Macro Year 12 Flashcards
(153 cards)
1
Q
What are the 5 macroeconomic objectives for the UK
A
Economic growth Stable Prices Low unemployment Balance of payments Fairer distribution of income
2
Q
What is aggregate demand definition
A
All expenditures for the entire economy added together, or the sum of all the demand in the economy
3
Q
What is the AD equation?
A
AD= C + I + G + (X-M)
4
Q
What is the circular flow of income?
A
Circular flow of income and spending shows connections between different sectors of an economy. It shows the flow of goods and services and factors of production between firms and households.
5
Q
What are the 3 methods of calculating national income
A
Expenditure method
Income method
Output method
6
Q
What is the expenditure method?
A
GDP = C + I + G + (X-M)
7
Q
What is the income method?
A
Sum of all 4 different types of incomes earned through the production of goods and services
Eg rent, wages, interest and profit
8
Q
What is the output method?
A
The value added by each enterprise in the production of goods and services is measured. Unpaid work and output cannot be measured
9
Q
What assumptions underpin the circular flow of income diagram?
A
A simple model closed economy
Households supply the labour
Firms pay households
Households use their wages to buy the goods and services the firms make
10
Q
What are examples of sone leakages from circular flow?
A
Some money put aside for future spending ie savings
Some money is paid in tax
Some money is spent on imports
11
Q
What is an example of injections into the circular flow?
A
Capital spending by firms
Government expenditure
Uk export expenditure by foreign residents
12
Q
What does real mean in economics?
A
Real means the value of GDP, taking out inflation
13
Q
When do you move along the demand curve?
A
A change in price level caused by;
Reduced consumption
Reduced exports
Increased imports
14
Q
What can cause a fall in AD?
A
Fall in exports
Cut in the real level of gov spending
Higher interest rates
Decline in household wealth / consumer confidence
15
Q
What can cause an increase in AD?
A
Depreciation in value of exchange rate
Cuts in rate of direct and indirect taxes
Increase in the level of house prices and share prices
Expansion in supply of credit and lower interest rates
16
Q
Unemployment definition?
A
Where workers do not have jobs but are willing and able to work
17
Q
Employment definition?
A
All those members of the economy aged 16 or over, who has completed at least one hour of work in the period being measured
18
Q
Unemployment rate?
A
The % of the labour force not currently in paid employment
19
Q
What is full employment?
A
The level of employment rates where there is no cyclical unemployment (demand deficient)
20
Q
What are the 2 measures of unemployment in the Uk?
A
The claimant count
- the no receiving benefits
ILO; labour force survey
- generally more accurate
21
Q
Who is excluded from the claimant count?
A
People over pension age
People under 18
People in full time education
2nd income too high (household)
Anyone on gov. Training schemes
22
Q
How does the labour force survey work?
A
Asks 60000 people whether they are unemployed and whether they are looking for a job.
It includes those not eligible for JSA
Good for international comparison
23
Q
Problems of the labour force survey?
A
Subject to sampling errors therefore not truly representative
Difficult to decide whether somebody is sick or actively seeking work
24
Q
What are reasons for economic inactivity?
A
Caters for family members
Parents who care for children full time
The retired
25
What is under employment?
Working less than they want to
26
What is frictional unemployment?
Unemployment caused by the time taken for people to move between jobs
27
What is structural unemployment?
A mismatch of skills in the labour market.
Eg occupational inmobilities; difficulty learning new skills
Geographical immobilities; difficulty in moving regions to get a job
28
What is demand deficient unemployment?
Occurs when the economy is below full capacity
29
What is classical (real wage) unemployment?
Wages in a competitive labour market are pushed above the equilibrium eg by minimum wage
30
What is seasonal unemployment?
high demand for pickers in summer
High demand at Christmas
31
Negative consequences of unemployment?
Lost output; the economy not producing as much as it should be
Financial cost to the government
Social effects on the unemployed (eg hysteresis)
32
What are the positives of unemployment?
Makes it easier for firms to employ good workers
Keeps inflation levels low
33
Describe the effects of unemployment
Lost output
Financial cost, less money to gov in tax
Hysteresis; unemployment breeds unemployment; if you’re out of a job for a long time then employers are more reluctant to employ
34
What is inflation?
A sustained increase in the general price level in an economy
35
What is deflation
The inflation rate is negative, when PL is falling
36
What is disinflation?
When the price level is rising but at a slower rate than before- inflation rate is falling
37
What is hyperinflation
This occurs when inflation spirals out of control
38
How do we measure inflation the UK?
Consumer price index
39
How does the CPI measure inflation?
Changes in the price of representative basket of 650 consumer goods and services using index numbers
40
What are the 2 types of inflation?
