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BPP FIN > Module 11 > Flashcards

Module 11 Flashcards

(47 cards)

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1
Q

Increase in national income

A

Injection x 1/MPS

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2
Q

MPS=

A

1-MPC

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3
Q

Income (Y)=

A

Savings (S) + consumption (C)

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4
Q

Aggregate demand =

A 
Consumer spending (C)
\+ investment (I)
\+ government spending (G)
\+ exports (X)
- Imports (M)
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5
Q

The consumption function is

A

C = a + bY

C is amount consumes

a is Autonomous consumption (amount will consume if income is zero)

b is the MPC, proportion of an increase in their income a person will spend consuming goods 0-1

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6
Q

Trade surplus

A

Exports > imports

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7
Q

Trade deficit

A

Exports < imports

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8
Q

Governments 4 key macroeconomic objectives?

A

Economic growth
Low unemployment
Low inflation
Avoidance of balance of payments deficits and exchange rate problems

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9
Q

GDP

A

sum of the market values of all goods and services produced in an economy during a period of time

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10
Q

Four types of unemployment

A

Frictional
Seasonal
Structural unemployment
Real wage

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11
Q

What is frictional unemployment

A

Time takes to switch jobs

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12
Q

Seasonal unemployment

A

Industry where demand for labour is seasonal

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13
Q

What is structural unemployment

A

Supply of labour in one industry outstrips demand and people’s skills are too inflexible to be transferred

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14
Q

What is real wage (classical) unemployment?

A

Demand curve : people firms are willing to employ at each wage rate

Supply curve: number of people willing to work at each wage rate

Crossing point is equilibrium so no unemployment

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15
Q

Why is inflation a problem?

A

Uncertainty
Redistribution of income
Balance of payments (exports more expensive to buyers, levels fall)

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16
Q

Macroeconomic schools of thought

A

Classical
New classical
Keynesianism
Monetarism

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17
Q

Demand pull inflation?

A

Increase in prices caused by increase in demand

Increasing output and rocked
Shift to right demand curve

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18
Q

Cost push inflation

A

Rising prices met with demands for higher wages

Increases production costs

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19
Q

Demand side - Fiscal policy

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A

Expansionary - increase gov spending, cut tax to increase agg demand

Contractionary - cut gov spending, raise tax to reduce agg demand

Can be unsustainable as increase budget deficits and add to national debt
Difficult to predict long term

20
Q

Macroeconomic policy may be

Study These Flashcards
A

Demand side- change level of spending

Supply side - influence level of production

21
Q

Demand side - monetary policy

Study These Flashcards
A

Expansionary - decrease interest rates, encourage to save less spend more

Contractionary- increase interest rates , save more spend less

22
Q

Supply side policies

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A

Market orientated- remove regulation
Interventionist- increase aggregate supply

Disadvantages

  • time/cost
  • necessary increase in aggregate demand, must be high enough to absorb increase created
23
Q

Aggregate demand and supply graph

Study These Flashcards
A

Aggregate demand \
Aggregate supply / becomes perfectly inelastic at the point where factors of production are used up, can’t supply any more

24
Q

Who owns the factors of production?

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A

Households

Firms need them as inputs to product goods and service so pay for their use

25
How do firms pay for the factors of production?
Land - Rent Labour - Wages Capital - Interest Enterprise - Profit Firms use factors to manufacture goods Households will consume by spending income they receive for providing the factors
26
Circular flow model savings and investment?
Savings are a withdrawal out of the economy Investments are an injection in
27
Circular flow imports and exports
Imports are withdrawals as money is paid to foreign supplier Exports are injections as money flows in
28
Governments in circular flow model?
Spend money on both households and firms Injection into economy Tax both households and firms Withdrawal from
29
When the economy is in equilibrium
Planned withdrawal = planned injections Often out of balance
30
Budget deficit
Gov spending > taxation Must borrow money Usually through gov bonds and loan stock Public sector net cash requirement - total requires to borrow for a period
31
What is aggregate demand?
The total demand for goods and services in an economy
32
What is MPC?
Proportion of an increase in income a person will spend consuming goods 0-1
33
What is MPS?
Proportion of an increase in come an individual would save
34
MPS=
1-MPC
35
What is the multiplier effect?
Effect whereby an injection into the economy leads to a greater increase in national income
36
Increase in national income =
Injection x 1/MPS 1/MPS is the multiplier
37
What is cyclical unemployment? Demand deficit
In times of very low economic growth or recession, aggregate demand falls Shifts to left Employ fewer workers Wage rates not flexible so don’t fall to new equilibrium Results in unemployment
38
What is inflation?
Sustained increase in the price level in an economy
39
How is inflation measured in the UK?
Monthly using the CPI and RPI Consumer price index (doesn’t include council tax or mortgage interest) Retail price index
40
What are the macroeconomic schools of thought?
Classical New classical Keynesianism Monetarism
41
What is classical school of thought?
Works best when left alone Minimum government intervention Naturally always return to equilibrium level with full employment 1st school Adam Smith 18th C economist
42
What is new classical school?
Belief that individuals make rational decisions and firms act to maximise their profits Leave market alone to work itself
43
What is Keynesianism?
Interventionist approach Influencing aggregate demand to achieve optimal economic performance ‘Demand side theory’ John Maynard Keynes 1930s
44
What is monetarism?
Centres around amount of money in circulation Inflation is caused by too much money chasing too few goods Producers only option of increasing prices Milton Friedman
45
If aggregate demand is too high in comparison to aggregate supply?
Could lead to inflation and balance of payments deficits AD too high- demand pull inflation and trade deficit AD too low- recession and unemployment.
46
What is demand side policy?
Seeking to change level of spending
47
What is supply side policy?
Seeking to influence the level of production directly by encouraging to produce more

BPP FIN (14 decks)

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