Flashcards
Economic Growth, Inflation, AD/AS, Fiscal and Monetary Policy
Flashcards do conjunto (61)
- 1What 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 - 2What is GDP a measure of?Economic growth
- 3How can output be measured?Volume
Value
Total national expenditure or national income - 4True or False: National output+national expenditure = national incomeFalse
National output = national expenditure = national income - 5What is the rate of economic growth?It is the speed at which the national output grows over a period of time
- 6Is the rate of economic growth usually constant?No, it usually speeds up and slows down depending on economic conditions
- 7What are long periods of economic growth called?Booms
- 8How would you define a recession?Two consecutive quarters of negative economic growth
- 9What can long recessions be referred to?Slumps
- 10What 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
- 11How do you calculate the change in the amount of goods and services in the economy (GDP)?Change in GDP (£billions)/Original GDP (£billions) = % change
- 12Define nominal GDP vs Real GDPNominal GDP has not been adjusted for inflation whilst RGDP has
- 13How can you measure standards of living in a country?Look at their GDP per capita and their PPP
- 14What is GNP?Total output of the citizens of a country, whether or not they are resident of said country
- 15Define GNIGDP + net income from abroad (domestically)
- 16What does PPP measure?Measures the real value of an amount money in terms of what you can actually buy with it.
- 17Two ways you can define inflation1. 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 - 18What is disinflation?The rate of inflation slowing down- prices are still rising but at a slower speed
- 19Define hyperinflationWhen prices rise extremely quickly and money loses its value rapidly
- 20If prices are falling, what is happening?Deflation
- 21How many surveys are used to calculate the RPI?Two
- 22How many people are surveyed in the first survey?6000
- 23What is the first RPI survey called?Living Costs and Food
Survey - 24What 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.
- 25What is this information used to work out?The relative weighting of each item consumers buy
- 26What 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)
- 27Why do the items in the basket change over time?So the basket reflects what the average household might spend their money on
- 28How 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%
- 29Examples of goods taken out of the basketLocal newspapers
Analogue radios
Disposable cameras
Boiled sweets - 30Examples of goods added to the basketDaily disposable contact lenses.
E-books
Blueberries
Honey - 31What 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 - 32Does the CPI tend to be slightly higher or slightly lower than the RPI?Lower- except when interest rates are low
- 33What is the official measure of inflation in the UK?CPI
- 34Name two limitations for both the RPI and the CPIRPI: 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 - 35How 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 - 36How 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 - 37Explain the steps of a positive multiplier effect1. 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 - 38How do you measure the multiplier?Change in national income/ initial injection = multiplier
- 39Define the Marginal Propensity to comsumeProportion of any extra income that's spent on the consumption of goods and services
- 40Define the Marginal propensity to SaveProportion of any extra income that is saved
- 41Why 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
- 42Generally, people who have lower incomes have a higher MPC. True or False?True
- 43Name some examples of demand-side shocksIf 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 - 44Name some examples of supply side shocksPoor 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 - 45What is a negative output gap?Difference between the level of actual output and trend output when actual output is below the trend output
- 46When will a NOG occur?During a recession and the economy is under-performing and resources underutilised.
Will cause downwards pressure on inflation - 47What is a positive output gap?Difference between the level of actual output and the trend output when actual output is above trend output.
- 48When will a POG occur?During a boom when the economy is overheating- resources being fully used or overused. Employment would be high
- 49What is the formula for calculating the multiplier?Multiplier = change in national income/ initial injection
- 50What 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)
- 51What 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)
- 52What does fiscal policy involve?Government spending and taxation
- 53When is an reflationary fiscal policy likely to be used?During a recession or when there is a NOG
- 54When is a deflationary fiscal policy likely to be used?During a boom or when there is a POG
- 55What is monetary policy?It is a demand side policy that involves making decisions about interest rates, the money supply and exchange rates
- 56What is contractionary monetary policy?Reducing the AD by using high interest rates, restrictions on the money supply and a strong exchange rate
- 57What is expansionary monetary policy?Increasing AD using low interest rates, fewer restrictions on the money supply and a weak exchange rate
- 58What is the main aim of monetary policy?Ensure price stability as well as promoting economic growth and reducing unemployment
- 59Who is in charge of changing the interest rates?Monetary Policy Committee
- 60What information does the MPC look at?House prices
GBP exchange rate
Size of output gaps
Rate of increases and decreases in average earnings - 61How far into the future does the MPC have to look?About two years