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Economics 9708 > Unit 4 - The Macroeconomy > Flashcards

Unit 4 - The Macroeconomy Flashcards

1
Q

How is the level of activity in the economy determined?

A

The interaction of aggregate demand and supply (AD AS)

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2
Q

Define

Aggregate Demand

A

The total demand for final goods and services in the economy at a given time and price level

The amount of goods and services that will be purchased at all possible price level

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3
Q

Equation

Aggregate Demand
and what does each represent

A

AD = C + I + G + (X-M)

Consumption/Consumer Expenditure
Investment - spending by the private sector on capital goods
Government Spending
Net export = Exports - Imports

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4
Q

Why can’t you explain the downward slope of Ad with the same reasons as an individual demand curve?

A

A change in price level implies that many prices are changing, including wages paid to workers therefore incomes are changing,(C=a+bY) and consequently it is not possible to assume prices and incomes remain constant

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5
Q

Three reasons for a downward-sloping AD curve

A
  1. Wealth effect
  2. Interest rate effect
  3. Net exports effect
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6
Q

Explain

The Wealth effect on AD

A

the AD curve works under the assumption that the governments supply of money/economy’s wealth is held constant. As the price level rises the wealth of a country declines as the purchasing power of the currency falls. so if buyers become less wealthy they can not buy as much as they used to

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7
Q

Describe

The Interest effect on AD

A

As the price level rises, consumers requre more money to handle they transactions, however the supply of money is still fixed. increased demand for a fixed supply of money leads to increased interest rates

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8
Q

Describe

Net exports’ effect on AD

A

if the price of domestic price levels increases, demand increases for imports and because domestic goods have a higher price level, demand for exports fall as the goods are now expensive to foreigners

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9
Q

Define

Aggregate Supply

A

The total output that firms in a economy are willing and able to supply at diffrent price levels in a given period of time

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10
Q

Define

SRAS

short run aggregate supply

A

output which will be supplied at different price levels in a period of time when the factors of production remain unchanged or fixed

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11
Q

Describe

Why SRAS and Price level have a direct relationship?

A

higher price enables firms to meet extra costs and enjoy higer profit margins and producers are more willing and able to supply more goods

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12
Q

State

Reasons for SRAS and Price levels’ positive relationship

A
  1. Profit effect
  2. Cost effect
  3. Misinterpretation effect
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13
Q

Describe

Profit effect on SRAS

A

price level increses with the price of factor of production held constant, the gap between output and input prices widens therefore profit increases

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14
Q

Describe

Cost effect on SRAS

A

Average cost may rise as output increases, even though the rates and raw materials stay constant eg overtime and the miscellaneous costs must be paid. To compensate producers will require higher prices

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15
Q

What are *Reflationary Monetary policies *

A

When government reduces the interest rates and increases the money supply in the economy

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16
Q

What are Reflationary Fiscal Policies ?

A

Governments reduce taxes,
increased government expenditure ( subsidies)

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17
Q

Define

Inflation

A

A persistent increase in the general price level that leads to a fall in the value of money

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18
Q

What are the main economic problems?

A

Price stability
Exchange rate Stability
Unemployment
Equity
Balance of payment stability
Economic growth and development

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19
Q

What are some qualities of inflation?

A

Price increase must be on a wide range of items
Must be sustained over a period of time
If low and steady it allows businesses to plan with confidence

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20
Q

What are the three main causes of inflation?

A

Cost push
Demand pull
Monetarist

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21
Q

What are the three degrees of inflation?

A

Creeping/gradual inflation - <10
Strato-inflation - high but fluctuating rate of inflation >10
Hyperinflation - short lived, over 50%

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22
Q

What are the two types of inflation?

A

Suppressed inflation - caused by government prices that prevent the price mechanism from working
Stagflation/slumpflation - during periods of recession and can be attributed to economic stagnation

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23
Q

Describe

Cost Push inflation

A

Supply side inflation , due to changes in the aggregate supply factors leading to rises in cost of production and therefore price level
Bad inflation

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24
Q

What are the causes of cost push inflation?

