Macro Intro

Question 1

How is macro different to micro?

Answer 1

• Micro is small scale but macro is large scale economies
• Macro aggregate

Question 2

Economy

Definition

Answer 2

An economy is a collection of agents who undertake economic activity

Question 3

GDP

Definition

Answer 3

• The total amount of output of goods and services that is produced in the course of one year
• UK GDP 2025 = £3tn

Question 4

The circular flow of income and spending

4 steps

Answer 4

1. Factor inputs
2. Income
3. Consumption
4. Output

Question 5

Factor inputs

The circular flow of income and spending

Answer 5

• F.O.P
• Land
• Labour
• Capital
• Enterprise

Question 6

Income

The circular flow of income and spending

Answer 6

• One for each F.O.P
• Rent
• Wages
• Interest
• Profit

Question 7

Consumption

The circular flow of income and spending

Answer 7

• Consumer expenditure
• Consumers spending money they have earned

Question 8

Output

The circular flow of income and spending

Answer 8

Goods + services

Question 9

Leakages

Defintion + 3 types

Answer 9

• Anything that removes money from the flow of income so GDP reduces
• Saving (S)
• Tax (T)
• Imports (M)

Question 10

Injections

Defintion + 3 types

Answer 10

• Anything that adds money to the flow of income so the GDP increases
• Investment (I)
• Goverment spending (G)
• Exports (X)

Question 11

What is the difference between factor inputs + output and income + consumption?

Answer 11

• Factor inputs and output are both part of the real economy and will always survive
• Income and consumption are part of the moeny economy and aren’t needed

Question 12

What if the value of leakages and injections are equal?

Answer 12

The economy is in equilibrium

Question 13

What if the value of leakages > injections?

Answer 13

• GDP will fall and money circulating will fall
• Net leakages
• Negative economic growth or a recession

Question 14

What if the value of leakages < injections?

Answer 14

• GDP will rise and money flow increases
• Net injections
• Economics growth

Question 15

What is the significance of macro equilibrium?

Answer 15

• Not nessessarily a good thing
• A good equilibrium is when the economy is stable
• A bad equilibrium is if the economy is stable in a poor economical state
• Most governments want economic growth as one of their prime targets

Question 16

What is the link between savings and investment?

Answer 16

Both:
* In a financial sector relationship
* Are related to monetary policies

Question 17

What is the link between taxes and government spending?

Answer 17

Both:
* In a budgetary relationship
* Are related to fiscal policies

Question 18

What is the link between imports and exports?

Answer 18

• This creates the balance of international trade

Question 19

Macro policy objectives

7 to get

Answer 19

• Economic growth
• Employment
• Inflation
• Balance of Trade
• Government budget
• Use of environmental resources
• Distribution of income

Question 20

SUSTAINABLE economic growth

Macro policy objectives

Answer 20

Growth of GDP can be too fast and cause inflationary pressures or too slow and cause lower living standards

Question 21

HIGH employment

Macro policy objectives

Answer 21

Full employment is not a realistic target in market economies

Question 22

LOW AND STABLE inflation

Macro policy objectives

Answer 22

No developed nation aims for zero inflation. In the UK we target 2%. In Europe they target < 2%

Question 23

BROAD BALANCE ON balance of trade

Macro policy objectives

Answer 23

Equilibrium is an unrealistic target given the size of trade flows. Small surpluses or small deficits are acceptable. Large deficits (net leakage = deflationary) and large surpluses (net injections = inflationary) both bring their own unpleasant side effects.

Question 24

BROAD BALANCE ON government budget

Macro policy objectives

Answer 24

Government spending and tax revenues should be broadly equal over the course of an economic cycle

Question 25

SUSTAINABLE use of environmental resources | Macro policy objectives

Answer 25

This emphasises the longer term nature of economic policy i.e. to avoid depleting resources for short term gain at the cost of longer run problems for future generations

Question 26

FAIR distribution of income | Macro policy objectives

Answer 26

This does not mean an absolutely equal sharing of income. A degree of inequality can be fair. We can argue about what the extent of inequality should be.

Question 27

If stuck a general objective policy

Answer 27

Economic stability

Question 28

Disadvantages to the 7 policy objectives

Answer 28

* There are very clear trade-offs at work which means that success in one target area will conflict with success in another area * Different governments may pursue different macro-objectives e.g. conservative governments have been more concerned with controlling inflation

Question 29

Ways to remember exchange rate | 2 acronyms

Answer 29

SPICED WPIDEC

Question 30

SPICED | Ways to remember exchange rate

Answer 30

Strong Pound Imports Cheaper Exports Dearer

Question 31

WPIDEC | Ways to remember exchange rate

Answer 31

Weak Pound Imports Dearer Exports Cheaper