the price they pay for goods/services
  • the quantity they buy
  • where they buy from
  • % of income spent on goods/services
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83
Q

what is RPI

A
  • retail price index
  • its the same as the consumer price index but includes housing costs
  • also due to differents in calculating, the RPI would give a higher rate
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84
Q

what are some issues with CPI

A
  • personal inflation rates differ (there is not a unifrom average family, low income vs high income households)
  • price fluctuations of certain goods (could distort rate, food,energy often demand/supply inelastic goods/services)
  • Housing costs are not included (rent, mortage intrest payments, these take up a lot of income %)
  • basket updates too slow (consumption habits change faster, not perhaps not be representive of current consumption habits)
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85
Q

what is core CPI and what problems can it over come with CPI

A
  • its the CPI minius goods/services likely to experience heavy price fluctuations such as gas, electricity and fuel
  • overcomes problem of these good distorting inflation rates

CPI= consumer price index

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86
Q

What is the PPI
whe do we use it

A
  • producer price index
  • we go to this if we think changes in energy prices will effect CPI in the future
  • measures increase in the price of goods as they leave the factory gate
  • ^if these goods go up in price it means costs of production is increasing
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87
Q

What is CPIH
what problem does it overcome with CPI

A
  • consumer price index housing
  • all housing costs are in the basket
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88
Q

What are the 2 major types of inflation

A
  • demand pull inflation
  • cost push inflation
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89
Q

when & how does demand pull inflation occur

A
  • when aggregate demand shifts to the right (increase)
  • there is greater pressure on existing factors of production to produce more
  • ^existing FoP are becoming scarcer, when more pressure is put on a scare resource it come up in price
    ^(wages↑, price of capital↑, price of land↑, ↑↑↑cost of production)
  • firms pass on higher costs via higher prices
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90
Q

when & how does cost push inflation occur

A
  • when SRAS shifts to the left (SRAS decreases)
  • if firms are suffering from higher costs of production they are going to be passing on higher costs via higher prices
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91
Q

what are the costs of high inflation

A
  • lower purchasing power (if wages are not risinig in line with inflation)
  • erosion of savings (if intrest rates are not rising in line with inflation, puts people off saving and so could increase inflation)
  • lower export competativeness (lead to worsening of CA deficit, harming economic growth)
  • wage/price, consumer spirals
  • fiscal drag inflationary noise
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92
Q

what are shoe leather costs

A
  • oppurttunity costs of the time and effort put into searching for a bank with higher intrest rates
    ^(to try and battle erosion of savings due to high inflation)
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93
Q

what are the problems with erosin of savings due to high inflation

A
  • puts people off saving and so could increase inflation
  • in real terms your savings could be losing value
  • bad news for those who rely on savings such as unemployed, ecnomically inactive, old age pensioners
  • ^could result in fall in living standards
  • it is going to be harder for people saving to buy a house for instance
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94
Q

what are the problems with wages/consumer spending spirals due to high inflation

A
  • if high inflation becomes anticipated and then spiralling occurs it creates risk of further inflation and hyper inflation
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95
Q

How does wage/price inflation spirals occur

A

wage/price spirals:

  • as inflation is high and workers anticipated it they bargin for higher wages
  • ^this increases COP for firms and pass on higher prices to consumers which increases inflation and so leads workers to ask for even higher wages
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96
Q

How does consumer inflation spirals come about

A
  • if consumers anticipate high inflation the rational thing to do is bring forward your consumption
  • ^this would increase consumption, increasing AD and increase demand pull inflation
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97
Q

what are menu costs

A
  • if inflation is high and prices and rising, firms have to continuously print new menus, price catelogs
  • ^this is costly for them which they pass on via higher prices
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98
Q

what is fiscal drag

A
  • if a worker is receiving a pay rise in line with inflation over time it could drag them into a higher tax band in a progressive income tax system, which could result in them being worse off
  • ^good for gov bad for consumers

this only occurs if they tax bands themselves dont rise with inflation

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99
Q

what is inflationary noise

A
  • when the inflation rate is volatile
  • ^price signalling function of markets looses its value
  • ^creates uncertainty, consumers put off their consumption and firms put off long term investment plans
  • ^can hold back economic growth (decreases C + I)
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100
Q

what are the benefits of low, stable inflation

A
  • workers with higher wages
  • consumption is natural (no delaying or bring forward of spending, reduce shocks)
  • firms encouraged to increase output
  • can keep unemployment low in a recession
  • reduces real value of debt
  • improvement of goverment financies
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101
Q