A

Wage cost
Oil prices
Currency depreciation
Imported inflation
Profit margins and indirect tax

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25
#Explain Effect of wage cost
Wages and salaries account for a large portion of national income, and increase the cost of production when wages increase. When it is persistent it causes cost push inflation As price level increases workers, demand more money, which increases price level, causing a wage spiral
26
#Explain Effect of Oil prices on cost push
Oil is used directly and indirectly, especially in transport and as a raw material, and when oil prices rise, inflation
27
#Explain Currency depreciation effect on cost push
Loses its value or purchasing power heavily affecting countries that rely heavily on imported materials
28
#Explain The effect of imported inflation on cost push
If a country relies heavily on imported raw materials, inflation from the country of import can cause increase in cost of production and therefore an increase in price level.
29
#Explain The effect of profit margins and indirect tax on cost push
In an attempt to meet their profit targets and are likely to increase prices especially if demand is inelastic, which will increase price level as consumers continue to buy and prices continue to rise
30
#Describe Demand Pull Inflation
Demand side inflation due to changes in factors affecting aggregate demand pulling price level up by the price mechanism Good inflation
31
What are the causes of demand pull inflation?
Reflationary polices by government Increased consumer spending
32
#Explain Effect of Reflationary fiscal and Reflationary monetary policy on demand pull
Fiscal - government reduces taxes leaving consumers with more disposable income allowing them effective demand for more goods. They can also increase government expenditure leading to a multiplier effect leading to a further increase in AD
33
#Explain Effect increased consumer spending
Aggregate Demand increases when there is greater consumer confidence due to economic and political stability increasing propensity to consume
34
#State Fishers equation
MV=PT Money supply Velocity of circulation Price level Number of transactions
35
What does the quantity theory of money show?
How the reckless printing of money to pay debts back or finance campaigns, can result in an increase in general price level and lead to inflation that devalues the money
36
#state Possible benefits of inflation
Stimulating output - optimism about the future Reduce debt burdens - nominal interest rates do not adjust to inflation Prevent some unemployment -
37
Factors affecting the consequences of inflation
1. The cause of the inflation - Demand pull is good; cost push is bad 2. The rate of inflation - high inflation causes more damage 3. Whether the inflation rate is accelerating or stable - firms need time to adapt 4. Whether the inflation rate is anticipated or not - uncertainty reduces expenditure 5. How the inflation rate compares to other countries - other suffer more; your goods are still competitive
38
#Describe The misinterpretation effect on SRAS
Producers confuse the increase in price level with popularity of their good and may be encouraged to produce more which will reduce profits in the long run
39
#Define LRAS
Long run aggregate supply The output that firms will produce after the price level and factor prices have fully adjusted after any shift in AD Maximum potential output possible with given resources and technology at full employment
40
#Describe The shapes at each point of the Keynesians LRAS and what they mean
Initially it is perfectly elastic so output can be increased without raising the prices, for example the existence of spare capacity. Eventually firms begin to experience shortages and due to the large demand, workers require more wages (elastic). Eventually they reach maximum output and full employment and price level increases from there and the graph is perfectly inelastic
41
Why is the Neo-Classical LRAS Curve perfectly inelastic?
They believe that in the long run labour market will be in equilibrium and economy will always be operating at full capacity where AD=AS at full employment
42
What is the cause of a shift in the LRAS?
A change in quantity and or quality of resources (factor productivity)
43
What are the causes of of an increase in quantity of resources in the long run?
Net Immigration Increased retirement age More Women in the labour force Net investment Discovery new of resources Land reclamation
44
What are the causes of an increase in quality of factors of production in the long run?
Improvement in education Advancements in Technology
45
# State Consequences of inflation
1. A reduction in net exports - goods are less competitive in international markets 2. Unplanned redistribution of income 3. Menus costs - changing prices 4. Shoe leather costs - costs of moving between asset types 5. Fiscal drag - (bracket creep) individuals and firms are dragged into higher tax brackets 6. Inflationary noise - higher price level confused for more demand for goods 7. Inflationary spiral 8. Discouragement of investment
46
#Define Deflation
Sustained fall in the price level that leads to a rise in the value of money
47
#Define Disinflation
A fall in the rate of inflation There is still inflation but the rate of increase falls
48
#State Causes of deflation
Good deflation (AS) - advancements in technology, lower cost of production Bad deflation (AD) - fall in demand, more unemployment
49
Positive consequences of deflation(AS)
Lenders receive more money - increased real value Increased employment
50
Negative consequences of deflation (AD)
Consumers may delay their purchases for times when prices are even lower. Firms see low demand and are unlikely to reinvest, increase unemployment, further reducing demand causing a deflationary spiral
51
How to measure CPI and RPI
