Economics Macroeconomics

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  • Created by: SanaaA156
  • Created on: 17-04-18 19:13
Define macroeconomics?
Branch of economics concerned about large scale or general economic factors.
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What are the four key objectives of macroeconomic policy?
*Price stability *Growth in real GDP *Falling/rising employment *Improved competitiveness
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Define GDP.
A monetary measure of all the outputs of the economy.
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Explain the circular flow model.
Households pay taxes to the government the government purchase goods and services from firms firms pay taxes to governments and the government give social transfers to households. Firms pay wages to households and households purchase g/s from firms.
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Define Injections and give three examples.
Money coming in. Investments. Exports of g/s. Government spending.
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What is the GDP equation ?
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Define national income.
Monetary value of the flow of g/s produced in an economy over a time period.
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What is the national income used to measure?
The level of growth of national income.
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Define real and nominal.
Real data is adjusted for inflation. Nominal data is not inflation adjusted.
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Define gross national income.
GDP plus the net property income from overseas.
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Define remittance.
Transfer of money.
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Explain purchasing power parity.
how amny units of one countries currency are needed to buy the same basket of g/s with a given amount of another counties currency.
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Define aggregate demand.
Total level of planned real expenditure on the g/s produced within a country.
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What causes a shifts along the demand curve?
Increase/decrease in the price level.
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What causes a shift of the demand curve?
Increase/decrease in the national output.
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What are four examples of a cause of falling AD?
*Fall in exports *Cut in government spending *Higher interest rates *Decline in household wealth and confidence
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What are four examples of a cause of rising AD?
*Depreciation of the exchange rate *Cuts in direct/indirect taxes *Increase of house prices *Lower interest rates
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What are the key causes of sifts in AD ?
*Changes to monetary policy *Changes to government fiscal policy *Business and consumer confidence
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State some examples of external shocks to AD.
*Large rise/fall in value of exchange rate *Recessions/boom/slowdown *Slump in housing market *Global financial crisis *Large change in commodity prices.
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Define consumption.
Spending on consumer g/s.
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Define marginal propensity to consume.
Change in consumer spending following a change in income.
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What are the factors affecting consumer spending?
*Real disposable income *Employment and job security *Household wealth *Expectations and sentiment *Market interest rates
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Define consumer confidence survey.
Measures a range of consumer attitudes.
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Define savings.
Occurs when people decide to postpone their consumption until a future time.
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Define savings ratio.
Ratio of personal savings to households disposable income.
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What are factors affecting savings?
*Real interest rates *Price expectations *Availability of credit terms *Unemployment/job security *Consumer confidence *Taxation on savings *Need to pay back debt *Trust in savings institutions.
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What are the macroeconomic importance of saving ?
*Business survival *Funding investments *Buffer for consumers.
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Define investments.
Spending on capital goods.
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Define gross investment.
Total investment on new capital inputs.
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Define net investments.
Gross investment adjusted for capital consumption.
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What is the equation for net investments.
NI= Gross investment-capital depreciation.
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What key factors affect business investments?
*Actual and expected demand *Expected profits and business taxes *Interest rates *Business confidence
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What are the advantages of investments ?
*Injection into the circular flow of income *New capital can boosts productivity *Creates extra demand in invesment goods industries *Investment will boost a countries competitiveness.
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What are the economic importance of infrastructure investment ?
*Potential high multiplier effect *Lack ofinfastructure may discourage investment (foreign) *Increases the capital stock/productive potential.
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Define exports.
G/s sold to other countries.
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Define net trade balance.
Value of export g/s minus imported g/s.
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State the factors affecting a nations exports.
*Relative prices of exports in world markets *non-price demand factors *The exchange rate *strength of AD.
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What is a trade surplus ?
X>M AD will increase.
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What is a trade deficit ?
M>X AD will fall.
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What is trade balance ?
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Define public sector debt.
Debt owned by central/local government and by state owned corporations.
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Define private sector debt.
Debt owed by private businesses and households.
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What are the consequences of debt ?
*reduce disposable income *limited business investment *deflation occur if debt worsens
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Define productivity.
Measures the efficiency of the production process.
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What is the equation for output ?
