Macro loose ends

What is the wealth effect?

Prices decrease so purchasing power of income increases, people spend more which boosts AD

What is the trade effect?

When firms exports become more competitive they will increase AD and vice versa

What is the interest effect?

When consumption is low interest rates are also low, hopes to increase consumer AD

When does AD shift in general?

When C, I, G, (X-M) change independent of price level

What are the determinants of consumption?

Level of real disposable income → Income tax

IRs and Availability of credit

Consumer confidence

Asset prices

Household indebtedness

What are the determinants of saving?

Level of real disposable income

Interest rates

Consumer confidence

Range/Trustworthiness of financial institutions

Tax incentives e.g ISA

Age structure of population

What are the determinants of investment?

Interest rates

Business confidence

Corporation tax

Spare capacity

Level of competition

Price of capital

What are examples of government spending?

Current spending - Maintenance of public services

Capital spending - e.g infrastructure projects

Welfare spending - e.g benefits and pensions

Debt interest payments

What is national debt?

Total stock of debt over time, accumulation of budget deficits

What are the determinants of net exports?

Real disposable income at home and abroad

Strong or weak ER

Protectionism at home or abroad

Relative inflation levels at home

What is SRAS shifted by (classical)?

Costs of production e.g wages, raw materials, oil price, business tax and import prices

What is LRAS shifted by (Classical and Keynes)?

Q²Cell and productive efficiency

Labour productivity, investment, infrastructure, Q of labour and new resource discoveries

What do classical economists believe about LRAS?

The maximum output over a period of time at sustainable levels

What does Keynes believe about LRAS?

There is not one LR level of output the economy produces at

Curve bends due to level of spare capacity in the economy

What is the multiplier effect?

Process where any change in components of AD will lead to an even greater change in national output

What is the accelerator effect?

Changes in investment which are directly linked to changes in the rate of GDP growth

How do we calculate multiplier effect?

1/1-MPC

When does a negative output gap occur?

Where actual output is less than potential output

When does a positive output gap occur?

Where actual output is greater than potential output

What are drawbacks of GDP as a measure for growth?

Risk of double counting

Informal activity

Errors in data collection

Negative externalities

Income inequality

Output produced

What are drawbacks of GDP per capita as a measure for growth?

Same as GDP

Factor income abroad

Influence of FDI

What is GNI?

The total value of FOPs no matter where they come from

GNI=GDP+Net factor income

What is green GDP?

GDP that accounts for the environmental costs of production

Green GDP=GDP-Environmental costs

What are causes of SR (Actual) Growth?

Lower IRs

Lower income tax

Higher confidence

Higher gov spending

Weaker exchange rate

What are causes of long run (potential) growth?

Increased labour productivity

Increase in workforce size

Investment

Infrastructure

Increased competition

New resource discoveries

What are the types of shocks that cause recession?

Demand side and supply side shocks

What are costs/drawbacks of economic growth?

Inflation

Income inequality e.g rural vs urban

Environmental costs

Current account deficit

What are some evaluation/considerations for economic growth?

Sustainable growth

Inclusive growth

Balanced growth

Role for private sector/government

What are the 2 ways of measuring unemployment?

Labour force survey and claimant count

What are features of the labour force survey?

Number of employed, unemployed and economically inactive

Unemployment rate = unemployed/economically active x100

What are features of the claimant count?

Number of people claiming unemployment benefit

BUT:

Difficulty of comparison, not everyone can or will claim and could be subject to fraud

What are drawbacks of both unemployment measurements?

Large sample - errors

Cost

Discouraged workers (Hidden unemployed)

Inactive groups

The under-employed

Disparities (Differences in unemployment between groups/regions)

What are the types of unemployment?

Disequilibrium:

Cyclical and real wage

Equilibrium:

Structural, frictional and seasonal

What is cyclical unemployment?

When there is unemployment due to lack of AD in a recession

What is real wage unemployment?

When wages are forced above equilibrium so there is excess supply of labour

What is structural unemployment?

Immobility of labour when the structure of an industry changes

What is frictional unemployment?

When people are between jobs

What is seasonal unemployment?

When the season changes, your job becomes redundant and you are unemployed

What is the natural rate of unemployment?

Unemployment when the labour market is in equilibrium

What causes the natural rate of unemployment?

Generous benefits, excessive labour market regulation, lack of transport, lack of training

What are benefits of unemployment?

Greater pool of workers, low inflation, improved current account, time for workers to find suitable job

What are costs of unemployment?

Lost output, deterioration of gov finance, social costs/costs to other countries, lost income and hysteresis

What are benefits of inflation?

Workers with higher wages, consumption is natural, firms encouraged to increase output, keeps unemployment low through recession, reduces real value of debt and improvement of gov finances

What are costs of inflation?

Lower purchasing power, erosion of savings, lower export competitiveness, wage/consumer price spirals, fiscal drag and inflationary noise

Why is short term deflation beneficial?

Falling prices and falling input prices

Why is long term deflation bad?

Deflationary spiral (Delayed spending), positive real IRs and increases value of real debt

How do we calculate the average rate of tax?

Tax paid/Income x100

What are cons of expansionary fiscal policy?

Demand pull inflation, current account deficit, worsening of gov finances, crowding out effect, X-Inefficiency and Time Lags

What are some automatic stabilisers (Fiscal policy tools)?

Progressive income tax system

Welfare benefits

What are the 2 types of budget deficit?

Structural: Budget deficit at full employment

Cyclical: Budget deficit in a recession

What are pros of budget deficit?

Higher growth and lower unemployment

Increased benefits of gov spending

Redistribution of income

Incentives of tax cuts

Crowding in

What are cons of budget deficit?

Deterioration of gov finances

Inflation conflict

Current account deficit conflict

Crowding out effect

X-inefficiency

What are pros of budget surplus?

Confidence in gov finances

Flexibility with fiscal policy

Less crowding out/X-inefficiency

Lower inflation and CA deficit

What are cons of budget surplus?

Demand side shock

Ignored LR returns of increased gov spending and lower taxation

Incentive distortion of increased tax

Risk of income inequality

What does expansionary MP aim to do?

Increase inflation and AD

Increase growth

Reduce unemployment

What does contractionary MP aim to do?

Reduce inflation

Prevent asset and credit bubbles

Reduce excess debt and promote saving

Reduce current account deficit

What does the expansionary MP transmission mechanism do?

Banks cut IR, increases C

Banks lower saving rates, increases C

Banks lower mortgage rates, increases C

Banks lower rates on business loans, increases investment

Weaker exchange rates, increases exports

What are cons of expansionary MP?

Demand pull inflation and current account deficit

Liquidity trap

Negative impact on savers

Time lags

What is some evaluation of expansionary MP?

Size of output gap

Consumer and business confidence

Banks willingness to lend

Size of rate cut