Economics > Macro – Objectives > Flashcards

Macro – Objectives Flashcards

(50 cards)

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1
Q

What are the four Macroeconomic Objectives?

A

1) Low unemployment
2) Low and stable rate of inflation
3) Economic Growth
4) Sustainable level of government debt

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2
Q

State the Formula for Unemployment Rate

A

(number of unemployed / labor force) x 100

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3
Q

What are the Difficulties in Measuring Unemployment?

A
  • Excludes discouraged workers
  • Doesn’t distinguish full and part-time workers
  • Doesn’t distinguish type of work
  • Excludes retraining programs and early retirement
  • Excludes parallel markets
  • Doesn’t count for differences in population
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4
Q

What are the Consequences of Unemployment?

A
  • Loss of real GDP, income and tax revenue
  • Costs for unemployment benefits
  • Costs for dealing with social issues
  • Unequal distribution of income
  • Difficulty to find jobs in the future
  • Social issues (e.g. crime)
  • Personal issues (mental health)
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5
Q

What are the Types of Unemployment?

A

1) Cyclical
2) Structural
3) Frictional
4) Seasonal

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6
Q

What is Cyclical Unemployment?

A

Occurs during the down-turns of the business cycle when the economy is in a recessionary gap and AD decreases.

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7
Q

What are Labor Market Rigidities?

A 
Factors preventing the forces of demand and supply to operate in the labor market. They can include:
• Minimum wage legislation
• Labor union activities
• Employment protection laws
• Generous unemployment benefits
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8
Q

What is Frictional Unemployment?

A

Results when workers are in between jobs (occurs in the short run).

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9
Q

What is Seasonal Unemployment?

A

Results when the demand for labor changes on a seasonal basis because of variations in needs.

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10
Q

Explain the Natural Rate of Unemployment

A

Equal to the sum of frictional, seasonal and structural unemployment.

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11
Q

Distinguish between Inflation, Deflation and Disinflation.

A

Inflation: sustained increase of prices
Deflation: sustained decrease of prices
Disinflation: decreases in the inflation rate

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12
Q

How is Inflation Measured?

A

Can be measured through the use of a price index (most commonly CPI).

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13
Q

How can you Form a Weighted Price Index?

A

(basket specific year / basket base year) x 100

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14
Q

How can you Form a Weighted Price Index?

A

(basket specific year / basket base year) x 100

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15
Q

What is CPI and how can you Calculate it?

A

CPI (or consumer price index) is a measure of the costs of living for the typical household. Formula:
(basket specific year / basket base year) x 100

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16
Q

What are the Limitations of CPI?

A 
Cannot be comparable between countries and in the long term as prices of goods change throughout the year. Also, it doesn't consider:
• Individual consumers (gives average)
• Changes in prices of substitute goods
• Discount stores
• Introduction of new products
• Changes in product quality
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17
Q

What are the Causes of Inflation?

A

Either by increases in aggregate demand (demand-pull) or decreases in aggregate supply (cost-push).

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18
Q

How can we use CPI to Calculate Real Income?

A

(nominal income / CPI) x 100

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19
Q

What are the Consequences of High Inflation?

A
  • Redistribution effects
  • Uncertainty (low incentive to invest)
  • Lower incentive to keep savings
  • Exports are more expensive to foreigners
  • Reduces economic growth
  • Price mechanism is inefficient (allocative inefficiency)
  • Social and personal costs due to redistribution
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20
Q

Who is Better off during Inflation?

A
  • Borrowers
  • Payers of fixed income/wages
  • Payers of wages slower than the rate of inflation
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21
Q

Who is Worse off during Inflation?

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A
  • People with fixed income/wages
  • People with wages slower than the rate of inflation
  • Holders of cash
  • Savers
  • Lenders
22
Q

What are the Causes of Deflation?

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A

Decreases in aggregate demand or increases in aggregate supply (however very rare in the real-world).

23
Q

What are the Consequences of Deflation?

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A
  • Redistribution effects
  • Uncertainty
  • Cyclical unemployment
  • Deferred consumption (postponed spending)
  • Deflationary spiral
  • Risk of Bankruptcy
  • Price mechanism is inefficient (allocative inefficiency)
  • Policy ineffectiveness (exp. monetary policy)
24
Q

Who is Better off during Deflation?

