The Economy (Macro) Flashcards
Where does Aggregate Demand come from
- Consumers / Households Consumption
- Businesses - Investment
- Government - Government Spending
- Foreign countries - EX ports
Formula for AD
AD = C + I + G + X - M
Factors that shift AD
Income Tax ©
Rate of interest (Short Run)
Exchange rate if Exchange rate decreases. Exports increase, decrease in imports. This increases Aggregate demand. Increase in price of imported goods. Decrease in price of UK goods.
Increase in Government spending on health and education.
Factors that shift AS
Rate of interest (Long Run)
Price of Oil
Increase in Government spending on health and education (Long Run)
VAT if Exchange rate decreases AS
What is Inflation
Inflation is the sustained rise in the general level of prices. It is measured by the Retail Price Index and the Consumer Price Index.
How to calculate CPI
Index x weight ÷ total weight - 100
How to work out real income
Current Income Figure x Index base year/ Index in current year
Factors that increase inflation
- Increase in the price of oil / energy
- Increase in wages
- Increase in VAT
If the exchange rate decreases import prices, particularly oil, will seem higher.
What is Monetary policy
Changing the rate of interest to affect AD and thereby the level of inflation AND GDP and unemployment
What are criticisms of monetary policy
There is a time lag of 12-18 months for an interest rate change to have an impact.
Interest rates don’t address cost push inflation very well.
What are some economic costs of inflation
- Inflation causes a re-distribution of income and wealth.
- From lenders to debtors if real interest rates become negative.
- Away from those on fixed incomes or with weak bargaining power.
- From tax-payers to government because of Fiscal drag effects.
- Loss of international competitiveness
* “Expenditure-switching effect” away from UK exports overseas.
* Imports become relatively cheaper (rising import penetration). - Monetary policy response to high inflation
* Higher nominal interest rates - negative effect on output, investment. - Loss of business confidence (lower planned investment) due to uncertainty and lower expected real rates of return on capital.
- Increased inflation expectations
- Shoe Leather costs:
* During periods of inflation consumers will spend more time searching for a bargain.
* Traditionally this meant wearing your shoes wandering around the shops.
* Today it probably means the opposite.
* Cost of time spent surfing the net. - Menu costs
* Continually re-price their goods during periods of inflation. (Restaurants re-write menus) Websites need updating.
This is time consuming and time is money.
What are the types of unemployment?
Cyclical, Frictional, Seasonal, Structural
What is Fiscal policy?
Changing the level of Government spending and/or taxation to change AD and therefore affect Inflation, GDP, Unemployment.
What are the main types of free market policies?
Deregulation: The removal of rules and legislation in a market E.G The “Big Bang” in the financial markets.
Privatisation: E.G British gas, telecom, rail and petrol. Aimed to end state run monopolies and create competition.
Lowering taxes such as income and corporation Tax to encourage work and business investment resulting in a increase in consumption and investment (then multiplier / accelerator and growth). Also lowering Tax on imports to stimulate FDI. (foreign direct investment).
What are 3 Blarite policies?
Healthcare: improved health improves the quality of labour.
Education: makes labour more skilled and productive (N.B. 1997 Tony Blair)
Transport: increase the speed of moving resources around E.G HS2, smart motorways, new runways at Heathrow.
