Economics Flashcards

Define basis point

1 basis point = 0.01%

interest rate rise from 10% to 11% is 100 basis point increase

Define Consumer Price Index

Average change in prices paid for a basket of goods over time (includes volatile items such as fruit and veg).

Define Average Propensities to Consume and Save

Measures how individuals allocate their income between consumption and savings.

Define Non-Accelerating Inflation rate of Unemployment

The lowest unemployment rate that does not cause inflation to accelerate.

Define Stagflation

When the economy is experiencing high inflation and unemployment, and low economic growth at once.

Define Structural Deficit

When government spending is greater than revenue (budget deficit), despite the economy operating at full capacity.

This contributes to increased foreign debt and limit government flexibility during economic shocks.

Explain the Multiplier Effect

k = 1/(1-MPC)

k - Keynesian multiplier

MPC - Marginal Propensities to Consume

decreased MPC → smaller multiplier → smaller change in AD

Explain cyclical and structural factors affecting AD and AS

Cyclical → movement along the curve

• - price level changes: interest rates, consumer confidence, gov spending/taxation

Structural → shifts the curve

• - productive capacity

• - production costs

• - long-term consumption

Explain the role of Automatic Stabilizers in the Fiscal Policy

Automatic Stabilizers change government revenue and expenditure in response to economic activity and reduce fluctuations in aggregate demand without policy changes.

• - decreased income → progressive income tax decreases → disposable income is preserved and AD fall is slowed

• - increased unemployment → more people receive unemployment benefits → disposable income is preserved and AD fall is slowed

Explain all types of unemployment

Natural Unemployment - target rate is the NAIRU (4% - 4.5%):

Structural - when skills don’t match available jobs (underutilization)

Frictional - when people are transitioning jobs

Seasonal - employment affected by time of year e.g christmas casual

Cyclical Unemployment - caused by insufficient economic growth

Hidden Unemployment - underemployed or not participating

Long-term Unemployment - unemployed for a large period of time, usually greater than 12 months

Explain all types of inflation

Underlying - inflation excluding volatile items e.g fresh produce and fuel

Headline - aggregate change in prices including volatile items

Demand-pull - demand increase → price increase

Cost-push - production cost increase → price increase

Imported - import price increase → production cost increase → domestic price increase

(opposite of inflation is disinflation)