How can low, stable inflation help to keep unemployment low in a recession

A
  • in a recession its normal for firms to sack workers to lower costs and maintain profit margins, firms dont really want to do this tho
  • ^its hard to get skilled workers so dont want to let them go
  • if there is some inflation e.g. 5% firms can raise there prices by 5% and hopefully get an increase in rev
  • if they give their workers a 1 % pay rise (costs increase by 1%)
  • ^so hopefully revenue is increasing more than costs and so can still remain relatively profitable while retaining workers
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102
Q

evaluation of costs and benefits of inflation

A
  • if inflation is low and stable we get more benefits than costs vice versa
  • demand pull inflation is more favourable as we get higher growth and lower unemployment, cost push we get lower growth and higher unemployment
  • ^demand pull inflation is easier to solve, if cost push gets out of control nothing u can do
  • long term high rates of inflation could result in more spiraling and hyperinflation concerns
  • the more volatile it is the more inflationary noise
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103
Q

what are the 2 types of deflation

A
  • demand side deflation (bad/malignant deflation)
  • supply side deflation (good/benign)
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104
Q

why is demand side deflation reffered to as bad/malignant deflation

A
  • comes with lower economic growth
  • it can be long-term and anticipated

not always, could be short term and unanticipated

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105
Q

why is supply side deflation reffered to as good/benign deflation

A
  • comes with higher economic growth
  • short-term and unanticipated

not always, could be long term and anticipated but less likely

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106
Q

Why is short term unanticipated deflation good news

A
  • falling prices for consumers
  • falling input prices for firms
107
Q

why is anticipated deflation dangerous

A
  • could lead to deflationary spiral
  • ^delayed spending, falling demand, falling prices
  • positive real intrest rates (hard to stimulate economic growth)
  • increase real value of debt (profits and incomes fall, harder to pay off, debt is always a fixed value)
108
Q

formula for finding real intrest rates

A

nominal intrest rates - inflation rates

109
Q

what are the impacts of a currency becoming stronger

Acronym to remember

A
  • SPICED
  • Strong Pound, Imports Cheaper, Exports Dearer
110
Q

How does the demand and expenditure for imports change as a currency becomes stronger

A
  • Due to imports being cheaper demand would increase and would therefore lead to a increase in expenditure
111
Q

How does the demand and revenue for exports change as a currency becomes stronger

A
  • due to exports being dearer the demand would fall and therefore revenue would fall
112
Q

How would a strong currency effect the AD curve on a macro diagram

A
  • X=export revenue and M=import expenditure
  • due to X falling and M increase it means that overall (X-M) would fall and the value of AD would also fall resulting in a shift left
113
Q

what are the impacts of a currency becoming weaker

Acronym to remember

A
  • WIDEC
  • Weak, Imports Dearer Exports Cheaper
114
Q

How does the demand and expenditure for imports change as a currency becomes weaker

A
  • due to imports being more expensive demand would fall and so expenditure would also fall
115
Q

How does the demand and revenue for exports change as a currency becomes weaker

A
  • as exports become cheaper to foreigners demand for them would increase and so revenue would also increase
116
Q

How would a weak currency effect the AD curve on a macro diagram

A
  • X=Export revenue, M=Import expenditure
  • As X increase and M decrease the overall value of (X-M) would increase resulting in a increase to the value of AD and so AD curve would shift right
117
Q

What impact would imports becoming cheaper and dearer have on the economy due to appreciation and depreciation

A
  • it would effect cost push inflation as cost push inflation is about the cost of production and so if imports were to become cheaper or more dear it would result in inflation increasing or decreasing and SRAS would shift left or right
118
Q

out of a strong or weak currency which would have the ability to increase both cost push and demand pull inflation

A

weak currency
- can increase demand pull inflation due to (X-M) becoming larger(shifting AD right) and imports becoming dearer and increasing cost of production

119
Q

what are some evaluation points when talking about appreciations and depreciations of currencys influencing the economy

A

Depends on:
- the PED for exports and imports
- the size of the appreciation or depreciation
- may be restrictions on trade (can’t assume if weak exports will increase)
- affect of AD may be offset by other factor that may increase or decrease AD
- Depends on incomes abroad

120
Q

what is Aggregate demand

A

the measure of total expenditure on a countries goods and services in an economy in a year

121
Q

what type of relationship does price level and real GDP share

A

they have an inverse relationship

122
Q

what causes extensions and/or contractions along the demand curve

A
  • as price level increases/decreases purchasing power of income will change
    ^willingness/ability to consumer changes
123
Q

what does the trade effect state when talking about extension and contraction along the AD curve

A
  • as the privce level changes exports and imports will become more or less competative individually which would increase or decrease the overall value of (X-M) which would results in a extension or contraction along the AD curve
124
Q

when would there by extensions or contractions along the AD curve

A

when C + I + G + (X-M) changes due to a change in price level

125
Q

what is the intrest effect when talking about AD

A
  • as the price level (inflation) changes, the intest rates in the economy can be changed because most central banks will adopted intrest rate policys to meet an inflation target
  • intrest rates effect C+I & (X-M) and so can effect AD and cause extensions and contractions
126
Q

when would the AD curve be shifted

A
  • AD is shifted when C,I,G, X and M change independent of the price level
127
Q

What is meant by MPC (marginal propensity to consume)

A
  • the willingness of a household to spend any extra income that they earn
128
Q

what are some factors that can affect demand independent of the price level

A
  • level of real disposable income (income tax)
  • intrest rates/availability of credit
  • consumer confidence (job prospects)
  • assest prices (wealth effect)
  • household indebtedness
  • fashion/taste
  • Advertising
  • Substitute’s price/availability
  • Compliment’s price/availability
129
Q