Demand pull
Cost push
41
What is demand pull inflation?
Inflation may occur from excessive growth in the AD in the economy
42
What is cost push inflation?
Inflation that’s caused by an increase in the cost of producing goods and services in the economy
43
Factors that affect demand pull inflation?
Economic boom; increased confidence and spending
Increased demand for exports
Shortages due to lack of capacity
Too much money circulating in the economy;
“Too much money chasing too few goods”
44
Factors that affect cost push inflation?
Wage levels may increase which increases costs to businesses
A rise in the cost of imported raw materials
45
Consequences of inflation
```
Inequality
Falling real incomes
Negative real interest rate
Cost of borrowing up
Risks of wage inflation
Business competitiveness
Business uncertainty
```
46
Causes of deflation?
Long recession
Excessive spare capacity in industry or supple side events
Technological improvements
Falling wages
Better productivity
Higher exchange rates
47
Negative consequences of deflation?
Consumers may postpone demand
Real value of debt rises
Real cost of borrowing increase
Lower confidence due to falling asset price
Low profit margins
48
What is aggregate supply
It Measures the volume of goods and services produced each year.
AS represents the ability of an economy to deliver goods and services to meet demand
Aggregate supply is the total output that producers in an economy are willing and able to supply at a given price level in a given time period
49
What are the features of a Keynesian curve?
Low output, supply can increase without increasing PL
Higher Output/ Low unemployment, resources more scarce, price of output increases
Maximum Output, all resources employed, AS curve perfectly inelastic
50
What causes shifts in the LRAS curve?
Changes in quantity of resources
Changes in quality of resources
51
What are the 3 injections into the circular flow of income?
Investment (I)
Government Expenditure (G)
Exports (X)
52
3 withdrawals from circular flow of income
Savings (S)
Taxation (T)
Imports (M)
53
How to calculate average propensity to consume?
Consumption / income
54
Calculation for average propensity to save?
Savings / Income
55
APC + APS should equal what
One
56
What does Marginal propensity to consume measure?
MPC measures how much consumption will change following a change in income
57
MPC CALCULATION
Change in C / Change in Y
58
MPS CALCULATION
Change in S / Change in Y
59
APC CALCULATION
C / Y
60
APS CALCULATION
S / Y
61
When does the multiplied effect occur?
When an injection into the economy can lead to a bigger final increase in real GDP.
62
What formula is used to determine the size of the multiplier?
1/1 - MPC
DETERMINED BY THE % OF THE EXTRA INCOME SPENT ON UK GOODS
THE HIGHER THE MPC = GREATER SIZE OF MULTIPLIER
63
What is the accelerator effect?
An increase in national income results in a proportionally larger rise in investment
The demand for capital goods is being driven by the demand for the products that the firm is supplying to the market.
64
What is autonomous investment?
When investment increases or decreases independent of economic output.
65
What are the 3 main economic policies?
Fiscal policy
Monetary Policy
Supply Side Policy
66
What is fiscal policy?
Taxation and spending decisions of a government can be
Reflationary- increase AD
OR
Deflationary - designers to reduce AD
67
What is monetary policy?
Central bank makes decisions on the rate of interest, the money supply and the exchange rate.
Governments set the goals and central banks try to achieve them through monetary policy
68
Supply side policy, what is it?
Policies designed to increase AS by improving the efficiency of labour and product markets
69
What are the 3 components of fiscal policy?
Expenditure
Receipts
Borrowing Requirement
70
What is capital expenditure?
Improving the capital stock of the country in the long term
| Eg HS2
71
What is current expenditure?
Running public services day to day
| Eg wages of teachers or nurses
72
What are transfer payments?
Benefits (in exchange for nothing)
73
What are the 3 types of tax?
Progressive
Proportional
Regressive
74
What is a progressive tax?
Larger % of income from a higher income eg UK
75
What is a proportional tax?
Same % of income from all income groups
Eg Russia’s flat rate
76
What is a regressive tax?
A tax that takes a larger % of income from low income groups
Eg poll tax
77
What is a direct tax?
A tax charged on the income or profits of the person who pays it
78
What is an indirect tax?
Tax charged on goods and services
79
What is a cyclical budget deficit?
The government needs to respond to the economic cycle eg to help the economy cope with recession
80
What is a structural budget deficit?
A deficit, even when the economy is at full employment.
81
What is expansionary fiscal policy?
Choosing deliberately to run a deficit. This is called a structural deficit which is sometimes unavoidable
82
What are automatic fiscal stabilisers?
In a recession, tax revenues falling BUT increased gov spending on benefits will help stabilise the economy
- injection into G
83
What are the consequences of debt?
