Economic Growth, Inflation, AD/AS, Fiscal and Monetary Policy

Izzy Noone
Flashcards by Izzy Noone, updated more than 1 year ago
Izzy Noone
Created by Izzy Noone almost 3 years ago



Resource summary

Question Answer
What are the four macroeconomic indicators? The rate of economic growth The rate of inflation The level of unemployment The state of the Balance of Payments
What is GDP a measure of? Economic growth
How can output be measured? Volume Value Total national expenditure or national income
True or False: National output+national expenditure = national income False National output = national expenditure = national income
What is the rate of economic growth? It is the speed at which the national output grows over a period of time
Is the rate of economic growth usually constant? No, it usually speeds up and slows down depending on economic conditions
What are long periods of economic growth called? Booms
How would you define a recession? Two consecutive quarters of negative economic growth
What can long recessions be referred to? Slumps
What is the difference between a depression and a recession? A depression has to have sustained negative economic growth for a long time period (eg. 2 years or more) whilst a recession has a shorter time period
How do you calculate the change in the amount of goods and services in the economy (GDP)? Change in GDP (£billions)/Original GDP (£billions) = % change
Define nominal GDP vs Real GDP Nominal GDP has not been adjusted for inflation whilst RGDP has
How can you measure standards of living in a country? Look at their GDP per capita and their PPP
What is GNP? Total output of the citizens of a country, whether or not they are resident of said country
Define GNI GDP + net income from abroad (domestically)
What does PPP measure? Measures the real value of an amount money in terms of what you can actually buy with it.
Two ways you can define inflation 1. Sustained rise in the average price of goods/services (some prices may be rising/falling at different rates) 2. Fall in the value of money. A fixed amount of money can buy less than it once could/ PPP
What is disinflation? The rate of inflation slowing down- prices are still rising but at a slower speed
Define hyperinflation When prices rise extremely quickly and money loses its value rapidly
If prices are falling, what is happening? Deflation
How many surveys are used to calculate the RPI? Two
How many people are surveyed in the first survey? 6000
What is the first RPI survey called? Living Costs and Food Survey
What is the Living Costs and Food Survey trying to find out? It finds out what people spend their money on and what proportion of their income is spent on these things.
What is this information used to work out? The relative weighting of each item consumers buy
What is the second survey based on? Prices. It measures the change in price of around 700 goods of the most commonly used goods and services (basket of goods)
Why do the items in the basket change over time? So the basket reflects what the average household might spend their money on
How is this information used to make it into an index? Economists use the price changes in the second survey and multiply them by the weightings in the first survey. They are converted into an index number to see the percentage change over to see inflation. 100 to 102 would be an inflation rate of 2%
Examples of goods taken out of the basket Local newspapers Analogue radios Disposable cameras Boiled sweets
Examples of goods added to the basket Daily disposable contact lenses. E-books Blueberries Honey
What is the difference between the CPI and the RPI? The CPI excludes items such as mortgage interest payments and council tax A slightly different formula is used to calculate the CPI A larger sample of the population is used for the CPI
Does the CPI tend to be slightly higher or slightly lower than the RPI? Lower- except when interest rates are low
What is the official measure of inflation in the UK? CPI
Name two limitations for both the RPI and the CPI RPI: Excludes all households in the top 4% of incomes. Inaccurate representation for non-typical households Differences in prices between regions are not taken into account CPI: Information given in Living Costs and Food Survey can be inaccurate The basket of goods only changes once a year so can miss short term spending habits
How do the RPI and CPI help determine wages? Employers and trade unions use them as a starting point in wage negotiations The government uses them to decide on increases in state pensions, and other welfare benefits Some benefits are index-linked they rise automatically each year by the same percentage as the chosen index
How can RPI and CPI be used to measure changes in the UK's international competitiveness? If the rate of inflation measured by the CPI is higher in the UK than in other countries it trades with, then UK goods become less price competitive, as they'll cost more for other countries to buy So- exports will fall and imports will increase
Explain the steps of a positive multiplier effect 1. Money is injected into the circular flow of income 2. This money can be used for wages 3. This can be spent by consumers, increasing consumption creating a second increase in AD, continuing until the initial injection has leaked out
How do you measure the multiplier? Change in national income/ initial injection = multiplier
Define the Marginal Propensity to comsume Proportion of any extra income that's spent on the consumption of goods and services
Define the Marginal propensity to Save Proportion of any extra income that is saved
Why are the MPS and MPC important in terms of the multiplier effect? The size of the multiplier will depend on how much of an injection of money into the circular flow is spent by those who receive it and how much is saved. Money that is saved does not contribute to another person's income- when people are more likely to spend their money, the multiplier effect is greater
Generally, people who have lower incomes have a higher MPC. True or False? True
Name some examples of demand-side shocks If consumer confidence is boosted (house prices rising leads to increased consumer spending) If a country's major trading partners go into a recession the demand for exports will drop
Name some examples of supply side shocks Poor harvest -> reduced supply of food -> increased prices + reduced economic capacity Discovery of a major new source of a raw material will reduce its price and increase its supply- increasing the capacity of an economy
What is a negative output gap? Difference between the level of actual output and trend output when actual output is below the trend output
When will a NOG occur? During a recession and the economy is under-performing and resources underutilised. Will cause downwards pressure on inflation
What is a positive output gap? Difference between the level of actual output and the trend output when actual output is above trend output.
When will a POG occur? During a boom when the economy is overheating- resources being fully used or overused. Employment would be high
What is the formula for calculating the multiplier? Multiplier = change in national income/ initial injection
What is reflationary fiscal policy? "Expansionary" or "loose" fiscal policy involves boosting AD so it shifts to the right by increasing government spending or lowering taxes. It's likely to involve a government having a budget deficit (government spending > revenue)
What is deflationary fiscal policy? "Contractionary" or "tight" fiscal policy is when the government reduces AD by reducing G spending or increasing taxes. It involves a government having a budget surplus (government spending > revenue)
What does fiscal policy involve? Government spending and taxation
When is an reflationary fiscal policy likely to be used? During a recession or when there is a NOG
When is a deflationary fiscal policy likely to be used? During a boom or when there is a POG
What is monetary policy? It is a demand side policy that involves making decisions about interest rates, the money supply and exchange rates
What is contractionary monetary policy? Reducing the AD by using high interest rates, restrictions on the money supply and a strong exchange rate
What is expansionary monetary policy? Increasing AD using low interest rates, fewer restrictions on the money supply and a weak exchange rate
What is the main aim of monetary policy? Ensure price stability as well as promoting economic growth and reducing unemployment
Who is in charge of changing the interest rates? Monetary Policy Committee
What information does the MPC look at? House prices GBP exchange rate Size of output gaps Rate of increases and decreases in average earnings
How far into the future does the MPC have to look? About two years
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