How can intrest rates and the availability of credit affect consumption

A
  • if intrest rates are cut then the cost of borrowing falls and the rate of return on savings fall
  • there is an increase incentive to borrow money and a decreased incentive to save money thereby increase peoples MPC
  • if the availability of credit is low then is could reduce the impact of borrowing (banks are not willing to lend if the availability of credit is low)
130
Q

how can consumer confidence affect consumption

A
  • if there is a high consumer confidence then consumers will have a higher MPC
  • job prospects and the level of unemployment both affect consumer confidence
  • if people assume they are likely to be promoted soon or there job prospect is very strong they are likely to have a higher MPC
131
Q

How can assest prices affect the level of consumption

A
  • assest prices link to how wealthy people feel, the wealthier people feel the higher their MPC is likely to be (things like house prices and share prices are examples of assests)
132
Q

How can the level of household indebtedness affect the level of consumption

A
  • if there is a large amount of household indetedness (familys living in hude debts) then individuals are more likely to save money instead of spending it
133
Q

what are some factors that can affect saving independent of the price level

A
  • level of real disposable income
  • intrest rates
  • consumer confidence
  • range/trustworthyness of financial institutions
  • tax incentives e.g. ISA’s
  • age structure of population
134
Q

How do intrest rates affect the level of saving

A
  • If intrest rates are high then you will recieve a better return on savings and so there is an incentive to save increase the marginal propencity to save (MPS)
135
Q

how does the level of consumer confidence affect the level of saving

A
  • if consumer confidence is low in the economy (people fear an incoming recession or losing their job) then individuals are more likely to save therefore having a higher MPS
136
Q

how does the range/trustworthyness of financial institutions affect the level of saving

point important for developing countries

A
  • in developing countries there is much less diversity of banks to choose from and they may be corrupt or unoffical which would decrease peoples MPS
  • in developing countries individuals may not have been educated on the benefits of saving or how a bank operates which are both barriers to saving
137
Q

How can tax incentives e.g. ISAs affect the level of saving

A
  • an ISA is an Individual saving account that offers returns on savngs completely tax free upto a certain threshold
138
Q

How does the age structure of a population affect the level of saving

A
  • middle aged people (35-55) are more likely to save because of kids and retirement
  • people aged 0 - 34 more likely to consume as well as 60 + are more likely to consumer instead of save
139
Q

what are some factors that can affect investment independent of the price level

A
  • intrest rates
  • bussiness confidence
  • corporation tax
  • spare capacity
  • level of competition
  • price of capital
140
Q

what is investment

A

when firms spend money on capital goods to improve there productive capacity

141
Q

How would intrest rates affect the level of investment independent of price level

A
  • a big way firms finance investment is through borrowing money
  • if intrest rates are low then it would be cheaper to borrow as the intrest you pay on the borrowed amount is less than it would be if the intrest rates where high
  • low intrest rates also incentivise firms to borrow and invest instead of save
  • MPI will increase
142
Q

How does the level of bussiness confidence affect the level of investment independent of the price level

A
  • bussiness confidence is determinded in this case by things such as expected profit and expected demand within the economy
  • if the expectation of future profit and demand is high then firms are more likely to invest (MPI going to increase)
143
Q

How would spare capacity affect the level of investment independent of price level

A
  • if businesses have lots of spare capacity then there is no need to invest to buy more machinary
  • greater the level of spare capacity the lower the MPI (marginal propensity to invest)
144
Q

how would the level of competition affect the level of investment independent of the price level

A
  • if competition is strong and competators are spending on investment is could mean that other firms would also spend on investment
  • if comp is high you can expect a huge amount of investment to take place
145
Q

How would the price of capital machinary affect the level of investment

A
  • if the price of capital machinary is low then investment is less costly and firms would be more likely to invest
146
Q

what is the accelerator affect and how does it link to investment

A
  • when there is an increase in rate of real GDP in the economy which the encourages further investment (which would inturn increase the rate of real GDP leading to a loop)
147
Q

what is current expenditure when talking about public expenditure

A
  • everday expenditure: salaries of those employed by public sector, electricity bills for street lights, maintainence of public facilities, buying drugs for NHS
148
Q

what is capital spending when talking about goverment spending

A
  • spending on infrastructure projects
149
Q

what is welfare spending when talking about goverment spending

A
  • spending on benefits and pensions
150
Q

When does a budget deficit occur

A
  • gov spending > tax rev in a fiscal year
151
Q

when does a budget surplus occur

A
  • Gov spending < tax rev in a fiscal year
152
Q

how does budget deficet and national debt link

A
  • the national debt is the accumaltion of budget deficits
153
Q

what are some factors that will affect net exports independent of the price level

A
  • real disposable income earned abroad
  • real disposable income earned at home
  • strong or weak exchange rates
  • protectionism domestically and abroad
  • relative inflation levels at home
154
Q

How would protectionism at home and abroad affect net exports independent of price level

A
  • if there are strong protectionist measues abroad such as tariffs and quotas it may prevent us from accessing international markets and will limit the amount of export rev we can generate
  • if home has strong protectionist measures then the value of import expenditure will be lower
155
Q

what can affect the position of SRAS on a classical diagram

A
  • determined by costs of production within
    the economy
  • if CoP changes then SRAS will shift
156
Q