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A
  • People with fixed income/wages
  • People with wages slower than rate of deflation
  • Holders of cash
  • Savers
  • Lenders
25
Who is Worse off during Deflation?
* Borrowers * Payers of fixed income/wages * Payers of wages slower than the rate of deflation
26
How is Inflation connected to Purchasing Power and Income?
Inflation leads to a fall in real income (PP) as: % change in nominal income – % change price index = % change in real income
27
What is Hyperinflation?
Consists of very high rates of inflation when the price level increases by more than 50% per month.
28
When can Inflation be Favorable?
Governments usually aim at keeping the inflation rate between 2-3%. When inflation is higher than 4% it is considered excessively high.
29
Can Deflation bring Positive Changes?
Although deflation is unfavorable, it decreases export prices making them more competitive to the international market (net exports hence increase).
30
What Conflict can Arise between Low Inflation and Low Unemployment?
When there is a recessionary gap there is low inflation but high cyclical unemployment. When
31
What Conflict can Arise between Low Inflation and Low Unemployment?
When there is a recessionary gap there is low inflation but high cyclical unemployment. When the gap is curbed, unemployment decreases however there is higher inflation.
32
Explain the Trade-off between Inflation and Unemployment
The relationship can be shown using the Philips curve. This illustrates that there is negative relationship between the two and therefore each government must choose one to focus on.
33
What is Stagflation?
Refers to the situation in which the economy experiences deflation combined with high unemployment and inflation. This can be illustrated with a shift in the Phillips curve.
34
Explain Economic Growth using the PPC Model
Short-term: output moves closer to PPC curve | Long-term: shift of the PPC curve
35
Explain Economic Growth using the AD-AS Model
Short-term: increases in AD or SRAS increase real GDP | Long-term: increases in LRAS
36
Distinguish between Actual Growth and Growth in Production Possibilities in the PPC Model
Actual growth is short-term growth, whereas growth in production possibilities represents long-term economic growth.
37
What Formula can be used to Measure Economic Growth?
Percentage change of Real GDP
38
What three areas does Economic Growth Affect?
1) Living Standards 2) Environment 3) Income distribution
39
What are the effects of Economic Growth on Living Standards?
* Improvement in distribution of income * Increased household spending (food/education) * Improvement in gender equality (income to women) * Increased government spending on merit goods * Help from NGOs to manage growth
40
What are the effects of Economic Growth on the Environment?
Rapid growth most oftenly leads to unsustainable management of resources, however modern growth theory suggests that growth and sustainability can be consistent with each other under the conditions where: • Negative externalities are corrected • Environmental regulations are implemented • Green investments • Structural changes for a sustainable economy • Emphasis on human capital instead of physical.
41
What are the effects of Economic Growth on Income Distribution?
Economic growth can have both positive and negative effects on income distribution depending on the ability of an economy to take advantage of the growth. Reasons for negative impacts include: • Introduction of labor-saving technologies • Low levels of government investment in human capital • Investment only in urban areas (exclusion of rural areas)
42
What is the Relationship between Economic Growth and Real GDP per capita?
If real GDP increases are higher than population size increases then GDP per capita will also increase with economic growth.
43
Explain Economic Growth using the Business Cycle
Short-term economic growth is shown in the business cycle as expansionary fluctuations. Instead, long-term economic growth corresponds to the long-term growth trend.
44
How can Economic Growth be induced?
* Investment in human and physical capital * Taking advantage of marketable commodities * Environmental conservation (common-pool res.) * Improvement of productivity
45
What is the Impact of Economic Growth on Unemployment?
Economic growth will be able to reduce cyclical unemployment only in the short-run due to fluctuations of the business cycle. However, it could cause structural unemployment if hand-labor is replaced by technology.
46
What is the Impact of Economic Growth on Inflation?
Increases in AD will give rise to inflation in economic growth. However, if increases in AD occur with increases in LRAS also, then inflation will not occur (as long as AD is slower than LRAS).
47
State and describe the Types of Government Budget
Budget deficit: revenue < expenditure | Budget surplus: revenue > expenditure
48
What is the Relationship between Government Debt and Budget Deficit?
When governments find themselves in a budget deficit (very common) they will borrow money through issuing bonds. Doing so, they accumulate debt.
49
How is Government Debt Measured?
Measured as a share of GDP of the borrowing country. This is called the debt-to-GDP ratio and it is expressed as a percentage.
50
What are the Consequences of High Government Debt?
* Debt-servicing costs (opportunity cost of repayment) * Poor credit ratings * Increase in taxation * Decrease in government spending * Increased income inequality (buyers of bonds gain) * Lower private investment * Debt trap * Lower economic growth
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