The Macro Economic Environment Flashcards
CHAPTER 4 (32 cards)
Aims of macro-economics
a) Achieve economic growth
b) To control price inflation
c) To achieve full employment
d) To achieve a balance between export & import
Explain concept of multiplier in national economy
Injection of a certain size in economy leads to much larger increase in national income
Explain aggregate demand
Total demand in economy for goods & services
Formula for aggregate demand
AD = C + I + G + ( X-M)
C = consumption
I = investment
G = government spending
X = total export
M = total import
Aggregate supply
Ability of economy to produce goods & services
Explain fiscal policy
Use of government spending & tax policies to influence level of demand in an economy
B - Borrowing
E - Expenditure planning
R - Revenue raising (tax)
What is Public Sector Net Cash Requirement (PSNCR)
When expenditure > revenue = Government need to borrow
Explain budget surplus
Government income > Expenditure
How can government increase demand using fiscal policy
a) Reduce taxation, maintain spending
b) Increase spending, maintain taxation
How can government reduce demand using fiscal policy
a) Increase taxation
b) Reduce spending
Key points about taxation
- Key source of revenue
- Serves to discourage certain activities
- Redistribute income & wealth
Explain direct taxation
Paid directly to revenue authority
eg: income tax, capital gain, inheritance tax
Indirect taxation
Collected via a 3rd party
2 types of indirect taxes
a) Specific - $/unit sold
b) Ad valorem - fixed percentage of the price of the item
3 types of tax
1) Regressive tax –> higher proportion of a poor person’s salary , same for all people
[etc: indirect tax]
2) Proportional tax –> same proportion of income in tax from all levels of income
3) Progressive tax –> higher proportion of income in tax as income rises
[etc: income tax]
Explain monetory policy
Use of monetary supply, interest rates, exchange rates & credit control to influence aggregate demand
What is quantitative easing
Policy whereby government prints more money in order to stimulate economy
What monetory control aims to control?
Inflation
Why we need to control inflation
- provide greater economic certainty
- business confidence, stimulate investment
- stimulate economic growth & international competitiveness (should provide higher income)
What happen in recession
- Consumer demand/confidence falls
- Investment project begin to look unprofitable
- Orders are cut, inventory level reduced
- Some unable to sell inventory become insolvent
Depression
Extreme recession that lasts three or more years
What happens during recovery
- Governments look to boost demand (fiscal/monetary policy)
- Lack of confidence at first but due to gov intervention, confidence rises
- Investment flows into economy
What happens during boom
- Capacity & labour fully utilised
- Further rises in demand –> rise in prices
- Business is profitable & high inward investment occurs
Cost push inflation
Inflation resulting from increase in the cost of production of goods & services, through escalating prices of imported raw material/wage increase
[whether or not they in short supply]