What are some Costs of production that can affect SRAS

A
  • wages
  • raw material/commodity prices
  • oil price
  • business tax
  • import prices
  • these can affect the whole economy and is why they can affect SRAS
157
Q

what YFE represent on a macro diagram

A
  • the aximum level of output an economy can produce using all factors of production at sustainable levels
    ^it is possible to go beyond YFE if you where to use factors of production unsustainably
158
Q

what can cause LRAS to shift on maro diagrams

A
  • an increase or decrease in the quality and/or quantity of factors of production as well as an increase or decrease in productive efficency
159
Q

what are some examples of things that could shift LRAS

A
  • increased labour productivity
  • increased investment (tech, R&D)
  • increased infrastructure
  • increased quantity of labour (immigration, incentives such as cutting benefits)
  • increased competition (drives lower costs to increase productive efficency)
  • new resource discoveries
160
Q

where does SR macroeconomic equilibrium occur

A

AD=SRAS

161
Q

where does LR macroeconomic equilibrium occur

A

where AD=SRAS=LRAS

162
Q

when do negative output gaps occur

A

where actual output is less than potential output

also known as delfationary/recenssionary gap

163
Q

when do output gaps occur

A

when the actual level of output is different from the level of potential output

164
Q

when do positive output gaps occur

A

when actual output is greater than potential output

also known as inflationary gap

165
Q

how would you show a negative output gap on a classical macro diagram

A
166
Q

how is a positive output gap shown on a classical diagram

A

dont bother showing it on keynesian as doesnt really work

167
Q

how can output gaps be used to evaluate AD shifts

shifting right for example

A
  • if there is a huge inital negative output gap if there is a shift in AD to the right there might not be any inflation, however if the economy was closer to full employment and there was a shift right then you might start to see increases in inflation but not necessarily increases in growth
168
Q

what does fiscal policy involve

A

changes to goverment spending and taxation in order to influence AD

169
Q

whats the difference between expansionary and contractionary fiscal policy

A
  • expansionary aims to boost AD
  • contractionary aims to reduce AD
170
Q

why would a goverment employ the use of expansionary fiscal policy and aim to boost AD

A
  • boost growth (when growth is sluggish or the economy is in a recession)
  • reduce unemployment (mainly cyclical unemployment, during a recession)
  • increase inflation (demand pull inflation, but it is not the goverments job to control inflation))
  • redistribute income (
171
Q

why would a goverment employ the use of contractionary fiscal policy and aim to reduce AD

A
  • reduce inflation (not really the govs job)
  • reduce budget deficit/national debt (reduce the amount the gov borrows yearly)
  • redistribute income (high taxes on rich)
  • reduce current account deficit (ig higher taxes, incomes will be lower and less sucking in of imports)
172
Q

what are some examples of policys that are used within expansionary fiscal policy to boost AD

A
  • reduction in income and corporation tax
  • reduction in regressive taxes (VAT)
  • increase in goverment spending
173
Q

How could the policies used in expansionary fiscal policy effect LRAS

A
  • reduction in income tax could incentive those outside the labour force to enter it thereby increase the quantity of labour, also incentive to work harder and earn more for those already in work
  • a reduction in corporation tax would lead to more retain profits which could lead to an increase in firms marginal propensity to invest which would lead to an increase in the quantity and quality of FoPs such as capital
  • an increase in goverment spending could lead to spending on infrasture which would make the economy more productively efficent
174
Q

what are some of the cons that come with using expansionary fiscal policy

A
  • demand pull inflation (macro objective tradeoffs)
  • current account deficit (macro objective tradeoffs)
  • worsening of goverment financies (cuts may have to be made elsewhere in economy to fund spending, taxes may rise in future)
  • crowding out effect
  • x-inefficency (due to lack of profit motive no incentive to become efficent)
  • time lags
175
Q

what is meant by ricardian equivalence

A

if households know that the goverment cannot afford expansionary fiscal policy in the form of an income tax cut, households could save the tax cut now expecting a tax rise in the future
^would not result in a boost to the economy

176
Q

what are some evaluations points when looking at the effectiveness of expansionary fiscal policy

A
  • size of output gap
  • size of the multipler (maybe not need for dramatic EFP is multipler effect could do lots)
  • consumer/business confidence (if low tax cut might be saved and not spent)
  • state of gov. finanices (if budget deficit gov cant afford for example, but if budget surplus they can afford it)
  • LR returns to the gov (in SR maybe debt but in LR the returns in tax rev for example could outweight the costs)
  • laffer curve ideas (income tax cut could incentive people to work harder earn more, therefore more tax rev for gov)
  • role of automatic stabalisers
  • crowding out vs crowding in
  • classical view os self correcting economy in recession
177
Q

How could the size of the output gap be used as an evalution point when talking about expansionary fiscal policy

A
  • if the economy is already near full employment it means EFP is less likely to be effective at boosting growth and reducing unemployment
  • however if large output gap EFP could be very effective at boosting growth and reducing unemployment without causing a conflict of increasing demand pull inflationary pressure
178
Q

what is meant by discretionary fiscal policy

A

expansionary fiscal policy on top of the automatic stabalisers during a recession

