1
Q
What is the aggregate demand equation?
A
AD = C + I + G + (X - M)
2
Q
Aggregate demand definition
A
The total expenditure on a country’s goods and services at a given price level in a given time period
3
Q
Aggregate demand and the download slope
A
- Wealth effect
- Trade effect
- Interest effect
4
Q
Determinants of consumption
A
- Level of real disposable income
- Interest rates
- Wealth (asset prices)
- Consumer confidence
- Household indebtedness
- Anticipated inflation
5
Q
Determinants of saving
A
- The level of real disposable income
- Interest rates
- Consumer confidence
- The range and trustworthiness of financial institutions
- Tax incentives like ISAs
6
Q
Determinants of investment
A
- Interest rates
- Business confidence
- The level of corporation Tax
- Capacity utilisation
- The rate of growth of technology and competition
- The price of capital
7
Q
Governments spend money in the economy to:
A
- Influence the level of economic activity
- Correct marker failures and improve allocative efficiency
- To reduce inequality and promote equity
8
Q
Determinants of net exports (X - M)
A
- Exchange rates
- Real disposable income earned abroad
- Real disposable income earned at home
- Government restrictions on free trade
9
Q
SRAS
A
Drawn assuming the price of FOP are fixed
10
Q
Determinants of SRAS
A
Think costs of production
- Raw material/commodity prices such as oil
- Business taxes like VAT
- Wages
- Prices of imported commodities/raw materials due to exchange rate changes
11
Q
Classical LRAS
A
The maximum level output an economy can produce using factors of production at sustainable level. The productive potential of the economy
12
Q
Keynesian LRAS
A
The total amount of goods and services that producers are willing and able to produce at a given price level in a given time period
13
Q
LRAS determinants
A
- Labour productivity
- Investment
- Infrastructure improvements
- Competition
- Immigration
- The institutional structure of the economy
14
Q
Macroeconomic equilibrium
A
Where AD = AS
15
Q
Macroeconomic equilibrium (AD shift right)
A
- Growth: increases
- Unemployment: falls
- Inflation: DP inflation rises
- Trade position: worsen
16
Q
Macroeconomic equilibrium (AS shift right). Evaluation
A
- The initial level of economic activity
2. The size of the multiplier
17
Q
Macroeconomic equilibrium (LRAS shift right)
A
- Growth: rises
- Unemployment falls
- CP inflation falls
- Trade position: improve
18
Q
Macroeconomic equilibrium (LRAS shift right): evaluation:
A
The initial level of economic activity
19
Q
Negative output gap
A
Deflationary/recessionary gap
Where actual growth is less than potential growth
20
Q
Positive output gap
A
Inflationary gap
Where actual growth is grater than potential growth
21
Q
Deflationary gap and adjustment in the classical model evaluation
A
- Will wages fall?
- Time
- Is debt fuelled fiscal policy a better solution?
22
Q
Real GDP
A
The total value of all final goods and services produced in an economy at a given price level in a year adjusted for inflation (using constant prices)
23
Q
Economic growth
A
An increase in real GDP or an increase in the productive capacity of the economy
24
Q
Benefits of using national income statistics e.g real GDP
A
- They can be used as a report card for a country, so economic performance over time can be analysed.
- They can use it to enact and inform economic policy
- Individuals, businesses and the government can use them to build forecasting models using e.g extrapolation
- They’re used as a benchmark to evaluate standards of living
25
Problems with real GDP as a measure of economic growth
1. To accurately measure GDP, a lot of data is needed, all coming from varied sources. It's inevitable for inaccuracies to exist.
2. Unrecorded economic activity will mean a country's GDP is lower than what it should be
3. Double counting (using output method): final value of all goods and services measured solves problem
26
Problems with real GDP as measure of living standards
1. Real GDP purely a single measure of living standards. Only measures income
2. GDP only accounts for the quantity of output produced, no information regarding the quality of that output: to overcome, use Green GDP but politically sensitive given GDP figures can massively reduce. Also hard to calculate green GDP exactly given monetary value of negative externalities
3. Doesn't provide information regarding the distribution of income
4. The composition of output produced may not provide an immediate boost to living standards e.g. Capital goods
5. Often calculated by converting from local currency to US dollars to provide international comparisons in days. BUT nominal exchange rates used not real exchange rates
6. Doesn't take account of remittance income: income earned abroad by domestic workers which is often sent back to family members in the home country).
7. Can misguide an increase in living standards by included profit made by MNCs
27
To solve issues 6 and 7 of using real GDP as a measure of living standards
GNI (gross national income) can be used.
Accounts only for income generated by a country's FOP, regardless of location
Remittance income therefore included whilst MNC profit notes
Explains why GNI per capita preferred measure of living standards than GDP in developing countries
28
Causes of short-run economic growth
1. A cut in interest rates (reduces the cost of borrowing, reduces the rate of return on savings, reduces monthly payments for those with tracker or variable rate mortgages, reduces cost of borrowing for firms).
