Macroeconomics Flashcards
(15 cards)
Name the 3 macroeconomic alternatives.
1.Reducing the budget deficit
2.Reducing inequality
3.Environmental
Name the main 4 macroeconomic objectives.
1.High sustainable economic growth
2.Low unemployment
3.Low inflation
4.Balanced current account
Explain High sustainable economic growth.
Higher living standards – higher incomes so people are materially better off
Improved government finances – greater tax revenues from increased economic activity
Explain Low unemployment.
Increased spending power for individuals
Less crime, mental health issues, etc.
Improved government finances – less to spend on benefits
Explain Low inflation (or ‘price stability’).
Protects real terms spending power – i.e. high inflation could mean a real terms cut in wages
Encourages investment – firms more likely to invest when prices are stable (and therefore predictable)
Makes firms more competitive if inflation is lower than in rival economies
Explain Balanced current account
Country can afford to pay for the imports that it consumes
A deficit means that each year there is an outflow of money – this means that debt will build up over time.
Explain Reducing the budget deficit.
Makes any borrowing more sustainable
Failing to reduce a large deficit leads to a rapid increase in national debt
Explain Reducing inequality
Fairness argument – that high levels of inequality is unfair
Incentives – more equality could create greater work incentives for unemployed and low income workers
Explain Environmental.
Not causing environmental armageddon…
Sustainable growth – reducing environmental impact today increases the economic prosperity for people tomorrow
The AS curve
Aggregate supply is the volume of goods and services produced within the economy at a given price level. It indicates the ability of an economy to produce goods and services and shows the relationship between the real GDP and the average price levels.
as curve
AS Curve: Shows the relationship between real GDP and average price levels.
Short-run AS (SRAS): Upward sloping; firms increase production by offering overtime or hiring temporary workers, leading to higher costs and prices.
long run as
Long-run AS (LRAS): All factors of production are variable. Disagreement exists on its shape:
classical eras
Classical View: LRAS is vertical, indicating full capacity output.
Keynesian View: LRAS is not always vertical due to “sticky” wages and other factors.
Factors Influencing SRAS
Costs of Raw Materials and Energy: Higher costs shift SRAS left.
Exchange Rates: A weaker pound increases import costs, shifting SRAS left.
Tax Rates: Higher taxes increase production costs, shifting SRAS left; subsidies shift it right.
2.3.3 Long-run AS
Technological Advances: Improve productivity, shifting LRAS right.
Productivity Changes: More efficient production shifts LRAS right.
Education and Skills: A skilled workforce increases output, shifting LRAS right.
Government Regulations: Policies can expand the workforce and encourage R&D, shifting LRAS right.
Demographic Changes and Migration: More working-age people increase LRAS.
Competition Policy: Promotes efficiency and innovation, shifting LRAS right.