179
Q

what is meant by crowding in when talking about expansionary fiscal policy

A

when gov spending creates demand in the economy generating output and economic activity which incentives private sector businesses invest and grow because there is greater profit potential

180
Q

what is the crowding out effect

A

when the goverments borrowing makes intrest rates higher, making borrowing higher thereby reducing investment and consumption reducing AD halting growth

181
Q

How does the crowding out effect work

A
  • when a goverment decides to spend money by borrowing it means they are demanding loanable funds in the market
  • the increase in demand increases the intrest rates which are likely to be transferred to loans in general, thereby making them more expensive for firms to take out
  • ^can hold back investment, which can hold back AD, which can hold back growth
182
Q

what does the laffer curve show us

A
  • increasing taxes will increase tax revenue up to a point
  • increasing taxes beyong the efficent tax rate we will see a reduction in tax revenue
183
Q

what 3 reasons explain why tax revenue would decrease beyond the efficent tax rate on a laffer curve

A
  • disincentive to work harder/be entrepreneurial
  • emigration
  • tax evasion/avoidance
184
Q

what are automatic stabalisers

A

fiscal policy tools to influence GDP and counter fluctuations in the economic cycle

185
Q

what are the automatic stabalisers

A
  • progressive income tax system
  • welfare benefits (unemployment benefits)
186
Q

What do automatic stabalisers do in a boom

A

they cushion demand

187
Q

What do automatic stabalisers do in a boom

A

they support output

188
Q

how do progressive tax systems act as automatic stabilisers in a boom

A
  • in boom incomes will be rising due to growth, this means they will be pushed into higher tax bands, this will increase the amount of tax paid as a proportion of total income
    ^this would slow down increases in comsumption and therefore AD

control extent of boom, demand pull inflation not overshoot target

189
Q

how do welfare (unemployment) benefits act as automatic stabilisers in a boom

A
  • unemployment is going to be low, gov spending on unemployment benefits is going to be reduced, reducing AD
190
Q

How do progressive income tax systems act as automatic stabilisers during a recession

A
  • incomes are going to be lower
  • results in workers moving into lower tax bands
  • results in lower amount of income tax paid as a percentage of total income (more disposable income)
  • helps to prevent large drop in consumption
191
Q

how do welfare (unemployment) benefits act as automatic stabilisers during a recession

A
  • unemployment going to be high during recession
  • results in higher gov spending on benefits
  • this props up AD and prevents a deep recession
192
Q

what is a budget deficit

A

when goverment spending is greater than tax revenue

193
Q

what is structural budget deficit

A

budget deficit at full employment

194
Q

what is cyclical budget deficit

A

budget deficit in a recession

195
Q

what is meant by national debt

A

total stock of gov debt over time

196
Q

what must be taking place if the goverment is running a budget deficit and increasing national debt

A
  • increases in goverment spending must be taking place or decreasing tax revenue
197
Q

what are the pros of running a national debt/budget deficit

A
  • higher growth and lower unemployment
  • benefits of increasing public spending (can boost LRAS)
  • redistribution of income (gov spending on benefits, helathcare,education, lower regressive tax)
  • incentives of tax cuts
  • crowding in

increasing national debt and budget deficit links to expansionary fiscal policy as it involves lower taxation and high gov spending

198
Q

what are the cons of increasing national debt and budget deficit

A
  • deterioration of gov financies
  • inflation conflict
  • current account deficit conflict
  • crowding out effect (as gov may borrow)
  • x-inefficency

rising natinonal debt and budget deficit is expansionary fiscal policy and so cames with mostly same cons

199
Q

why is deterioration of gov finacies a con of rising national debt and budget deficit

A
  • decreasing confidence in gov financies (can deter FDI)
  • ^this can be reflected in lower credit ratings of goverment bonds (the risk of lending money to gov)
    ^means your at risk of not getting money back and not getting annual intrest
  • this means that the gov have to provide higher intrest rates to intise people to buy gov bonds
  • makes it harder and more expensive for the gov to borrow and to fund public services
  • burden future generations at debt will have to be paid back
200
Q

what are some evaluations points for rising national debt and budget deficit

A
  • state of gov financies (if already have big deficit cons>pros)
  • SR vs LR implications
  • stage of economic cycle (in recession good but in boom could be bad)
  • specific policy used
  • consumer/business confidence (cuts in direct taxation rely on high con/bus confidence)
  • automatic stabilisers (if role of these is strong then discretionary fiscal policy may not be needed to correct it)
  • crowding out effect

- basically expansionary fiscal policy

201
Q

How can the state of gov financies be used as evalutation for rising national debt and budget deficit

A
  • if gov financies are already shit and they get worse the cons wil heavily outweight pros
  • but if gov financies are good then it could be good and pros can outweight cons
202
Q

What are the SR and LR implications of rising national debt and budget deficit

evalutation point

A
  • SR: debt, austerity, higher taxes, higher gov repayments
  • LR: benefits of gov spending on healthcare, education, infrastructure
203
Q

what is a budget surplus

A

when tax revenues is greater than goverment spending in a year

204
Q

what is meant by structural budget surplus

A

budget surplus at full employment

205
Q

what is meant by cyclical budget surplus

A

budget surplus in a boom

206
Q

what is implied is the goverment is running a budget surplus and decreasing natinoal debt