a) Selecting the base year - this base year is given an index of 100 b) Selecting the "basket" of goods - is determined by family expenditure survey in which about 7000 households provide an annual record of their spending over a fortnight. c) Attach weights to the different categories of goods d) Calculations of price relatives for goods involved in the "basket" - this is done by calculating the percentage changes in the base date prices. e) Determining the weight of goods and services - the weights are determined by the relative expenditure on the various goods and services by the households
52
Problems of using CPI/RPI
1. Time factor - changes in taste and new goods are not accounted for properly 2. Quality changes - increases in price accompanied by better quality are interpreted as inflation 3. Taxes and benefit - changes in tax and tax allowances are not considered 4. High rates of inflation- difficult to measure annual rate 5. Political implications - data may be changed by institutions as the state of an economy is liked with their success. Assists and pensions will have to be index linked 6. Statistical errors
53
# Equation Rate of inflation
Current year index - Base year Index
54
# Equation Base year index
Sum of indices / sum of items Should equal 100
55
#Equation Weighted index
Weight x index
56
#Equation Subsequent years index
Sum of weighted index / sum of weights
57
What are the three ways of measuring national income?
Expenditure, income and output
58
What is a closed economy?
No trade with other economies
59
What are the assumptions of a closed economy?
1. All goods produced are sold 2. All incomes are spent 3. No trade with the outside world 4. There are only household and Firms
60
What is an open economy?
An Economy that does trade with other economies
61
What are injections and leakages
Injections add income to a particular sector Withdrawals/Leakages remove income from a particular sector
62
#State Withdrawals and Injections of an Open economy
Injections - I + G + X Withdrawals - S + T + M
63
#state Injections and Withdrawals of a Closed economy with government (3 sector)
Injections - I +G Withdrawals - S+ T
64
#state The withdrawals and injections of a closed economy
Injections - I Withdrawals - S
65
# define National Income
Total amounts of goods and services that an economy can produce over a period of time (usually yearly)
66
#Equation Savings
S = -a + sY a is negative because it is dissaving
67
Why is investment perfectly elastic?
It is not based on changes in GDP and is dependent on decisions that are subjective
68
Methods of measuring income equilibrium
1) Injection and Withdrawal 2) Using the AD approach
69
#Define Unemployment
When people who are willing, able and available for work are unable to find work
70
Who are economically inactive?
People who are not working and not trying to find employment Eg. Homemakers, students, early retirement
71
What is the labour force participation rate?
Percentage of the total working age who are part of the labour force
72
Factors affecting labour force level?
Total population Age distribution School School leaving age Retirement age Attitudes towards women working Higher education opportunities Post retirement employment Part time opportunities
73
what is the unemployment rate?
Percentage of people in the labour force without a job but registered as being willing and available to work
74
What is stock and flow?
Stock is at a particular time Flow is over a period of time
75
Who are discouraged workers?
Those who give up on finding jobs and therefore are not long unemployed because they are not willing to
76
Who are discouraged workers?
Those who give up on finding jobs and therefore are not long unemployed because they are not willing
77
How does the claimant count measure unemployment?
It’s counts those who register as unemployed in order to claim benefits
78
Advantages and disadvantages of the claimant count?
Advantages - cheap, quick Disadvantages - counts frauds, misses out, those who are old and young, full time students looking for jobs, those with non-unemployment income that is too high
79
How does the labour force survey (LFS) measure unemployment
Measures unemployment based on a survey that identifies people who are actually seeking jobs
80
Advantages and disadvantages of LFS?
Advantages - includes groups that are forgotten by claimant, allows for international comparison, more information is found (qualifications ) Disadvantages - Data is more expensive, time cons to collect, practical problems with data collection, sampling error
81
What are the the three types of Unemployment?
1) Frictional 2) Structural 3) Cyclic
82
What is frictional unemployment and examples?
Temporary unemployment that arises when people are between jobs Voluntary Search Causal Seasonal
83
What is Structural Unemployment and examples?
Caused by changing of the structure of economic activity Regional Technological International (manufacturing in another country)
84
What is cyclic unemployment?
Demand side unemployment caused by a fall in aggregate supply of labour
85
Consequences of unemployment ?
• Lose wages, can’t afford basis news or no long contribute to the economy • Erosion of skill making them less employable (*Hysteresis*) • cost employers money and time, and constant termination cause a deterioration in corporate brand • Output falls, Consumptionfalls , tax reduces, government can’t spend money on other problems •increases in crime, political instability and scarce jobs allow for bad worker ing decision
86
What makes unemployment is significant?
Rate , Duration and type
87
#Define Labour force
Total number of workers available for work 18 - 60 years
88
Factors affecting Labour force
Total population Age distribution School leaving age Retirement age Attitudes towards women working Higher education opportunities Post retirement employment Part time opportunities

Economics 9708 (5 decks)

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