Macroeconomics key terms

Question 1

Nominal Value

Answer 1

based on current prices taking no account of changing prices through time (not adjusted to inflation)

Question 2

Real Value

Answer 2

Value of an economic variable taking account of changing prices through time (adjusted for inflation)

Question 3

Index Number

Answer 3

A device for comparing the value of a variable in one period or location with a base observation (e.g. measuring the average level of prices relative to a base period)

Question 4

Consumer Price Index (CPI)

Answer 4

A measure of the general price level in the UK adopted as the UK’s inflation target since December 2003

Question 5

Inflation

Answer 5

A sustained rise in the general price level

Question 6

Costs of Inflation

Answer 6

Reduced standard of living
Risk of hyperinflation
Menu Costs
Shoeleather Costs
Uncertainty

Question 7

Retail Price Index (RPI)

Answer 7

A measure of the average level of prices in the UK. Measure the average level of prices relative to a previous (base) year

Question 8

Cost-Push Inflation

Answer 8

Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials.

Question 9

Demand Pull Inflation

Answer 9

Inflation initiated by an increase in AD

Question 10

Aggregate Demand

Answer 10

Total spending in an economy over a given period of time

Question 11

Deflation

Answer 11

A sustained fall in the general price level

Question 12

CPI

Answer 12

Measure of inflation. Used both in the UK and in other countries, useful for international comparisons. Seen as better at measuring the effectiveness of macroeconomic policy.

Question 13

Menu costs

Answer 13

The cost of having to constantly having to reprint and change prices

Question 14

Shoe Leather Costs

Answer 14

Shoe-leather cost is the time and effort you spend to minimize the effect inflation has on your finances.

Question 15

Economically Inactive

Answer 15

Those people of working age who are not looking for work, for a variety of reasons (e.g students/elderly)

Question 16

Discouraged Workers

Answer 16

People who have been unable to find employment and who are no longer looking for work, seen as economically inactive.

Question 17

Workforce

Answer 17

People who are economically active- either in employment or unemployed

Question 18

Unemployed

Answer 18

People who are willing and able to work but do not have a job.

Question 19

Full Employment

Answer 19

When people who are economically active are able to find work

Question 20

Claimant Count

Answer 20

Number of people claiming job seekers allowance each month

Question 21

The labour force survey (ILO)

Answer 21

Percentage of workforce who are available for work (willing and able) but are without jobs

Question 22

Problems of Measuring the Claimant Count

Answer 22

Only finds those who are eligible for JSA. so excludes people with a valid excuse e.g. people returning from raising children or those on Government training schemes etc

Question 23

Problems of Measuring Labour force survey

Answer 23

Based on sample evidence therefore not completely accurate doesn’t show people who would be willing to work at their desired wage

Question 24

Frictional Unemployment

Answer 24

Unemployment associated with the job search; people between jobs

Question 25

Structural Unemployment

Answer 25

Unemployment arising because of the changes in the pattern of economic activity within an economy. unemployment due the loss/decline of entire industries e.g. coal mining

Question 26

Cyclical Unemployment

Answer 26

Unemployment that arises from a lack of AD (for example, during the down turn of a economic cycle such as a recession)

Question 27

Demand Deficient Unemployment

Answer 27

occurs when there is not enough demand for goods and services in the economy, leading to a reduction in production and a corresponding reduction in employment.

Question 28

Seasonal Unemployment

Answer 28

Unemployment that arises in seasons of the year when demand of the good/service is relatively low

Question 29

Voluntary Unemployment

Answer 29

A situation that arises when a individual decides not to accept a job at the going wage rate

Question 30

Involuntary Unemployment

Answer 30

Situation arising when an individual who would like to accept a job at the going wage rate cannot find employment- rely on social security payments

Question 31

Long Run Economic Growth

Answer 31

An increase in the productive potential of an economy/increasing the quantity or quality of the factors of production

Question 32

Short Run Economic Growth

Answer 32

An increase in real GDP/actual output/AD

Question 33

Labour Productivity

Answer 33

Output per worker per period of time

Question 34

Capital Productivity

Answer 34

Output per unit of capital per time period

Question 35

Total Factor Productivity

Answer 35

The average productivity of all factors, measured as the total output divided by the total amount of inputs used

Question 36

Investment

Answer 36

The addition to the capital stock of the economy through expenditure by firms

Question 37

Capacity Output

Answer 37

When all factors of production are fully and efficiently optimised

Question 38

Human Capital

Answer 38

The stock of skills and expertise that contribute to a workers productivity; can be increased through education and training

Question 39

Economic Growth on PPC Curve

Answer 39

outward shift indicates economic growth in long run (increase in productive capacity curve). Short run economic indicated through a movement toward full capacity but not in the productive capacity curve itself.

