Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

A-Level Macroeconomics > Macro Year 12 > Flashcards

Macro Year 12 Flashcards

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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the AD equation?

A

AD= C + I + G + (X-M)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the 3 methods of calculating national income

A

Expenditure method

Income method

Output method

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the expenditure method?

A

GDP = C + I + G + (X-M)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What does real mean in economics?

A

Real means the value of GDP, taking out inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

When do you move along the demand curve?

A

A change in price level caused by;
Reduced consumption

Reduced exports

Increased imports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Unemployment definition?

A

Where workers do not have jobs but are willing and able to work

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Unemployment rate?

A

The % of the labour force not currently in paid employment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is full employment?

A

The level of employment rates where there is no cyclical unemployment (demand deficient)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What are reasons for economic inactivity?

A

Caters for family members

Parents who care for children full time

The retired

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is under employment?

A

Working less than they want to

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is frictional unemployment?

A

Unemployment caused by the time taken for people to move between jobs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is structural unemployment?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is demand deficient unemployment?

A

Occurs when the economy is below full capacity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What is classical (real wage) unemployment?

A

Wages in a competitive labour market are pushed above the equilibrium eg by minimum wage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What is seasonal unemployment?

A

high demand for pickers in summer

High demand at Christmas

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Negative consequences of unemployment?

A

Lost output; the economy not producing as much as it should be

Financial cost to the government

Social effects on the unemployed (eg hysteresis)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What are the positives of unemployment?

A

Makes it easier for firms to employ good workers

Keeps inflation levels low

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Describe the effects of unemployment

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What is inflation?

A

A sustained increase in the general price level in an economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What is deflation

A

The inflation rate is negative, when PL is falling

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What is disinflation?

A

When the price level is rising but at a slower rate than before- inflation rate is falling

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

What is hyperinflation

A

This occurs when inflation spirals out of control

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

How do we measure inflation the UK?

A

Consumer price index

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

How does the CPI measure inflation?

A

Changes in the price of representative basket of 650 consumer goods and services using index numbers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

What are the 2 types of inflation?

A

Demand pull

Cost push

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

What is demand pull inflation?

A

Inflation may occur from excessive growth in the AD in the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

What is cost push inflation?

A

Inflation that’s caused by an increase in the cost of producing goods and services in the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

Factors that affect demand pull inflation?

A

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”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Factors that affect cost push inflation?

A

Wage levels may increase which increases costs to businesses

A rise in the cost of imported raw materials

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Consequences of inflation

A 
Inequality
Falling real incomes
Negative real interest rate
Cost of borrowing up
Risks of wage inflation 
Business competitiveness
Business uncertainty
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

Causes of deflation?

A

Long recession

Excessive spare capacity in industry or supple side events

Technological improvements

Falling wages

Better productivity

Higher exchange rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

Negative consequences of deflation?

A

Consumers may postpone demand

Real value of debt rises

Real cost of borrowing increase

Lower confidence due to falling asset price

Low profit margins

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

What is aggregate supply

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

What are the features of a Keynesian curve?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

What causes shifts in the LRAS curve?

A

Changes in quantity of resources

Changes in quality of resources

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

What are the 3 injections into the circular flow of income?

A

Investment (I)

Government Expenditure (G)

Exports (X)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

3 withdrawals from circular flow of income

A

Savings (S)

Taxation (T)

Imports (M)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

How to calculate average propensity to consume?

A

Consumption / income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

Calculation for average propensity to save?

A

Savings / Income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

APC + APS should equal what

A

One

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

What does Marginal propensity to consume measure?

A

MPC measures how much consumption will change following a change in income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

MPC CALCULATION

A

Change in C / Change in Y

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

MPS CALCULATION

A

Change in S / Change in Y

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

APC CALCULATION

A

C / Y

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

APS CALCULATION

A

S / Y

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

When does the multiplied effect occur?

A

When an injection into the economy can lead to a bigger final increase in real GDP.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

What formula is used to determine the size of the multiplier?

A

1/1 - MPC

DETERMINED BY THE % OF THE EXTRA INCOME SPENT ON UK GOODS

THE HIGHER THE MPC = GREATER SIZE OF MULTIPLIER

63
Q

What is the accelerator effect?

A

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
Q

What is autonomous investment?

A

When investment increases or decreases independent of economic output.

65
Q

What are the 3 main economic policies?

A

Fiscal policy

Monetary Policy

Supply Side Policy

66
Q

What is fiscal policy?

A

Taxation and spending decisions of a government can be
Reflationary- increase AD
OR
Deflationary - designers to reduce AD

67
Q

What is monetary policy?