A

implies low goverment spending and higher taxation

links to contractionary fiscal policy

207
Q

what are the pros of running a budget surplus and decreasing national debt

A
  • increasing confidence in gov financies
  • flexibility with fiscal policy (with debt coming down less intrest payments, more sustainable gov financies means more space to do fiscal policy, they can afford those policys)
  • less crowding out/x-inefficency (as less debt feuled gov spending less crowding out, can lead to higher intrest spending)
  • lower inflation and current account deficit
208
Q

How is increasing confidence in gov financies a pro of running a budget surplus and decreasing budget deficit

A
  • should translate to improve credit rating of gov bonds as gov is seen as less risky borrower (attracts FDI)
  • gov can issue lower intrest rates on gov bonds
  • makes it cheaper and easier to borrow over time making it easier to fund gov spending
  • major long run benefit
209
Q

what are some cons of running a budget surplus and decreasing national debt

A
  • using both low gov spending and high tax could result in demand side shocks (into recession by low AD = low growth, high unemployment)
  • micro and macro impacts of lov gov spending and high taxation
  • Long run returns of high gov spending and low taxation ignored
  • incentivees distortion of higher taxation (lower incetives to work)
  • risk of income inequality (ig gov spending on welfare is cut and regressive tax is increased)
210
Q

what are some evaluations points for running a budget surplus and decreasing national debt

A
  • it is necessary to run a budget surplus (if gov financies are looking shit then it could be needed (pros outweight cons) but if gov financies are looking alright then need it eroded (cons could outweight pros))
  • debt/GDP rising (if policys reduce GDP it will make gov financies look worse then before)
  • policy used (if we balance use of policys then cons can be somewhat mitigated)
  • stage of the economic cycle (policys most worth while during boom to cool down over heating economy and reduce inflation)
211
Q

what does monetary policy involve

A

changes to intrest rates, the money supply and the exchange rate by the central bank in order to influence AD

212
Q

what does expansionary monetary policy involve

A
  • policies to raise AD

intrest rate cuts

213
Q

what does contractionary monetary policy involve

A
  • policies to reduce AD

increases in intrest rates

214
Q

why would a central bank decide to use expansionary monetary policy

A

in order to:
- increase inflation
- increase growth
- reduce unemployment

215
Q

why would a central bank decide to use contractionary monetary policy

A
  • reduce inflation
  • prevent assest/credit bubbles (prevent excessive growth of house prices)
  • reduce excess debt (prevent excessive borrowing) & promote saving
  • reduce current account deficit (as AD falls, growth falls, incomes fall means less sucking in of imports)
216
Q

what are some ways that expansionary monetary policy would actually effect the economy and influence AD

A
  • ↓ credit card intrest rates, cheaper to borrow, disincentivises saving, increases consumption
  • ↓ saving rates, increases incentive to spend as less return on savings
  • ↓ mortage rates, for tracker rate and variable rate mortages it means they would pay less monthly and so would lead to an increase in consumption
  • ↓ rates on business loans, cheaper to borrow leads to high MPI
  • weaken the exchange rate, hot money out leads to this, exports become comp, ↓ imports
217
Q

what are some cons of using expansionary monetary policy

A
  • demand pull inflation (if there obj was to stim growth and employment, macro trade off)
  • current account deficit (as more growth incomes will be rising more sucking in of imports, macro trade off)
  • liquidity trap (basically overkill of lowering intrest rates, wont see pros of lowering them as already happened)
  • negative impact on savers (lower returns on savings, if inflation is high, real returns on savings could be negative, value is eroded), less savings in economy comes with risk (what if suddenly unemployed)
  • time lags (to boost AD fully, takes 18 months to 2 years)
218
Q

what are some evaluation points that can be used when talking about expansionary monetary policy

A
  • size of the output gap (ig neg output gap is small, cons>pros such as high inflation with low growth vice versa)
  • consumer confidence (in job prospects and promotions for example, if low rate cut wont stim consumption vice versa)
  • business confidence (if bad wont stim investment vice versa)
  • banks willing to lend/pass on the full cut to rates (if banks not lending intrest rate cutand expansionary fiscal policy is pointless)
  • size of the rate cut (if small cut might not work to desired magnitude)
219
Q

when would quantitative easing be used

A

when traditional approaches to monetary policy have failed

220
Q

when could expansionary monetary policy fail

A
  • when there is low availability of credit (found it hard to fund loans)
  • when there is low business/consumer confidence
  • when there is low willingness of banks to lend
221
Q

what are the stages of quantitative easing

A
  • 1)central banks create money electronically
  • 2)Money used to buy financial assest (gov bonds) from financial instiutions (banks, hedge funds)
  • 3)as price of bonds goes up its yeild (intrest rate) wil fall
  • 4)financial institutions either loans this money (increases consumption and investment) or invest in riskier corporate bonds or shares (wealth effect may stim increase in consumption)
  • 5) price of corporate bonds rise, yeild falls - reducing the cost of borrowing money, easier to raise finance
  • 6) access to credit improves, general intrest rates fall, willingness to lend should rise at lower intrest rates
  • 7) stimulates borrowing, investment and consumption (rising AD, growth and employment)
222
Q

what are the pros of contractionary monetary policy

A
  • falling demand pull inflation (↑ intrest rates, ↓ AD)
  • discourage household/corporate debt
  • more sustainable borrowing/lending
  • encourage saving (higher rate of return on savings, high living standards)
  • more affordable housing
  • reduce CA deficit (↓incomes, ↓ import )
  • flexibilty for expansionary monetary policy (more space to cut intrest rates)
223
Q

what is an evaluation point for saying contractionary monetary policy will cause a decrease in demand pull inflation