Question 40

Productivity

Answer 40

Output per input over a period of time

Question 41

Economic Growth through Labour

Answer 41

Another key driver of Growth is the skilled labour needed to operate the high-tech equipment. Can increase supply of labour through immigration policies. Investment in Labour will also increase the productivity of the economy, education + training are merit goods.

Question 42

GDP

Answer 42

measurement of economic output in an economy over a period of time. Not seen as a good assessment of standard of living in a country. Expenditure = Output = Income

Question 43

Advantages of measuring GDP

Answer 43

Straightforward/understood Internationally used so comparable with other nations However different countries have different sized populations which isn't taken into account

Question 44

Importance of Economic Growth

Answer 44

Expanding the availability of resources (economic growth) in an economy enables the standard of living to increase. For any society economic growth is a fundamental objective perhaps the most important. Other policies may also be seen as subsidiary to it e.g. inflation control or full employment.

Question 45

Economic Growth vs Basic needs provision

Answer 45

Growth objectives will eventually trickle down despite initial inequality of incomes and will tackle basic problems such as poverty. However people do still argue that basic needs should be catered for first, as people will gain human capital→can contribute to growth process.

Question 46

3 measures of circular flow of income

Answer 46

Expenditure method = Output method = Income method

Question 47

Average propensity to consume

Answer 47

calculated as C(household consumption)/Y(disposable income)

Question 48

Marginal Propensity to Consume

Answer 48

calculated as Change in consumption( ∆C)/ Change in disposable income(∆Y).

Question 49

The Multiplier

Answer 49

= 1/MPW(Marginal Propensity to Withdraw) Or 1/MPS(Save)+MPT(Tax)+MPI(Import)

Question 50

Why the demand curve is downward sloping (ALL ASSUME CETERIS PARIBUS)

Answer 50

1) Real Income effect 2) Wealth effect: if the price level is low then peoples assets will be worth more meaning they have more wealth→more willing to spend 3) Interest rates: prices low→interest rates low→discourages saving→more consumption and investment

Question 51

Factors affecting the Position of the AS curve

Answer 51

1) Technology = Advances means firms can produce more with the same available resources. 2) Productivity = If workers become more skilled and thus productive, the capacity level of the economy will rise. 3) Factor mobility = I.e. how willing workers are to move around the country to fill job vacancies/retrain themselves for job mobility in other industries. It can overall increase output. 4) Enterprise = Encouraging people to become entrepreneurs and set up businesses will increase the capacity of an economy. 5) Economic incentives and attitudes = Government policy can affect LRAS; E.G. incentives in taxes and benefits, as well as legislation can affect the willingness of people to work and their motivation. (supply-side policies)

Question 52

Comparative Static Analysis

Answer 52

When something is changed to examine its effects on the equilibrium

Question 53

Different shapes of LRAS

Answer 53

Position of AD/AS equilibrium determines whether the economy is in full employment→ classical view that economy will always return to full employment. Keynesian→possible for equilibrium to settle below full employment in a long-run recession

Question 54

Disadvantages of GDP

Answer 54

Income inequality distribution Informal sector and accuracy of data Social indicators

Question 55

Economic growth (diagrams)

Answer 55

Expressed in terms of an outward movement of PPC curve. Long run→ shift right in long run AS curve→may be because of an increase in quantity in the factors of production. Short run growth→shift in AD curve

Question 56

Macroeconomic Objectives

Answer 56

Price Stability (low inflation), Full employment, Balance of payments, Economic growth, redistribution of income, environmental protection

Question 57

Price Stability (low inflation) example

Answer 57

Govt tries to control inflation→controlling money stock→rise in money stock→rise in AD→rise in price level

Question 57

Price Stability (low inflation) example

Answer 57

Govt tries to control inflation→controlling money stock→rise in money stock→rise in AD→rise in price level

Question 58

Full employment

Answer 58

Full employment refers to a situation where all available labour resources in an economy are being used, and there is no significant surplus of unemployed workers.

Question 59

Current Account Deficit (Issues)

Answer 59

ownership of UK assets sold to foreigners→long run effects on AS. Needs to be funded by a financial/capital account surplus to continue

Question 60

Economic growth (as a policy Objective)

Answer 60

Long term aim→ to increase countries productive capacity→ by shifting LRAS curve

Question 61

Monetary policy

Answer 61

Government policy that attempts to manage Ad by controlling monetary tools (interest rates/money supply or QE/exchange rates)

Question 62

Monetary policy committee

Answer 62

Body within the bank of England responsible for the conduct of the monetary policy

Question 63

Fiscal policy

Answer 63

Taxation and government spending to influence AD

Question 64

Direct tax

Answer 64

A tax levied directly on income

Question 65

Indirect tax (definition)

Answer 65

Tax on expenditure (for example, VAT)

Question 66

Indirect tax (examples)

Answer 66

VAT Customs duties levied on imports, excise duties on production, sales tax

Question 67

Education and training

Answer 67

Investment in human capital to improve productivity by teaching new skills.