Output= Factor productivity + factor inputs
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A fall in labor productivity leads to
A rise in a firms unit costs of production.
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A rise in labor productivity
Allows a business to pay higher wages and have increased profits
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What does an increase in labor productivity lead to ?
*Decrease inflation *Increased economic growth *Lower unemployment *Improve balance of trade in g/s *rise in spare capacity in the economy *Increase in business investment *Reduced government fiscal balance.
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What is the accelerator effect?
Relationship between planned capital investment and the rate of change of national income. If an industries demand rises quickly the accelerator effects occur. Productive capacity is used more intensively so more is spent on machinery.
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What is the negative accelerator effect ?
Rate of growth of demand in an industry slows than net investment spending often falls.
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What is the multiplier effect?
Change in one components of AD can lead to a multiplied final change in equilibrium level of GDP.
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Define negative/positive multiplier.
P:When an increase/decrease in injection/withdrawals lead to a greater final increase in real GDP.
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Define marginal propensity to save.
Change in savings after a change in income.
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What are the equations to work out MPS and MPC ?
Change in total consumption/change in gross income AND Change in total saving/change in gross income.
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What is the value of the multiplier equation ?
1/Sum of MPS+MPTax+MPImport
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Explain the simple multiplier.
.Assume their are no tax or imports .Savings are leakages .1/1-MPC
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What is the correlation between the multiplier and P.E.D of the AS curve ?
If the curve is elastic their is a high multiplier effect. If the curve is inelastic their is a low level of the multiplier.
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What occurs when the multiplier level is high ?
Plebty of spare capacity to meet demand. MPI is low and tax is low. High propensity to consume any extra income.
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What occurs when the multiplier level is low ?
Economy is close to its boom phase. High propensity to import causing tax leakages. Higher inflation=Rising interest rates which can dampen components of AD.
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Define aggregate supply.
Quantity of g/sthat producers in an economy are willing and able to supply at a given price level.
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Define SRAS.
The relationship between planned national output and the general price level.
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What is the general price level ?
An index that shows the change of prices overtime.
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Explain time lag with reference to LR/SR and AS/AD.
AD(no LR/SR) AS(LR/SR present SR it is fixed LR it is variable)
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What causes an expansion or contraction of the supply curve ?
A change in the GPL.
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What causes a shift of the supply curve ?
Change in resource prices. Business taxes, subsidies, regulations and import taxes. Supply shocks.
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What are external factors affecting AS ?
World oil/gas prices. Energy prices/costs. Mineral/metal prices. Foodstuff prices. Import tariffs/quotas.
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Defne LRAS.
Supply in the long run where F.OP are variable.
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What is a major factor of the LRAS compared to SRAS ?
The LRAS is inelastic.
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What are key factors affecting LRAS ?
Higher productivity of labour and capital. Increased labour market participation. Gains from innovation and enterprise.Capital investment.
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Define trend growth.
Estimated rate of growth of a nations productive potential.
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Explain the Keynesian non linear AS curve.
When spare capacity is high then SRAS will be elastic. The elasticty of SRAS falls as output increases.When SRAS becomes perfectly inelastic the economy is at full capacity or on their PPF boundary.
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Define full employment.
Everyone willing and able to work at current wage rates is in employment, excluding those who are fictionally unemployed.
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Define economic growth.
Long term expansion of productive potential.
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Define LT and ST economic growth.
ST: annual % change in real national output. LT; increase in potential GDP outward shift of LRAS.
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Explain ST economic growth.
Cyclical changes in real GDP. Chnages in AD (C,I,G,X,M). Change in SRAS. ST external shock to s/d. ST policy changes.
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Explain what causes LT economic growth.
Potential output/trend growth. productivity of labour and capital. Technologoical progress and enterprise strength. Changes in labour force. Investment rates.
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What are some factors affecting SR economic growth.
Intrest rates set by central banks. Fiscal policy. Exchange rate. Commodity prices. Trading conditions in other countries. Business/household confidence.
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What are factors affecting LR economic growth ?
invesment. Productivity. Labour supply. Research. Innovation. Enterprise.
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A rise in productive potential leads to ....
outward shift of LRAS and a higher level of AD can be met.
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What are key ways of boosting economic growth ?
Expanding the capital stock. Increasing the active labour supply. Extracting and selling national resources. Improving factor productivity.
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What are the benefits of economic growth ?
higher living standards. Employment effects. Fiscal divide end. Accelerator effect.
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Explain the virtuous circle of economic growth.
Higher national output of GDP.Increased capital spending. Increased output per head. Increased wages/real incomes for people.Rising consumer spending on g/s.
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What are benefits associated with technological change.