The borrowing of today’s government has to be repaid by the next generation so that will mean much less gov spending in the future
84
What to do when the deficit gets too big?
Increase tax levels
Austerity- cut back public spending
Boost economic growth eg replace current expenditure with capital expenditure
85
What is discretionary fiscal policy?
Deliberate attempts to affect aggregate demand using changes in G, direct and indirect taxation and borrowing
86
What are the problems with expansionary fiscal policy?
Adding to the national debt
Time lags and inflexible
Depends on the multiplier
May lead to crowding out
87
What is crowding out?
When government spending fails to increase overall AD because higher gov spending causes and equivalent fall in private sector spending and investing
88
What is the impact of higher gov spending on AD
Higher taxes —> decrease in C
Increasing borrowing —> selling bonds to priv sector = less investment in priv sector
89
What is financial crowding out?
Gov borrowing can cause higher interest rates. If the gov needs to sell more securities, then it may have to increase interest rates in order to attract people to buy it. The higher interest rates on bonds lead to higher interest rates elsewhere in the economy and then is likely to discourage private sector spending / investment
90
What are fiscal rules?
Attempts by the government to limit public sector debt and annual borrowing to certain criteria
91
What are the 2 common rules applied to the EU?
Total gov debt must not be more than 60% of GDP
The gov deficit must not be more than 3% of GDP except in particular circumstances
92
What are the advantages of fiscal rules?
Fiscal rules put pressure on gov. to stick to fiscal responsibility
If countries stick to fiscal rules, markets will have more confidence
Single currencies make fiscal rules more important, countries in the eurozone cannot reply upon an independent central bank to print money and buy bonds, therefore fiscal responsibility is more important
93
What are the disadvantages of fiscal rules?
Austerity measured are often introduced to achieve targets = cut spending and increased tax
Lack of alternative policies to adapt to
Lack of flexibility; unsuitable time frame
94
What is monetary policy?
Monetary policy relates to the supply of money in the economy, influenced by interest rates.
95
What are the 2 tools used in monetary policy?
Interest rates
Quantitative Easing
96
What are interest rates?
The price of money, the price you pay to borrow money.
97
What is quantitative easing?
When the central bank creates more money in the economy ie by printing
98
Increasing interest rates is what types of monetary policy?
Deflationary
Reduced investment
Reduced consumption
Reduced exports
99
Decreasing interest rates is what kind of monetary policy?
Expansionary
Increased investment
Increased consumption
Increased exports
100
What are the advantages of monetary policy?
Independent from governments so there is no political bias
Interest rates have a direct and powerful effect on household spending
Interest rates can be adjusted on a monthly rate
Full impact not felt for a year, but confidence is immediately impacted
101
What are the disadvantages of monetary policy?
Time lags
Raising interest rates can negatively impact investment spending and household markets and the exchange rate
Dual economy, High rates set for the booming service sector
Difficult to control QE
Liquidity trap may occur when a low interest rate is combined with high savings
102
What are examples of free market policies?
Privatisation
Deregulation
Reducing income tax rates
Deregulate labour markets
Reducing power of trade unions
Reducing unemployment benefits
103
Why are free market policies advantageous?
Can be felt across a large range of firms and industry can lead to the AS curve shifting right
Changes in business culture and attitude to be more entrepreneurial
104
Disadvantages of supply side policy?
Deregulation can lower business standards
Reduce quality of goods and services provided
Which in turn reduces competitiveness
105
What is an interventionist policy?
A policy than involves the government becoming involved in the economy, with the aim to affect AS
106
What are examples of interventionist policies?
Increased education and training
Improving transport and infrastructure
Build more affordable homes
Improves healthcare
107
What part of the economy does supply side policy target?
LIFE
L- labour
I - industry
F - finance
E - enterprise
108
What kind of results do supply side policies produce?
EPIC
E- improve efficiency
P - improve productivity
I - incentive to work harder
C - increase competition
109
What is does the laffer curve show?
It suggests a link between the marginal tax rate and tax revenue.
Laffer beloved that a certain marginal tax rate, any increase in rates above that, will decrease not increase government tax revenues.
This is because at higher marginal tax rates, there becomes a disincentive to work due to the tax and therefore less is raised in tax revenue
110
What is international trade?
This is the exchange of goods and services across international borders
111
What is an absolute advantage?
When a country can produce a good or service using fewer resources and at a lower cost than another country
112
What is a comparative advantage?
This occurs when a country can produce a good or service at a lower opportunity cost than another country
113
What are the benefits from trade?
Exports increase national income
Stimulates innovation
Imports are often goods that cannot be produced in an economy
Increase consumer choice
114
What is opportunity cost?