A
  • if the inflation is being driven by cost push inflation, higher intrest rates would not effect global commidity prices for instance
224
Q

what is meant by systemic risk

A
  • Systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy
  • prominant in the banking industry
225
Q

How could contractionary monetary policy lead to lower house prices why is it a pro

A
  • by increasing cost of mortages demand is reduced which could lead to lower house prices or at the least a reduction in rate of growth of house prices
  • more affordable to first time buyers and low income families
226
Q

how can contractionary monetary policy lead to more sustainable borrowing/lending why is this a pro

A
  • only those who need to and can afford to borrow are able to enter market
  • less chance of ‘bad’ borrowers enter market (low job security, low credit history)
  • if growth based on unsustainable lending bubble can form (when bubbles burst leads to recessions in the economy)
227
Q

How can contractionary monetary policy discourage household/corporate debt

A
  • higher intrest rates increase cost of borrowing
  • if high amount of debt and then individual/firm has a sudden change of financial circumstances and cant afford to repay loans is bad for both borrower and loaner (bank)
  • when banks failed tend to not fail in isolation, high systemic risk, can lead to bringing down of whole sector
228
Q

what are some cons of contractionary monetary policy

A
  • lower growth (can shock econ into recession on demand side)
  • higher unemployment (can shock econ into recession on demand side)
  • impact on the indebted (more expensive to service debt, can lead to bankrupcy and homelessness)
  • reduces investment (bad for SR and LR growth)
  • worsening CA deficit via exchange rate strengthting (hot money inflow, ↑ demand, ↑ value, more imports, less exports)
229
Q

what are supplied side policys meant to achieve

A
  • designed to increase the productive compacity of the economy
230
Q

what are the 2 main groups of supply side policies

A
  • interventionist (promote role of gov in econ)
  • market based (reduced role of gov in econ)
  • both have same end goal however
231
Q

what policies are used in interventionist supply side policy

A
  • gov spending on education/training/healthcare (↑ quality of labour)
  • gov spending on infrastructure (↑ transport infrastructre = LR CoP will ↓, productive efficency ↑, builiding of schools/hospitals ↑ quantity of capital stock)
  • subsidies to firms to promote investment (↑ quality & quantity of capital stock and ↓ LR CoP)
232
Q

what are the 3 different groups of policies within market based supply side policy

A
  • Tax reform
  • labour market reform
  • competition policy
233
Q

what policies are used in Tax reform supply side policy

A
  • lower income tax (incentive people to become economically active and work harder, ↑ quantity and quality of FoP)
  • lower corporation tax (↑ investment, ↑ quantity and quality of FoP)
234
Q

what is the difference between supply side policy and expansionary fiscal policy

A
  • there intention
  • if in order to boost LRAS then supply side policy
  • if in order to boost AD then expansionary fiscal policy
235
Q

what policies are used in labour market reform supply side policy

A
  • reduce benefits (incentive economically inactive to join labour force, ↑ quantity of FoP)
  • reduce minimum wages (↓ CoP, ↑ productive efficency)
  • reduce trade union power (cant fight for higher wages,↓ CoP, ↑ productive efficency)
236
Q

what policies are used in competition policy supply side policy

A
  • privitisation
  • deregulation
  • trade liberalisation

All 3 aim to boost competition leading to firms reducing their Lr CoP

237
Q

what are some cons/evaluation points that can be used when talking about supply side policy

A
  • no gurantee of success
  • cost (especially interventionist SSP, ↑ cost)
  • time lags (especially for education and infrastructure, even for tax cuts)
  • negative stakeholder impacts
  • output gap
  • need for targeted supply side policy
238
Q

How can negative stakeholder impacts be used as a evaluative point when talking about supply side policy

A
  • labour market reform policies such as reducing benefits, could negatively impact those who rely on them, the same goes for reduction in min wage
  • competition polices such as deregulation could negative impact individuals in the laws/regulations in place are designed to protect people, such as product standard laws and environmental laws
239
Q

How can output gaps be used as an evaluative point when talking about supply side polices

A
  • depends on the size of the output gap (what stage of the economic cycle we are in as well)
  • if the economy is in a recession then SSPs are not gonna have same level of positive effects, vice versa
240
Q

How can the need for targeted supply side policies be used as an evaluative point when talking abouy supply side policy

