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Level 3 Economics > MacroEconomics > Flashcards

MacroEconomics Flashcards

(83 cards)

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1
Q

What does the production possibility curve show?

A

Current maximum output of the economy

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2
Q

What assumption does the production possibility curve make?

A

That resources are limited and are used to produce either capital or consumer goods

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3
Q

What does a point on the frontier of the production possibility curve show?

A

Maximum potential output and full employment

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4
Q

If resources are shifted from capital goods to more consumer goods, what does this indicate?

A

Higher living standards

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5
Q

What is price stability?

A

The government’s goal to avoid long periods of inflation or deflation

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6
Q

What is PTA?

A

Policy Target Agreement; to keep inflation between 1% and 3% on average over the medium term

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7
Q

What is GDP?

A

The value of all goods and services produced in the economy; measure of growth

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8
Q

Nominal GDP

A

Measured with current inflation

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9
Q

Real GDP

A

Measured with inflationary effects removed

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10
Q

Frictional unemployment

A

Those entering the labour force or are temporarily between jobs

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11
Q

Structural unemployment

A

Caused by permanent or long term changes in the structure of the economy

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12
Q

Cyclical unemployment

A

Caused by a recession or downturn = mass unemployment

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13
Q

What is a current account deficit funded by?

A

Borrowing from overseas which increases foreign ownership of our assets

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14
Q

Households to firms

A

Resources and consumption spending

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15
Q

Households to government

A

Direct tax

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16
Q

Households to financial institutions

A

Savings

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17
Q

Firms to households

A

Goods and services and income

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18
Q

Firms to government

A

Indirect tax

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19
Q

Firms to overseas

A

Export receipts

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20
Q

Financial institutions to firms

A

Investment

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21
Q

Overseas to firms

A

Import payments

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22
Q

Government to households

A

Transfer payments

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23
Q

Government to firms

A

Subsidies

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24
Q

What do financial institutions do?

A

Use consumer savings to give loans to firms for investment. If the level of savings increases, there are more funds available, but it doesn’t necessarily mean that investment will increase as there may not be loan-worthy firms or firms may have low confidence

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25
When are firms willing to increase output with a small increase in price and why?
Recession and because they have idle capacity
26
When do firms find it more difficult to increase output and why?
Boom and because there is less spare capacity
27
What factors change AD and AS
Exchange rates, migration and interest rates
28
What is a deflationary gap?
Occurs when the equilibrium is below full employment; horizontal distance to YF
29
What is an inflationary gap?
Occurs when the equilibrium is above full employment; horizontal distance to YF
30
What is disposable income?
Income after direct tax and transfer payments
31
What is discretionary income?
Disposable income after essential payments have been made
32
What are savings?
Income not spent
33
When will a business increase investment?
When they are confident it will be successful, considering the cost of borrowing, level of risk and profitability
34
What happens to investment when interest rates increase?
It decreases because there is a higher risk and higher cost of borrowing
35
How does a stable exchange rate impact investment?
It increases investment because business decisions are more predictable
36
What do increasing prices indicate?
Excess demand (shortage) which stimulates production
37
What do falling prices indicate?
Excess supply (surplus) which discourages production
38
Flexible/floating exchange rate
Determined in the market of foreign exchange (changes in demand and supply)
39
What is a clean float?
Government does not directly intervene to influence the exchange rate
40
What is a dirty float?
Government acts to influence the exchange rate
41
What factor effects demand AND supply of the NZ dollar?
Interest rates
42
How do you calculate export earnings?
Total foreign currency received / exchange rate
43
How do you calculate import payments?
Total foreign currency paid / exchange rate
44
What is the TWI?
Trade Weighted Index; measures the value of a currency in terms of a weighted average of the currencies of its major trading partners
45
What is balance of payments?
Records transactions of one country with the rest of the world
46
What makes up balance of payments?
Current account, capital account and financial account
47
What are New Zealanders travelling overseas considered as?
Import payments
48
What is included in the financial account?
Direct investment, portfolio investment, other investment and reserve assets
49
What is direct investment?
Ownership of 10% or more in another economy
50
What is portfolio investment?
Less than 10% ownership, shares, bonds, notes
51
What is other investment?
Loans, trade credits, deposits
52
What are reserve assets?
Special assets held by the monetary authority
53
How do you calculate terms of trade?
Export price index / import price index x 1000
54
What is terms of trade and how is it measured?
Ratio of a country's export prices to its import prices. Measured relative to a base year of 1000
55
What does terms of trade measure?
The purchasing power of exports; the quantity of imports a given quantity of exports can buy
56
Why can't NZ influence its terms of trade much?
Because we are a small country and have to accept prevailing prices in the world market
57
What is MPC and MPS?
The proportion of income spent and the proportion of income saved
58
What is the leakage from the spending stream?
Savings
59
What does the multiplier process refer to?
A given change in spending causing a more than proportionate change in GDP because one person's spending is another person's income
60
How do you calculate the change in GDP or size of deflationary gap?
Change in spending x multiplier
61
What is the official cash rate?
Central bank interest rate used to control the price of money
62
How is monetary policy used during low economic activity?
OCR is decreased
63
How is monetary policy used during high economic activity
OCR is increased
64
What does changing OCR effect?
AD - C, I, X-M | AS - costs of production
65
How may monetary policy not have the expected effect?
Time lag, those on fixed mortgages, consumers concerned about the future, business confidence
66
What does fiscal policy involve?
Changes to government income and expenditure in the budget
67
How is fiscal policy used during low economic activity?
Operating deficit; increased spending and decreased revenue
68
How is fiscal policy used during high economic activity?
Operating surplus; decreased spending and increased revenue
69
When will the government use monetary policy as well as fiscal policy?
If they expect the PTA to be breached
70
What must the government do during a deficit?
Borrow funds to cover expenses which adds to government debt
71
What does a shift in the production possibility frontier indicate?
A change in the productive capacity of an economy
72
What does full employment indicate?
That all resources are fully employed and firms are working to their capacity
73
What is productivity?
A measure of the efficiency of the production process using the rate of output relative to input
74
How can productivity of labour be improved?
Training workers, specialisation, division of labour, more technology used, education
75
What does supply-side policy include?
Higher rates of education, physical capital, technological advancements (research and development), reduced company tax rates, capital stock levels
76
What is the RMA
Promotes sustainable management of natural and physical resources
77
Why is the RMA important?
Because economic growth can result in the accelerate use of scarce resources and damage to the environment
78
What is the effect of the RMA on growth?
Decrease in the short run but more sustainable in the long run
79
What is protectionism?
Measures that impede the free flow of goods and services between nations; tariffs, quotas
80
What is free trade?
Trade between countries without government interference
81
Why is protectionism good?
Protects jobs, protects developing industries against competition, some industries need to be preserved, protects domestic firms
82
Why is free trade good?
Inefficient productive units are not preserved so resources are shifted to be more efficient and the export sector is more competitive, less cost to the government, less cost to consumers
83
What can high tariffs cause overseas trading partners to do?
Place tariffs on the goods they import from us, causing us to export less

Level 3 Economics (1 decks)

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