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AS Economics AQA > Macroeconomics part 1 > Flashcards

Macroeconomics part 1 Flashcards

1
Q

What are the main objectives of government macroeconomic policy?

A

economic growth,
price stability (linked to inflation),
minimising unemployment
stable balance of payments on current account
balancing the budget
achieving an equitable distribution of income

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2
Q

What is economic growth?

A

The rate of change of a country’s output over a period of time. measured by GDP

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3
Q

What is the key measure for economic growth?

A

Gross Domestic Product

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4
Q

What are the benefits of steady economic growth?

A
  • Job creation
  • rising incomes
  • improved standards of living
  • improved international competitiveness of the UK economy
  • Multiplier and accelerator benefits
  • Improved confidence of consumer spending, and business investing
  • Lower government spending on job seekers allowance -and associated benefits
  • Tax revenues likely to increase allowing the government to reinvest in infrastructure or spend on public services
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5
Q

Why do governments wish to pursue a policy of low unemployment?

A

Unemployment is seen as a waste of resources and

It’s an indicator of poor economic performance. Countries with strong economic growth have low unemployment.

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6
Q

What are the benefits of low unemployment?

A
  • Higher consumption and aggregate demand
  • Higher incomes
  • Improved standards of living
  • higher tax revenue for government
  • lower government spending on unemployment related welfare
  • improved productivity of UK economy
  • Reduced poverty (absolute and relative)
  • Social benefits (reduced crime, improved well being)
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7
Q

What is inflation measured by?

A

Consumer price index

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8
Q

What is the bank of England inflation target?

A

2%

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9
Q

What is balance of payment?

A

It measures the UK’s records of economic activities with other countries

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10
Q

What is a budget deficit?

A

Occurs when government spending is greater than tax revenues.

(Reducing the deficit can be achieved by tax increases or cuts in government spending or a period of economic growth which brings about a rise in direct and indirect tax revenues)

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11
Q

Describe the economic cycle

A

BOOM, Downturn, Recession, recovery.

The graph is Real GDP (y axis) against Time (x axis). A shallow positive gradient is the trend growth rate.

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12
Q

Descirbe the circular flow of income diagram

A

Inside: Households—-Taxes–> Government—Govnt Purchases—> Firms–Taxes—>Government—Social welfare—>Housholds

Outside: Households—Purchase goods and services
—> deamdn for Firms—Wages dividends, interest, profit and rent–>Inocme of households

At top: Imports–>Rest of world–>Exports

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13
Q

What are 3 injections to the circular flow of income?

A

Investments, exports of goods, Governemnt spending

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14
Q

What are 3 leakages from the circular flow of income?

A

Savings, taxation, imports

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15
Q

Formula for Aggregate demand?

A 
C+I+G+(x-m)
C=Consumption
I=Investemnt
G=Government spending
x=Exports
m=Imports
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16
Q

The multiplier effect

A

The mulitplier effect occurs when an initial injection into the economy, or ciricular flow of income, causes a larger final increase in the level of real national income output

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17
Q

How do you calcuate the multiplier?

A

K=Change in Y/Change in J

K=Mulitplier
Y=income
J=injections

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18
Q

Give a fiscal policy to reduce unemployment

A 
Income tax reduced...
more disposable income...
Consumer spending...
Increase in firms demand...
Employ more workers...
UNEMEPLOYMENT FALLS
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19
Q

Give a monetery policy to maintain growth

A 
Lower interest rates...
borrowing for investments is cheaper...
Improved technology...
Increase producitivty...
GROWTH
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20
Q

Monetary policy to reduce inflation

A

Increase interest rates…
Increase cost of borrowing…
discourage spending…
LOWER INFLATION, but low economic growth

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21
Q

What is the FTSE 100 index?

A

Measures the value change of the biggest 100 companies on the LSE

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22
Q

What is an index number?

A

An economic data figure reflecting price or quantity compared with a standard or base value. The base usually equals 100 and the index number is usually expressed as 100 times the ratio to the base value.

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23
Q

What is measure with index numbers?

A 
House price index
FTSE index
CPI
GDP
Exchange rate index
Employment/unemeployment
Wages
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24
Q

What is the base index?

A

100

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25
Q

What do index numbers measure?

A

changes in a representative group of date

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26
Q

if the index number is 102 what does it mean?

A

2% rise from the base year

27
Q

if the index number is 98 what does it mean?