2. Governments could reduce marginal rate of income tax for those in lower income tax bands or increase the income tax free allowance
3. Could reduce level of corporations tax
4. Governments could boost spending
5. The exchange rate could be weakened
29
Causes of long run economic growth
1. Government spending on education
2. Government spending on infrastructure
3. Government offering subsidies or tax allowances to increase the incentive for firms to invest
4. Reducing the marginal rate of income tax
5. Reducing corporation tax
6. Privatisation
7. Deregulation
8. Trade liberalisation
30
Causes of recession - demand side shocks
1. A sudden fall in consumption caused by a housing or stock market crash
2. A sudden fall in investment
3. A sudden fall in spending by foreigners (or a strong exchange rate)
4. A banking or financial crisis
31
Causes of recession - supply side shocks
1. A sudden rise in the price of oil
| 2. A rise in business taxes like VAT
32
Benefits of economic growth
1. A fall in unemployment
2. Higher profits for firms
3. Fiscal dividend for the government
33
Cost of economic growth
1. Can accelerate demand pull inflation
2. No information on output quality
3. Doesn't necessarily mean incomes increasing for all
4. Rising incomes is only one aspect of improving living standards
34
Economic growth evaluation
1. Growth should be sustainable
2. Growth should be inclusive
3. Growth should be sustained
35
Problems with using the CPI to measure inflation
1. The basket of goods and services generated won't necessarily reflect the consumption habits of all consumers in the economy
2. There'll always be issues with how quickly the basket of goods and services is changed according to changes in the consumption habits of a nation
3. The CPI basket is also prone to seasonal fluctuations
36
Causes of demand pull inflation
1. Cut in interest rates (reduces cost of borrowing, the rate of return on savings, monthly payments for those with tracker or variable rate mortgages, cost of borrowing for firms)
2. Reduction in the marginal rate of income tax for those in lower income tax bands or increase the income tax free allowance
3. Reduction in corporation tax
4. Governments boost spending
5. Exchange rate could be weakened
37
Causes of cost push inflation
1. Raw material/commodity prices increase such as oil
2. Business taxes like VAT rise
3. Wages rise
4. Higher prices of imported commodities/raw materials due to a weak exchange rate
38
Costs of inflation
1. Purchasing power falls
2. Menu costs
3. Shoe leather costs
4. Savings are eroded in value
5. Anticipated inflation can create inflation spirals
6. Reduced international competitiveness
7. Fiscal drag
8. Inflationary noise
39
Benefits of inflation
If at low and stable rate and caused by AD
1. Encourages firms to produce more output
2. Workers can receive increases in pay
3. During a recession, can provide flexibility to firms
40
Evaluation of whether inflation is good or bad
1. Demand pull or cost push?
2. The actual rate
3. The stability of the figure
4. Anticipated vs unanticipated inflation
41
Deflation - negative consequences
1. Delayed spending
2. Reduces incentive to borrow as real interest rates always positive
3. Increases the real value of debt
42
Deflation - positive consequence
If generated by supply-side
43
Evaluation of whether deflation is good or bad
1. Demand side or supply side?
| 2. Anticipated vs unanticipated deflation
44
Problems with LFS measure of unemployment
1. The hidden unemployed
2. The economically inactive
3. The under-employed
4. Disparities
5. Cost
45
Causes of structural UE
1. Country losing comparative advantage in production in a given industry
2. Technological advancements
3. Education
4. Geographical immobility of labour
46
Determinants of the NRU
1. Excessive governsmnt intervention due to a over generous benefits system encouraged frictional, seasonal and structural UE (free market)
2. Excessive labour market regulation can increase and maintain high structural unemployment (Free market)
3. Under provision of transport and affordable, high quality housing infrastructure (government intervention)
4. Under provision of adequate in work training schemes (government intervention)
47
Costs of unemployment to the economy
1. Lost output
2. Deterioration of government finances
3. Cost to other economies
4. Social costs
48
Cost of unemployment to the individual
1. Lost income
| 2. Hysteresis
49
Benefits of unemployment
1. Makes it easier for firms to find workers
2. Allows workers to take time in finding suitable, rewarding job for themselves
3. Unemployment can help to keep inflation under control
50
Evaluation of whether unemployment is good or bad
1. The level of unemployment
2. The duration of unemployment
3. The type of unemployment
4. The distribution of unemployment
51
Causes of income/wealth inequality
1. Age
2. Education
3. One sector dominant and capital intensive production
4. Globalisation and free movements of labour and trade
5. Technology
6. Ownership of financial assets and property
7. Corrupt governance
52
Consequences of income inequality
1. Higher levels of debt
2. Costs to the government
3. Social costs
4. Lower economic growth
53
Causes of poverty
1. Poor education and healthcare
2. Recession
3. Born into poverty
4. Work before education
54
Consequences of poverty
1. Low living standards
| 2. Poverty traps
55
Policies to redistribute income
1. Transfer payments
2. Government spending on essential goods and services
Evaluation: both cost a lot to the government
3. Implement or adjust income tax
Evaluation: ladder curve
4. A minimum wage
Evaluation: can cause UE
56
Evaluation of policies to redistribute income
1. Level of income tax set and which tax is targeted
2. State of government finances
3. Incentives
4. Does income inequality have to come down?
57
How the central bank reduces interest rates
By increasing money supply by
1. Reduce the reserve requirement
2. Reduce the bank rate
3. Buy bonds using open market operations
58
Transmission mechanism
a cut in interest rates:
1. Reduces the cost of borrowing
2. Reduces rate of return on savings
3. Reduces monthly payments for those with tracker or variable mortgages
4. Reduces cost of borrowing for firms
5. A weak exchange rate
59
Expansionary monetary policy cons
1. Inflation rise
2. Interest rates cannot fall below 0 (a liquidity trap)
3. Can have large negative impact on saves
60
Contractionary monetary policy pros
1. To control inflation
2. To protect against credit/asset bubbles and systemic risk in the banking sector
3. Make housing more affordable
4. Promote more appropriate/sustainable lending and borrowing
5. Encourages saving and investment
6. Improves the current account balance
61
Contractionary monetary policy cons
1. Potential economic shock
2. Indebted economic agents could "fall off a cliff"
3. Could detract borrowing for investment
4. Strengthen the exchange rate and could deteriorate the current account position
62
Expansionary monetary policy evaluation
1. Initial level of economic activity
| 2. Depends on the size of interest rate cut rates
AQA Economics
flashcards
Decks in class (6)
# Cards