A
  • for example if there is problems with infrastructure in the economy then the interventionist policy of gov spending on infrasturcture will be most effective
  • ^other policies will not be as effective and could perhaps generate waste in the economy
241
Q

what are the 2 different types of growth, how are they brought about

A
  • short run growth (actual, caused by boost to AD)
  • long run growth (potential, caused by boost to LRAS)
242
Q

when would we need to boost short run growth

A
  • if economy has very low AD
  • in a recession
  • when there is a very large negative output gap (with lots of spare capacity)
243
Q

what could be used to bring about short run growth

A
  • expansionary demand side policies (monetary and fiscal policy)
244
Q

when would we need to boost long run growth

A
  • when there is a very small/no negative output gap
245
Q

what could be used to bring about long run growth

A
  • supply side policis
  • ^interventionist & market based
246
Q

what evaluative point can be used when talking about polices to increase economic growth

A
  • the type of growth needed (if long run growth is needed then using some demand side policies to stimulate this will not be as effective as using supply side policies)
  • we want growth to be strong, sustained and sustainable, if these are not met then it might be damaging to the environment
247
Q

what can be used to try and reduce cyclical unemployment

A
  • expansionary demand side policies (fiscal and monetary policy)
248
Q

what is meant by real wage unemployment

A

when wages in the labour market have been forced above equilibrum (creates excess supply of labour, unemployemt)

249
Q

what policies can be used to reduce real-wage/classical unemployment

A
  • reduction in min wage
  • reduced strength of trade unions
250
Q

what are some evaluations point when talking about reduction in min wages and the power of trade unions

A
  • impact on workers
  • income inequailty
251
Q

what policies can be used to reduce structural unemployment

A

interventionist supply side policies:
- gov spending on education/training (↑skills)
- subsidies for in-work training (↑skills)
- gov spending on transport infrastructure (↑ acc mobility)
- grants/low cost housing (↑ geo)

Market based supply side policies:
- reduced benefits (incentive to skill up, workers cant be picky with jobs in certain areas)
- deregulate hiring/firing laws (firms have incentive to hire lower skilled workers and pay them lower wages and train them up, if it doesnt work out they can always fire them)

remeber structural unemployment is about immobility of labour in both skills and geography

252
Q

what policies can be used to reduce frictional unemployment

A

interventionist supply side policies:
- more & better resources for job centres (better resources to help people find appropriate jobs faster and easier)
- subsidies to private job agencies (same as above)
- gov spending on transport infrastructure (unemployed have a greater search radius, more likely to find jobs)

Market based supply side policies:
- reduce benefits (force those who are unemployed to be quicker)

frictional unemployment is unemployment between jobs

253
Q

what policies could be used to reduce demand pull inflation

A
  • contractionary demand side policies (monetary and fiscal policy)

fiscla policy unlikly to be used as not job of gov to control inflation

254
Q

why would monetary policy be more efficent at influencing inflation than fiscal policy

A
  • the monetary policy transmission mechanism has got many avenues for intrest rate changes to feed through into the economy
  • central banks are also separate from gov so can be more transparent, perhaps trustworthy, in getting to inflation target
255
Q

How does hot money inflow affect supply and demand

A
  • supply is not affected
  • demand is increased and so shifts to the right
256
Q

what are some policies to control cost push inflation

A
  • implement/reduce inflation rate (workers can bargain for wage rise to match inflation but not exceed it, limits rising wages)
  • Reduce VAT/subsidies to firms (decreases CoP)
  • intervene in FOREX markets to strength exchange rate (if weak exchange rate is making imports more expensive, stronger exchange rate makes imports cheaper, but what if free floating exchange rate
257
Q

what policies can be used if there is high long term inflation rates

A
  • market based and interventionist supply side policies (to increase LRAS)
258
Q

when would there be long term inflation rates

A

when the economy doesnt have enough spare capacity/low levels of spare capacity

259
Q

what are some policies that can be used to rectify a current account deficit

A
  • contractionary monetary/fiscal policy (reduce level of AD in econ to reduce amount of income, therefore spending on imports)
  • protectionist measures (tariffs and quotas on imports, subsidys on domestic firms)
  • allow currency to depreciate (allowing central bank to reduce intrest rates, intervention in FOREX markets)
  • supply side policies
260
Q

what are some evaluative points for rectifying a current account deficit

A
  • size of deficit, if very small there may not be a need to introduce policies to deal with it
  • some may argue that growth, inflation and unemployment are more important macro objectives and the policies used have negative effects on these
261
Q

what are some evaluative points for policies to reduce cost push inflation

A
  • cause of the inflation, e.g. reducing VAT might not be most efficent way of reducing if imports are driving inflation
  • subsidies to firm to decrease CoP will be very expensive and only really work in theory as whole economy would need subsidy
  • many countries in the world have free floating exchange rates and so would not intervene in forex markets
  • many causes of cost push are short term and so do not need drastic policies
  • many causes we cant do anything about and so should not implement policies that have side effects (e.g. high raw material prices)
262
Q

How could expansionary monetary policy lead to LRAS shifts to the right

A
  • as borrowing is cheaper, investments loans are cheaper, leading to increase in quantity and quality of FoPs and increase in producitve efficency
263
Q
  • What is an indicator
  • what are the indicators
A
  • Indicators tell us how the economy is doing

Examples include
- growth: incomes & living standards
- Unemployment
- Inflation
- Trade
- Distribution of income

Zak copy econ (7 decks)

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