Studied by 3 people
what are the macroeconomic objectives?
economic growth (4%), unemployment (4%), inflation (2%), balanced trade, distribution of income
what are the injections?
investment, government spending, exports
what are the withdrawals?
savings, taxation, imports
methods of measuring GDP
output, income, expenditure
why use index numbers?
to make numbers easier to read, to allow for quick data comparisons (always has a value of 100)
index number formula
(raw number / base year number) x 100
aggregate demand formula
AD = C + I + G + (X - M)
determinants of consumption
disposable income, interest rates, consumer confidence, asset prices
determinants of savings
level of real disposable income, interest rates, CCI, range of financial institutions, tax incentives, age of population
determinants of investment
interest rates, business confidence, corporation tax, spare capacity, competition, price of capital and the accelerator effect
government spending examples
current spending e.g. public services, capital spending e.g. infrastructure, welfare, debt interest payments
what is the budget deficit? (surplus opposite)
when G > taxation in a fiscal year
what is the national debt?
total stock of debt over time, accumulation of budget deficits
determinants of net exports (X-M)
real disposable income abroad and at home, exchange rates, protectionism, inflation rates
what are the costs of production?
wages, raw materials, oil prices, business tax, import taxes
what happens at productive efficiency?
increased labour productivity, increased I, better infrastructure, increased quantity of labour, competition incentives
what is the macroeconomic equilibrium?
when AD= AS
what makes AD shift to the right?
increase in growth, lower unemployment, increased inflation, trade position worsens
what makes AS shift to the right?
increase in growth, lower unemployment and inflation, trade position improves
what is the multiplier effect?
a change in the AD formula would lead to a greater change in national output
multiplier effect formula
1 / (1 - MPC) MPC= marginal propensity to consume
what is the accelerator effect?
change in investment can be directly linked to changes in the rate of GDP growth
what is the negative output gap? (positive is opposite)
where actual output is less than potential output
what are the measures of economic growth?
GDP, GDP/capita, GNI, green GDP
cons of measuring GDP
double counting, informal activity, errors in collection, negative externalities, income inequality, output produced, living standards
causes of economic growth
lower interest rates, lower tax, higher confidence, higher G, weaker exchange rate
components of the economic cycle
boom, recession, trough, recovery
benefits of economic growth
higher disposable income, higher employment, higher profits, increase in tax revenue
costs of economic growth
inflation, income inequality, environmental costs, current account deficit
unemployment measurements and cons
labour force survey (LFS), claimant count : sampling errors, cost, hidden unemployed, inactive groups
unemployment rate formula
(unemployed / economically active) x 100
claimant count cons
hard to compare with other countries, not everyone will/can claim, could be subject to fraud
what is cyclical unemployment?
demand deficient: unemployment in a recession due to lack of AD
what is real wage unemployment? (classical)
when wages are forced above equilibrium creating an excess supply of labour
what is structural unemployment?
immobility of labour due to long term change in the structure of an industry. occupational: skills mismatch, geographical: workers physically can’t move
what is frictional unemployment?
movement between moving from one job to another
what is the natural rate of unemployment?
4% due to the different types of unemployment
unemployment costs
lost output, deterioration of government finances, social costs, costs to other countries, lost income
unemployment benefits
greater pool of workers, low inflation, improved current account position
inflation definition
persistent increase in prices in an economy in a year
what is the consumer price index (CPI)?
when the prices of a basket of the most popular goods and services are weighed
CPI cons
inflation rates could differ, certain goods’ prices fluctuate differently, doesn’t consider housing costs, the basket may update slowly
what is demand-pull inflation?
when the price level rises due to an increase in demand
what causes demand-pull inflation?
lower interest rates, lower tax, increased confidence, increased G, weak exchange rate
what is cost-push inflation?
when price level rises due to an increase in production costs
what causes cost-push inflation?
increase in raw material price, increased wages, increased business tax e.g. VAT, increased cost of imports
costs of inflation
low purchasing power, erosion of savings, lower export competitiveness, wage spirals, fiscal drag
benefits of inflation
workers have higher wages, natural consumption, incentive to increase output, keeps unemployment low in a recession, reduces real value of debt
cons of deflation
delayed spending, positive real interest rates, increased real value of debt
pros of deflation
falling prices for consumers, falling input prices for firms
types of government spending
current spending, capital, welfare, debt interest payments
types of indirect tax
cigarette duty, alcohol duty, sugar tax, fuel duty, VAT
types of direct tax
income tax, corporation tax
reasons for taxation
raising government revenue, influence the economy, reduce income inequality, correct market failure
average rate of tax formula (ART)
( tax paid / income ) x 100
what is progressive tax
as income rises, ART rises
what is regressive tax
as income rises, ART falls
what is proportional tax?
as income rises, ART stays the same
what are fiscal policies?
changes to government spending and taxation to influence AD
why have expansionary fiscal policies?
to boost growth, reduce unemployment, increase inflation, redistribute income (multiplier effect)
expansionary fiscal policy examples
reduce income tax, reduce corporation tax, increase government spending
why have contractionary fiscal policies?
to reduce inflation, reduce national debt, redistribute income, reduce current account deficit
contractionary fiscal policy examples
reduce income and corporation tax, increase government spending to move the LRAS curve to the right
cons of expansionary fiscal policies
demand pull inflation, current account deficits, time lags
expansionary fiscal policies evaluation
depends on: output gap, multiplier size, CCI, government finances
what are automatic stabilisers
fiscal policy tools to influence GDP and counter fluctuations in the economic cycle e.g. tax systems and welfare systems
what is a budget deficit?
when G > tax revenue in a year
budget deficit pros
higher growth, lower unemployment, benefits of increased spending, redistribution of income, tax cut incentives
budget deficit cons
deterioration of finances, inflation, current account deficit
what is a budget surplus?
when tax revenue > G in a year
budget surplus pros
confidence in finances, flexible fiscal policies, lower inflation, lower current account deficit
budget surplus cons
demand side shock (lower growth and increased unemployment), risk of income inequality
what is monetary policy?
changes to interest rates, the money supply, and the exchange rate by the central bank to influence AD
why are expansionary monetary policies used?
to increase inflation, increase growth, reduce unemployment
why are contractionary monetary policies used?
to reduce inflation, reduce excess debt, reduce current account deficit
expansionary monetary policy methods
lower credit card interest rates, lower saving rates, lower mortgage rates, weaker exchange rates
expansionary monetary policy cons
demand pull inflation, current account deficits, liquidity traps
contractionary monetary policy pros
lower inflation, discourage debt, sustainable borrowing, encourage savings, more affordable housing, reduce current account deficit
contractionary monetary policy cons
lower growth, higher unemployment, reduces I
what are supply side policies?
policies designed to increase the productive capacity of the economy shifting the LRAS to the right
interventionist supply side policies
spending on education or training, spending on infrastructure, subsidies to firms to increase I
market based supply side policies
tax reform, labour market reform, competition policy
what are the common trade-offs?
growth, unemployment, income inequality vs. inflation, current account position, labour productivity
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Flashcard (20)