The next best alternative forgone
115
What does the theory of comparative advantage state?
That a country should specialise in the production of products with the lower opportunity cost
116
What is the importance of comparative advantage?
Combined output will be increased underpinning the principle of international trade: specialise in what you are good at
Improves the economy
117
Why might a comparative advantage change over time?
Non renewable resources may run out
Investment in research and development
Movements in exchange rate
Long term rates in inflation may deviate
Tariff and quotas may impose import controls
Non price competitiveness of producers may change.
118
What is a weakness of comparative advantage?
IT IGNORES;
```
Cost of trade
External costs of trade
Diseconomies of sale
Assumes perfect information
Assumed perfect factor mobility
Doesn’t take into account the losers
```
119
What is the current account?
It’s the main measure of external trade performance
120
What does the financial account measure?
Measures inflows and outflows of financial capital across national boundaries
121
What does the current account consist of?
Balance of trade in goods
Balance of trade in services
Net primary income
Net secondary income
122
What factors affect the balance of payments?
Economic growth / consumer spending
Exchange rate
Decline in international competitiveness making countries exports less competitive and imports more attractive
Marginal propensity to import
123
What should the overall balance of payments equal?
Zero
124
How can a short run imbalance in the current account be resolved?
By changes in the exchange rate
125
What do long term imbalances in deficits cause?
High levels of structural unemployment for the long term
126
What does a long term surplus lead to?
Lower living standards
127
What is exchange rate?
An exchange rate is the price of one currency in terms of another
128
What is a fixed exchange rate?
Where a currency’s value is fixed against either the value of another currency or to a basket of other currencies or to a measure of another value ie gold
129
What is a floating exhange rate?
Where the value of the currency is determined by the forces of demand and supply
130
How does the value of the £ change if supply is increased?
The price is reduced so the £ is worth less
131
What is demand for currencies based on?
Demand for exports
Inflows of investment
Speculative buying (hot money)
Central bank buying up their own currency
132
What is the supply of currencies based on?
Demand for imports of goods / services
Outflows of investment
Speculative selling
Central bank selling their currency
133
How can a country achieve a lower fixed rate?
Lower interest rates
Could buy a lot of foreign currency
Enact legislation limiting Foreign investment into the country
134
Why is a lower exchange rate beneficial?
Because it makes exports more competitive
135
What is a bilateral exchange rate?
Measuring one currency against another currency
136
What is effective exchange rate?
Describes the strength of a currency relative to a basket of other currencies
137
What is a nominal enganche rate?
Number of units of the domestic currency that are needed to purchase a unit of a given foreign currency
138
What is purchasing power parity?
Purchasing power parity is a theory that states that in the long term, the exchange rate between countries should even out so that goods essentially cost the same in both countries
139
Why is PPP useful?
Because it shows which countries have overvalued currency and undervalued currencies against the USD
140
Advantages of free floating economy?
Natural stabiliser for the economy
Gives the government / monetary authorities flexibility in determining interest rates
141
Disadvantages of free floating economy?
Uncertainty
Lack of economic discipline
May be inflationary; imports will be more expensive if ER is lower
142
What are the consequences of exchange rate fluctuations?
SPICED AND WPIDEC, changes in competitiveness, effect on inflation
Uncertainty
Effect on inward investment (FDI)
143
Advantages of fixed exchange rates?
Provide certainty
Less speculative activity
144
Disadvantages of fixed rates?
Fragile
Prone to wilting under pressure
Inflexible, take away natural stabilisers of the economy
145
How to get a target exchange rate from a base exchange rate CALCULATION
MULTIPLY
146
When converting back to the base? What calculation?
DIVIDE
147
What is a depreciation?
Currency has fallen in value, therefore a unit of a currency will but less of a foreign currency?
148
How will changes in export and import prices affect economic indicators?
Domestic production increase
Trade deficit reduces
Domestic jobs increase
149
How does a lower currency affect macro objectives?
Increase inflation
Stronger trade balance (better exports)
Export profits are a stimulus to labour markets
150
What is the j curve effect?
The j curve effect shows time lags between a falling currency and an improved trade balance
151
What does the Marshall Lerner Condition state?
A depreciation or devaluation of the exchange rate will lead to a net improvement in the trade balance, provided that the sun of price elasticity of demand for exports and imports > 1
152
What will effect the impact of a currency depreciation?
Length of time lags
How open an economy is
The scale of any change in exchange rate
Short term or long term change?
How businesses and consumers respond to changes in ER
The size of any multiplier or accelerator effect
What stage of the economic cycle it occurs at (recession or boom)
153
When will a depreciation in the currency improve the trade balance?
When the combined value for exports and imports is GREATER THAN ONE
