Macroeconomics

• What are the objectives of governments economic policy

  Economic growth (2.5%)

  minimise unemployment (3%)

  inflation (2%)

  stable balance of payments in current account

  balanced gov budget

  greater income equality

  environmental

  productivity
• What are the potential conflicts and trade offs between macroeconomic objectives

  Economic growth Vs Inflation

  Economic growth Vs Current Account

  Economic Growth Vs the gib budget deficit

  Unemployment Vs Inflation
• What are the macroeconomic indicators

  The Real GDP- quality of goods/services produced

  Real GDP per Capita- real GDP/pop

  Consumer Price Index- Family expenditure survey measures household purchasing power

  Retail Price Index- includes housing costs

  Measure of Productivity

  Balance of Payments on Current Account
• What do index numbers show 


  There used to make comparisons between years and to measure the magnitude of change over time

  measures inflation
• How can national income be measured

  Real GDP- value of GDP adjusted for inflation

  normal GDP

  Gross National Product- market value of all products produced in a year by 1 person

  Gross National Income- sum of value added by all producers in a nation + primary income from abroad
• What’s an injection 


  Money that enters the economy in the form of gov spending, investment and exports
• What is a withdrawal

  Money that leaves the economy in the form of taxes, savings and imports
• When is the economy in equilibrium

  When injections = withdrawals
• What happens when there’s net injections

  There will be an expansion of national output
• What happens if there’s net withdrawals

  There will be a contraction of production so output decreases
• causes of movement along the AD curve

  A fall in the price level causes an expansion in demand

  A rise in the price level causes a contraction in demand
• Why is the AD curve downwards sloping

  High prices lead to fall in the value of real incomes so goods and services become less affordable
• What’s the formula for aggregate demand

  C + I + G + (X - M)

  Consumption

  Investment

  Gov spending

  Exports - Imports
• What causes a rise in economic growth

  Higher confidence so more investment

  lower interest rates so borrowing cheaper

  lower tax so more disposable income

  Increase In gov spending

  Depreciation of currency as it increases exports
• Why is the AS curve upwards sloping

  At a higher price level producers supply more as they can earn more profit
• What causes the SRAS curve to shift

  Cost of employment

  Cost of other inputs e.g. raw materials

  Gov regulations and interventions
• Why is the LRAS curve vertical

  Supply is assumed not to change as price level changes and is responsive to changes in AD

  All factor inputs can change in LR
• What’s the largest component of AD

  Consumer spending as it takes makes up 60% of GDP
• What’s the marginal propensity to consume

  How much a consumer changes their spending after a change in income
• What’s the marginal propensity to save

  The proportion of each additional pound of household income used for saving
• What does marginal property to consume + marginal propensity to save equal to

  1
• What are the influences on consumer spending

  Interest rates

  consumer confidence

  taxes

  capital investment (15-20% of GDP)
• Influences on investment 


  Rates of economic growth

  business expenditures and confidence

  Demand for exports

  Interest rates

  Access to credit

  Influence of gov and regulations (corporation tax)
• What’s the accelerator process

  A higher rate of economic growth causes more investment
• How much does the government spend of the NHS

  18-20% of GDP

  £165bil 2024/25
• How does the trade cycle influence government expenditure

  During recessions real output falls and there negative economic growth do the government might increase spending to stimulate economy

  During growth government may receive more tax revenue and may spend less on economy
• How does fiscal policy influence government expenditure

  Use discretionary fiscal policy (one-off policy changes)

  Automatic stabilisers used to offset fluctuations

  Expansionary policy used during economic decline (reduce tax)

  Contractionary policy reduces gov expenditure so reduces gov budget deficit
• How do Exports and Imports influence gov expenditure

  UK has a large trade deficit which reduces the value of AD
• What are the influences on the (net) trade balance

  Real income

  Exchange rates

  State of world economy

  Degree on protectionism

  Non-price factors (innovation, low labour costs, trading blocks)
• What factors influence the level of economic activity

  Employment

  Confidence

  Events

  Taxes and Interest rates
• What’s the multiplier effect 


  An initial increase in AD leads to an even bigger increase in national income
• What’s the multiplier ratio

  ratio of the rise in national income to the initial rise in AD
• What’s the significance of the multiplier to shifts in AD

  If economy has lots of spare capacity then output can be increase at little cost making the SRAS elastic and multiplier will be larger

  if SRAS curve inelastic multiplier effect smaller as if AD increases prices will increase rather than a full increase in national income

  Reverse multiplier when a withdrawal leads to an even bigger decrease in national income
• How do you calculate the multiplier

  1/(1 - MPC)
• What are the factors influencing SRAS

  Cost of employment

  Cost of other inputs like raw materials

  Gov regulations and intervention

  Net outwards migration (brain drain)

  Fall in business capital spending
• What are the factors influencing LRAS

  Technological change

  Changes in relative productivity

  Changes in gov regulations

  Demographic changes and migration

  More Competition Policy
• What does the Keynesian AS curve show

  Price level fixed until resources fully employed

  Horizontal section shows when there not fully employed

  Vertical section shows then they are fully employed

  in SR changes aren’t inflationary, in LR they are
• What does in the Short Run refer to

  The percentage increase in country’s real GDP, measured annually, caused by increase in AD
• What does in the Long Run refer to

  When productive capacity if the economy is increasing and refers to trend rate of growth of real national output
• What is an output gap

  Occurs when the actual level of output is less or more than the potential level of output and if calculated as percentage of national output