rise in productivity. New g/s. Improved health.
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What are the three types of growth ?
Balanced, sustainable and inclusive.
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What has caused growth in B.R.I.C countries ?
Improvement of trade terms. Improved governance. Foreign direct investment. Intra-regional trade. Improved macroeconomic management. Rising per ca-pita incomes.Less dependent on primary commodities.
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How is economic growth sustained ?
Building trust/social capital. Growing intra-regional trade. Improving institutions. Growing a dynamic private sector. Macro policies to control inflation. Focus on addressing equity fairness.
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What policies can be used to attract foreign direct investment ?
Flexible labour market.Availability of low cost labour. Special economic zones. Attractive rate of corporation tax.
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What effect does economic growth have on society ?
Risk of higher inflation/interest rates. Environmental effects. Inequalities of income and wealth.
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What is the importance of savings and investments ?
Increase national savings. Increase in net investment. Larger capital stock. Rise in real GDP/GNI. Increased per capita incomes.
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Define Boom Recession Recovery and Depression.
Boom- A period of growth of real GDP higher than long term trend. Recession- 2 consecutive periods of negative output. Recovery-After a recession where real GDP and employment rises. Depression-Prolonged downturn in an economy.
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Define output gap- positive and negative.
Difference between actual and potential GDP. Negative output gap GDPpotential.
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What are the problems with measuring the output gap?
Innacurate data on labor force. Problem accurately measuring productivity.
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What are some problems in forecasting real GDP growth ?
Uncertain business confidence. Fluctuations in exchange rate. External events. Uncertain reactions to macro-policy changes. Rate of business job creation is hard to forecast.
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What are demand side shocks ?
Demand side shocks affect one or more component of AD.
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What are supply side shocks ?
Supply side shocks affect SRAS and can effect LR productive potential.
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What are four causes of a recession ?
External events. Tightening macro-policy. Fall in asset prices,supply of credit. Drop in (business/consumer) confidence.
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What are short term effects of a recession ?
Business profits and investment falls. Unemployment. Government finances. Inflation.
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What are long term effects of a recession ?
Rise in structural LT unemployment. Low investment. Reduced capital stock. Budget deficit/national debt.
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What are the LT social consequences of a recession ?
Falling real wages hits living standards. Equality of income and wealth. Social costs arising from relative poverty.
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What is hysteresis ?
When history effects current events.
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What is creative destruction ?
How capitalism leads to a changing structure of the economy.
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What are the four main macroeconomic indicators ?
Rate of economic growth. Rate of inflation. Level of unemployment. State of the balance of payments.
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Explain the Retail Price Index.
Two surveys. Living Costs and food survey Price survey. The living cost and food survey is used to find what people spend their money on then each is given a weighing. The price survey measures the change in price of 700 most commonly used g/s.
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Explain the Consumer Price Index.
Measures the cost of living and reflects the changing general price level.
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What is inflation ?
Sustained increase in the cost of living or the general price level leading to a fall in the purchasing power of money.
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How do you calculate inflation ?
Annual % change in consumer prices.
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Explain cost push inflation
When consumers experience rising prices due to the increase in a firms production cost. Causes an inward shift in supply.
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Explain demand pull inflation.
A peiod of inflation that arises from the rapid growth of AD. Outward shift in demand.
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What are the main causes of inflation.
Demand pull. Cost push. Administered prices.
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What are some internal examples of inflation ?
Surge in property prices. Higher wages/labour costs. Boom in credit supply. Rise in business taxes.
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What are some external examples of inflation ?
Increase in gas/oil prices. Inflation in global commodity prices. Depreciation rate. Higher inflation in other countries.
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Why is high inflation an economic problem ?
Inequality. Falling real incomes. Negative real interest rates. Increased cost of borrowing. Risk of wage inflation. Business competitiveness. Business uncertainty.
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Why is inflation hard to forecast ?
Volatile global energy prices. Change in value of currency. Uncertain growth of AD. Relative price of food. Government taxes change.
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What are four macroeconomic policies to control inflation ?
Fiscal. Monetary. Supply-side policies. Direct controls.
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What are some limitations of C.P.I as a measure of inflation ?
Not fully representative. Spending patterns. Changing quality of g/s.Slow respond to new products.
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Define deflation.
Persistent fall in a countries GPL.
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Other cards in this set

Card 2


What are the four key objectives of macroeconomic policy?


*Price stability *Growth in real GDP *Falling/rising employment *Improved competitiveness

Card 3


Define GDP.


Preview of the front of card 3

Card 4


Explain the circular flow model.


Preview of the front of card 4

Card 5


Define Injections and give three examples.


Preview of the front of card 5
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