A

2% fall from the base year

28
Q

Aggregate demand

A

The total demand for all goods and services in an economy at any given price level over a period of time

29
Q

Positive mulitplier

A

Initial increase in an injection leads to a greater final increase in real GDP

30
Q

Negative mulitplier

A

Initial decrease in injection leads to a greater final decrease in real GDP

31
Q

Give an example of a negative multiplier

A

Savings increase so people are spending less money on businesses, this could lead to business not being able to employ many workers. So injections would further fall which would lead to a greater final decrease in real GDP

32
Q

Describe an AD graph

A

Price level (y axis) against Real national output (x axis) neagtive gradient labeled AD

33
Q

What causes an expansion in AD?

A

Fall in price level

34
Q

What casues a contraction in AD?

A

Rise in price level

35
Q

How would you describe the realtionship between AD and price level?

A

Inverse

36
Q

What causes AD to shift left? (Fall in AD)

A

Fall in net exports (m>x)
Cut in Governemnt spending (G)
Higher interest rates
decline in household welath and confidence

37
Q

What causes AD to shift right? (rise in AD)

A

depreciation of the exchange rate
cuts in direct and indirect taxes
increase in house prices
expansion of supply of credit + lower interest rates

38
Q

Monetary policy

A

Involves chaning the interest rates and influencing money supply

39
Q

Fiscal policy

A

Involves the governemtn chainging tax rates and levels of governemnt spending to influence aggregate demand in the economy

40
Q

Base interest rates

A

Set by bank of england, it is the rate of interest used by commercial banks as the basis for their lending rates

(If interest rates rise consumption would fall as people save more, borrowless.)

41
Q

CPI

A

Measure of the price level based on the prices of a collection of goods and services that are designed to reflect the consumption basket of the average consumer.

If the price level increases, consumption falls

42
Q

Disposable income

A

Household income after the deduction of taxes and the addition of welfare benefits

More disposable income, more consumption

43
Q

FTSE 100 index

A

THe FTSE 100 tracks the share prices of the 100 largest companies listed on the LSE

If share prices increase consumption rises as people have more consumer confidence

44
Q

Saving ratio

A

Is the % of disposable income saved rather than spent

eg. if person has an annual income of £25k and save £2.5k then the saving ratio is 10%

45
Q

VAT

A

A tax on consumption, which is paid to the tax authorities by the seller on behalf of the consumer

If it rises, consumption falls

46
Q

Marginal propensity to consume=

A

change in consumption/ change in income

47
Q

Aggregate supply

A

Quantity of goods and services that producers in an economy are willing and able to supply at a given level of price

48
Q

Short run aggregate supply

A

Shows the total planned output when prices can change but the prices and productivity of factor inputs eg. wage rates and the state of technology, are held constant

49
Q

What are the factors of production?

A

Land
Labour
Capital
Enterprise

50
Q

What shifts aggregate supply?

A

Unit wage cost
Indirect/direct tax
Capital goods
Price of raw materials

51
Q

When does macroeconomic equillibrium occur?

A

When AD=AS

52
Q

Boom

A

A period when the rate of growth of real GDP is fast and higher than the longterm trend

53
Q

Business cycle

A

SR fluctations of national output (real GDP) around its long term trend

54
Q

Slowdown

A

A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate

55
Q

Recession

A

A period of at least six months when an economy suffers a fall in output. Or a broadly-based contraction in output, employment, investment and confidence

56
Q

Recovery

A

A phase of the cycle, after a reccesion, during which real GDP starts to increases and unemployment begins to fall

57
Q

Depression

A

a PROLONGED DOWNTURN IN THE ECONOMY AND WHERE A NATION’S gap FALLS BY AT LEAST 10%

58
Q

Spare capacity

A

Access to unutilised resources for production

59
Q

Negative out put gap

A

When level of actual GDP is less then potential GDP

Some factors resources are under utilised e.g.. demand deficit unemployment

Main problem is likely to be higher unemployment and possible deflation rise

60
Q

positive output gap

A

Actual GDP is greater than the estimated potential GDP

Some resources working beyond usual capacity (like overtime)

Main problem is rising demand pull and cost push inflationary pressures

61
Q

Inflation targets set by?

A

Government

62
Q

Interest rate set by?

A

Monetary Policy Committee (MPC)

63
Q

The accelerator principle

A

illustrates the relationship between planned capital investment and the rate of change of National income

64
Q

Real interest rates

A

real interest rate is the cost of borrowing and/or reward for saving money as a percentage of sum
borrowed/saved which has been adjusted to take into account the rate of inflation

AS Economics AQA (8 decks)

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