A

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
Q

Supply side policy, what is it?

A

Policies designed to increase AS by improving the efficiency of labour and product markets

69
Q

What are the 3 components of fiscal policy?

A

Expenditure

Receipts

Borrowing Requirement

70
Q

What is capital expenditure?

A

Improving the capital stock of the country in the long term

Eg HS2

71
Q

What is current expenditure?

A

Running public services day to day

Eg wages of teachers or nurses

72
Q

What are transfer payments?

A

Benefits (in exchange for nothing)

73
Q

What are the 3 types of tax?

A

Progressive

Proportional

Regressive

74
Q

What is a progressive tax?

A

Larger % of income from a higher income eg UK

75
Q

What is a proportional tax?

A

Same % of income from all income groups

Eg Russia’s flat rate

76
Q

What is a regressive tax?

A

A tax that takes a larger % of income from low income groups

Eg poll tax

77
Q

What is a direct tax?

A

A tax charged on the income or profits of the person who pays it

78
Q

What is an indirect tax?

A

Tax charged on goods and services

79
Q

What is a cyclical budget deficit?

A

The government needs to respond to the economic cycle eg to help the economy cope with recession

80
Q

What is a structural budget deficit?

A

A deficit, even when the economy is at full employment.

81
Q

What is expansionary fiscal policy?

A

Choosing deliberately to run a deficit. This is called a structural deficit which is sometimes unavoidable

82
Q

What are automatic fiscal stabilisers?

A

In a recession, tax revenues falling BUT increased gov spending on benefits will help stabilise the economy
- injection into G

83
Q

What are the consequences of debt?

A

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
Q

What to do when the deficit gets too big?

A

Increase tax levels

Austerity- cut back public spending

Boost economic growth eg replace current expenditure with capital expenditure

85
Q

What is discretionary fiscal policy?

A

Deliberate attempts to affect aggregate demand using changes in G, direct and indirect taxation and borrowing

86
Q

What are the problems with expansionary fiscal policy?

A

Adding to the national debt

Time lags and inflexible

Depends on the multiplier

May lead to crowding out

87
Q

What is crowding out?

A

When government spending fails to increase overall AD because higher gov spending causes and equivalent fall in private sector spending and investing

88
Q

What is the impact of higher gov spending on AD

A

Higher taxes —> decrease in C

Increasing borrowing —> selling bonds to priv sector = less investment in priv sector

89
Q

What is financial crowding out?

A

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
Q

What are fiscal rules?

A

Attempts by the government to limit public sector debt and annual borrowing to certain criteria

91
Q

What are the 2 common rules applied to the EU?

A

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
Q

What are the advantages of fiscal rules?

A

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
Q

What are the disadvantages of fiscal rules?

A

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
Q

What is monetary policy?

A

Monetary policy relates to the supply of money in the economy, influenced by interest rates.

95
Q

What are the 2 tools used in monetary policy?

A

Interest rates

Quantitative Easing

96
Q

What are interest rates?

A

The price of money, the price you pay to borrow money.

97
Q

What is quantitative easing?

A

When the central bank creates more money in the economy ie by printing

98
Q

Increasing interest rates is what types of monetary policy?

A

Deflationary

Reduced investment
Reduced consumption
Reduced exports

99
Q

Decreasing interest rates is what kind of monetary policy?

A

Expansionary

Increased investment
Increased consumption
Increased exports

100
Q

What are the advantages of monetary policy?

A

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
Q

What are the disadvantages of monetary policy?

A

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
Q

What are examples of free market policies?

A

Privatisation

Deregulation

Reducing income tax rates

Deregulate labour markets

Reducing power of trade unions

Reducing unemployment benefits

103
Q

Why are free market policies advantageous?

A

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
Q

Disadvantages of supply side policy?

A

Deregulation can lower business standards

Reduce quality of goods and services provided

Which in turn reduces competitiveness

105
Q

What is an interventionist policy?

A

A policy than involves the government becoming involved in the economy, with the aim to affect AS

106
Q

What are examples of interventionist policies?

A

Increased education and training

Improving transport and infrastructure

Build more affordable homes

Improves healthcare

107
Q

What part of the economy does supply side policy target?

A

LIFE

L- labour
I - industry
F - finance
E - enterprise

108
Q

What kind of results do supply side policies produce?

A

EPIC

E- improve efficiency
P - improve productivity
I - incentive to work harder
C - increase competition

109
Q

What is does the laffer curve show?

A

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
Q

What is international trade?

A

This is the exchange of goods and services across international borders

111
Q

What is an absolute advantage?

