Macroeconomics lecture 1

dexazuxo's version from 2017-05-19 20:29


Question Answer
What is economic growth?Growth in total output and standards of living
What is inflation? deflation?Change in the average level of all prices, rise = inflation. fall = deflation
What is monetary policy?What the central bank does in terms of interest rates
What is fiscal policy?What the government is doing in terms of government spending and taxes
What is monetary and fiscal policy used for?Used to influence the economic activity when worried about repercussions and dampen when worried about inflationary pressures. These monetary and fiscal instruments help stabilise the economy
What are the major issues of macro?1. economic growth: growth of total output and living standards
2. productivity: economic growth achieved by using more inputs e.g.. increased capital, labour. And getting more output for any given input. This is called PRODUCTIVITY GROWTH
3 unemployment: When the economy is in a recession in economic activity, there is a RISE in unemployment. The main method of reducing unemployment was for government to increase their spending and reduce taxes. The use of government spending and taxes is known as FISCAL POLICY
4. business cycles: This is when the economy tends to move up and down rather than have a stead pattern. During recessions, many businesses go bust whilst lowering profits for survivors. Contrastingly, a boom is when there is an increase in demand for products, profits rises, and most businesses find it easy to expand.
5. government budget deficits: The government is in deficit when they spend more than they raise (by taxes) and in SURPLUS when they spend less than they raise.
6. inflation: Change in the average level of all process is called inflation. when prices call called deflation. inflation rates increase with books and decrease with recessions
7. interest rates: Monetary policy involves setting a specific interest rate in order to influence the economy. HIGH interest rates is TIGHT monetary policy which makes it more expensive to borrow (more reluctant to invest as loans cost more) LOW interest rates = loose monetary policy (low interest stimulate demands)
Who is the MPC and what do they do?Monetary policy committee: They set monetary policy whilst the bank carried this out by setting interest rates/buying and selling securities on the open market. Policy makers tend to raise interest rates/taxes to bring inflation under control
How is the government budget financed?a. Raised from the public: Raises national debt (public lends money to the government)
b. Raised from the central bank: It is inflationary because the bank creates new money (without being repaid) while the public do not cut their spending
What happens when interest rates cannot be set any lower? Central bank may use QUANTITATIVE EASING to simulate the economy.
What is exchange rate? Changes in this can affect relative prices and so the competitiveness oaf domestic and foreign producers.
a. Actual GDP - What the economy actually produces (Y)
b. Potential GDP - What the economy would produce if all the recourses such as land, labour, and productive capacity were fully employed at their normal levels (Y*)
c. Nominal GDP - Current prices
d. Real GDP - Constant prices
What is recessionary gap? This is when actual GDP is less than potential GDP. (Y
What is inflationary gap?When the actual GDP exceeds the potential. Y
What are the withdrawals from/injections into the circular flow?Withdrawals: Part of the household income does not end up as spending on output of firms eg. Taxes, savings, imports. these are called LEAKAGES
Injections: Spending on consumption by government, investment by firms, and exports
What are the GDP Based spending? Private consumption spending: Spending by households
Government consumption spending: Government pays for goods and services citizens want (healthcare). These are called public goods
How to work out GDP?1. Add up value of final goods sold
2. add up value added
3. Sum of incomes (wages+profits)
What are basic and market prices?Basic prices: Prices of products received by producers
Market price: Prices paid by consumers
3 categories of incomes: 1. Operating surplus: Net business incomes after payment has been made to hired labour for material inputs before direct taxes
2. Mixed incomes: People who are earning a living but not employed by organisations, not clear what wage or profit is (sole trader)
3. Compensation of employees: Payments for services of labour such as wages
What does GDP not include? a. Excludes productions underground
b. does not measure everything that contributes to human welfare