A

When a country can produce a good or service using fewer resources and at a lower cost than another country

112
Q

What is a comparative advantage?

A

This occurs when a country can produce a good or service at a lower opportunity cost than another country

113
Q

What are the benefits from trade?

A

Exports increase national income
Stimulates innovation
Imports are often goods that cannot be produced in an economy
Increase consumer choice

114
Q

What is opportunity cost?

A

The next best alternative forgone

115
Q

What does the theory of comparative advantage state?

A

That a country should specialise in the production of products with the lower opportunity cost

116
Q

What is the importance of comparative advantage?

A

Combined output will be increased underpinning the principle of international trade: specialise in what you are good at

Improves the economy

117
Q

Why might a comparative advantage change over time?

A

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
Q

What is a weakness of comparative advantage?

A

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
Q

What is the current account?

A

It’s the main measure of external trade performance

120
Q

What does the financial account measure?

A

Measures inflows and outflows of financial capital across national boundaries

121
Q

What does the current account consist of?

A

Balance of trade in goods
Balance of trade in services
Net primary income
Net secondary income

122
Q

What factors affect the balance of payments?

A

Economic growth / consumer spending

Exchange rate

Decline in international competitiveness making countries exports less competitive and imports more attractive

Marginal propensity to import

123
Q

What should the overall balance of payments equal?

A

Zero

124
Q

How can a short run imbalance in the current account be resolved?

A

By changes in the exchange rate

125
Q

What do long term imbalances in deficits cause?

A

High levels of structural unemployment for the long term

126
Q

What does a long term surplus lead to?

A

Lower living standards

127
Q

What is exchange rate?

A

An exchange rate is the price of one currency in terms of another

128
Q

What is a fixed exchange rate?

A

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
Q

What is a floating exhange rate?

A

Where the value of the currency is determined by the forces of demand and supply

130
Q

How does the value of the £ change if supply is increased?

A

The price is reduced so the £ is worth less

131
Q

What is demand for currencies based on?

A

Demand for exports

Inflows of investment

Speculative buying (hot money)

Central bank buying up their own currency

132
Q

What is the supply of currencies based on?

A

Demand for imports of goods / services

Outflows of investment

Speculative selling

Central bank selling their currency

133
Q

How can a country achieve a lower fixed rate?

A

Lower interest rates

Could buy a lot of foreign currency

Enact legislation limiting Foreign investment into the country

134
Q

Why is a lower exchange rate beneficial?

A

Because it makes exports more competitive

135
Q

What is a bilateral exchange rate?

A

Measuring one currency against another currency

136
Q

What is effective exchange rate?

A

Describes the strength of a currency relative to a basket of other currencies

137
Q

What is a nominal enganche rate?

A

Number of units of the domestic currency that are needed to purchase a unit of a given foreign currency

138
Q

What is purchasing power parity?

A

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
Q

Why is PPP useful?

A

Because it shows which countries have overvalued currency and undervalued currencies against the USD

140
Q

Advantages of free floating economy?

A

Natural stabiliser for the economy

Gives the government / monetary authorities flexibility in determining interest rates

141
Q

Disadvantages of free floating economy?

A

Uncertainty
Lack of economic discipline
May be inflationary; imports will be more expensive if ER is lower

142
Q

What are the consequences of exchange rate fluctuations?

A

SPICED AND WPIDEC, changes in competitiveness, effect on inflation

Uncertainty

Effect on inward investment (FDI)

143
Q

Advantages of fixed exchange rates?

A

Provide certainty

Less speculative activity

144
Q

Disadvantages of fixed rates?

A

Fragile

Prone to wilting under pressure

Inflexible, take away natural stabilisers of the economy

145
Q

How to get a target exchange rate from a base exchange rate CALCULATION

A

MULTIPLY

146
Q

When converting back to the base? What calculation?

A

DIVIDE

147
Q

What is a depreciation?

A

Currency has fallen in value, therefore a unit of a currency will but less of a foreign currency?

148
Q

How will changes in export and import prices affect economic indicators?

A

Domestic production increase

Trade deficit reduces

Domestic jobs increase

149
Q

How does a lower currency affect macro objectives?

A

Increase inflation

Stronger trade balance (better exports)

Export profits are a stimulus to labour markets

150
Q

What is the j curve effect?

A

The j curve effect shows time lags between a falling currency and an improved trade balance

151
Q

What does the Marshall Lerner Condition state?

A

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
Q

What will effect the impact of a currency depreciation?

A

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
Q

When will a depreciation in the currency improve the trade balance?

A

When the combined value for exports and imports is GREATER THAN ONE

A-Level Macroeconomics (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions