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MACROECONOMICS CONCEPTS
1. 2 Causes of - Demand-pull (excess AD) 11. AS Curve - Planned output at any given price level
Inflation - Cost-push (increased cost of production) - The total quantity of output supplied in an
2. Actual economy over a period of time
- The annual percentage increase (or decrease)
growth - Dependent on quantities of factors of
in output
production
3. Actual - The annual percentage increase in output - Flexible depending on ST & LT effects
Growth - Influenced by skills of workforce, efficiency &
(economic quantity of capital, cost of raw materials and
growth) cost of workforce
4. AD Curve
- Relationship between level of AD and overall 12. Automatic - Automatic stabilisers help to reduce the
Definition price level over a period of time stabilisers volatility of the business cycle
- Price is an average of all goods and services definition - Taxes rise to avoid boom, benefits rise to
in an economy avoid recession
5. AD curve - When RNI increases whilst remaining at - If used, could reduce amplitude of cycle by
shifting current price level 20% say OECD
- Caused by changes (e.g taxes) effecting C, I, 13. Average - Ratio of consumption to income (proportion of
G or X-M propensity income you spend)
- Any changes that increase components of AD to consume
(assuming CP) will shift curve right (APC)
6. Advantages - ST boost to living standards (buy more better 14. Balance of Capital account + current account
of a current quality imports) Paymen ts
account - Cyclical - depends on time period
deficit 15 . Ba l ance of - Current Account: the trade in goods and of
- Deficit due to increased deman d fo r impo rt ed
Paymen ts s ervices (exports/imports), income flows
capital goods which would increa se pr oduc ti vit y
in UK in LT ( profits,dividends/interest), current transfers
- HOWEVER: CA surpluses not always good (g rants/subsides)
sign (e.g. Germany & Japan rec ess i ons ), cap it al - Capital Account: sale and purchase of capital
a ssets and non-produced or non-financial
flows have to be able to finance the curr ent
assets
account deficit
7. Aggregate - Financial Account: Trade in financial assets
- Sum of all expenditure in econo my over peri od
Demand - Net Errors and Omissions
of time
16. Balance of
- AD = C + I + G + (X-M) - Measures the economic transactions between
Payments
8. Aggregate UK residents and the rest of the world
- Sum of all expenditure in economy over a Definition
Demand - Trade in goods
period of time
- AD = C+I+G+(X-M) - Trade in services
- Income flows from investments (Example of a
9. Aims of - Equity (inter-generational equity - each positive flow)
fiscal generation pays the same level) - Financial flows - shares, loans
policy - Funding government spending (generate tax - Foreign aid (Example of a negative flow)
revenues to avoid borrowing and debt) 17. Balancing
- Benefits (benefits meet cost - only gain if you the current - I.e. deficit in current account = surplus in
pay the cost) account capital account in order to balance the BOP
- Macroeconomic stability (smooth path of AD - Attract foreign investment
over economic cycle - smooth peaks and - Government running down official reserves of
troughs) foreign currency
10. APC vs - High IRs leading to ST banking flows (Hot
- Income rises, APC falls
money flows)
MPC - MPC lower than APC
- Lower incomes have higher MPC than higher
earners (rich already have everything)
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18. Barriers to - Trade barriers (embargoes, high tariffs, quotas) 23. Causes of - External shocks (commodity price changes
growth - Decreased confidence (consumers mainly) cost-push - oil)
- Exchange rates (SPICED) inflation - Depreciation in the exchange rate (M more
- Unemployment (unemployed resources = spare expensive - withdrawal)
capacity) - Acceleration in wages (only in SR - wages
- Lack of credit (banks less likely to lend, often follow prices)
increased IRs) - Increased inflationary expectations (inflation
- High interest rates (less loans) expected to continue - workers demand
- Crowding out effect (more reliable public sector higher wages)
spending crowds out less reliable private sector 24. Causes of - Depreciation of exchange rate (increases
spending) demand-pull price of M)
- High taxes (reduces consumption & inflation - Reduction in indirect or direct taxation (inc.
investment) disposable income)
19. Benefits of - Rapid growth of money supply as a result of
- Increased standard of living (gov spends more
growth increased lending from banks (inc. spending)
on infrastructure improvements)
- Increased employment (growth > investment > - Rising consumer confidence (wealth effect)
capital increase > excess workforce (derived - Increase in rate of growth of house prices
demand - increase in one thing leads to an - Strong economic growth in trading partners
increase in another) (inc. UK exports - injection)
- Increased investment at home and abroad 25. Causes of
- Increase in consumer confidence
(ACCELERATOR EFFECT) growth - AD
- Increase in business confidence
- Increased income (bonuses & matching
- Increase in consumption
inflation)
- Increase in investment
- Sustainable growth (increased spend i ng on env
- Increase in Gov spending (G)
issues, greenbelt, recycling, nat u re poli ci es)
- Increase in Gov revenue (fiscal - Increase in exports
dividend/taxes) - Increase in employment (higher incomes -
- Increase in confidence (busines s & consumer) C)
- Trickle down effect (rich get riche r c r ea ti ng - Reduced interest rates (increases borrowing
more opportunities for poor, rich ge t ri che r, pay - C)
more tax increasing benefits to poo r) - Decrease in exchange rate (increases X)
. f
20. Boosting 26 Causes o
- Running a larger budget deficit (h ighe r gov r t - - Increase in productivity
AD by g ow h AS
spending or reduced taxation) - example of - Increase in labour market flexibility
running a
counter-cyclical demand management (occupational mobility)
budget
deficit - Multiplier effect (growth and employment - Increase in migration (larger workforce)
increases) - Increase in competition (within workforce =
- Some of gov spending may be self-financing if increase productivity)
the economy experiences an upturn - Increase in capital stock (increased
21. The
- Fluctuations in actual growth 27. Causes of potential)
Business
Cycle - Never 100% efficient due to unemployment, Inflation - Demand Pull: Increase in demand leads to
low productivity etc firms increasing prices to take advantage and
- Output gap is difference between potential and maximise profit. Causes an increase in AD
actual (aggregate demand)
- Trend output is the average from which the - Cost Push: Increase in the costs (labour,
GDP fluctuates around raw materials, imported costs etc) of
- LEDCs (lower GDP) have a steeper trend producing a product are pushed on to the
output than MEDCs (higher GDP) consumer pushing up prices to maintain
22. Capital
profits. Causes an in increase in AS
account Capital flows
Causes of (aggregate supply)
- Direct investments (factories, mergers and 28.

acquisitions) Unemployment - Occupational: when employment is available

- Financial investment - savings in stocks and (supply side) but people are not willing to look for jobs,
bonds don't have the skills
- Currency trading - Geographical: inability to move from one
area to another
- Imperfect info about job opportunities
- Real wages too high
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29. Circular flow of - Where supply = demand determines 35. Consumption - Largest component of AD
income price of something - Most important in determining disposable
- Factors: Tax, Investment, Savings, income
Spending - APC (average propensity to consume):
- Withdrawals/Leakages (net saving, proportion of income that you spend (ratio of
net taxes, import expenditure) C to income)
- Injections (Investment, government - MPC (margainal propensity to consume):
expenditure, export expenditure) proportion of an income increase that you
spend (proportion of income increase
30. Claimant Count - Those claiming job seekers allowance
devoted to C)
(must show evidence)
- As income rises, APC falls (people already
- 18-65 years old
have enough so don't spend as much)
- Have to prove you are looking for
- Lower income households have higher MPC
work
than richer households
- Stigma attached - people would feel
- Benefits capped to reduce C
embarrassed if they had to sign up
- High inflation means spending decisions are
leading it to become even more
brought forward so C increases (opposite for
inaccurate
deflation)
31. Claimant Count - Claiming job seekers allowance
36. Consumption - Disposable income minus tax and adding on
- 18-65 years old
Definition any transfer payments (benefits)
- Have to prove that you are looking for
work 37. Cost-push - When the cost of production is increasing
- Stigma attached - doesn't fully reflect inflation - Firms have to offload cost on to price (best
unemployed de fi niti on done when the market price is inelastic)

32. Classical AS Curve - LRAS is totally inelasti c (ve rtica l) 38 . Cos t-push
(LRAS) - Believe markets will clea r so ms fir w ill i nfl a ti on
produce to the maximum capac it y of di agr am
the economy whatever the r at e of (Cl ass i cal
inflation/price level v i ew)
- There will be no unemployed
resources (max capacity)

33. Consequences/costs - Money loses its value (con fi dence

of inflation decreases as value of s av i ngs
decreases - saving rate lower than
inflation rate)
- Wage-price spiral (prices inc., wages
demanded inc. - spirals out of control)
- Consumers and businesses on fixed
incomes lose out because their real
income falls (poor bargaining position) - LRAS would be a straight line at Y1
- Inflation writes off debts
39. Cost-push -
- Lower capital investment (business
inflation
planning disrupted)
diagram
- Unemployment
(Keynesian
- High IRs - stagnation leading to
view)
recession
34. Consumer Price - Measurement of Inflation
Index (CPI) - Basket of 700 goods from a survey of
7000 households
- Monthly
- Weighted average (sum of price x
weight) / (sum of weights)
- Basket is updated
- Doesn't include mortgage
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40. Costs of - Not all income distributed evenly (rich own 45. Costs of - Lower tax revenues - VAT (less
growth the factors of production) Unemployment disposable income), Cooperation tax
- Wealth in the hands of a few (growth to the economy (decrease in profits) and Income tax (less
increases the value of assets mainly held by people are working)
rich) (government have less money leading to
- Trickle down effect doesn't always work (tax loans which are unsustainable)
avoidance) - Higher benefit payments (job seeker
- Corruption may limit redistribution effects allowance, income support and pensions)
(regimes keep money rather than giving to - Social Costs (crime, family breakdowns,
people) (Nepitism = jobs kept within family regional decay)
members etc) - Opportunity Cost of potential output (what
- Growth could be spent on weapons which they could have produced - larger output
don't directly benefit the population (e.g. gap)
Syria)
46. Costs of - De-skilling (structural unemployment)
- Negative externalities (env damage from
Unemployment - Loss of self-esteem
more factories, waste, overproduction,
to the individual - Lower Income (reducing purchasing power
transport, use of scarce resources)
and lower standard of living)
41. Costs of - Menu costs: changing prices of goods - Effects on family unit
inflation - Wealth costs: affects those on fixed - Increase in stress related illnesses and
incomes redirecting wealth to those in mental breakdown (E.g. 3,000 suicides from
bargaining positions or those with physical the benefits being cut)
assets
47. CPI - Consumer Price Index
- Planning costs: businesses uncertain about
- Average price of a bundle of 700 goods
the future price changes aren't as li ke l y t o
and services measured at different points
invest impacting economic grow th
in time from a sample of 7000 households
- Fall in Competitiveness: inflation at a hi gher
- Each household completes a living costs
rate in one country means it is less
and food survey
competitive and affects the ba lance of
- Each good is weighted so that the ones
payments
which we purchase more of are worth
- Social Instability: In extreme cases,
more in the overall calculation
confidence in the currency is nul so
production and exchange stall s lead i ng t o 48 . Cu rr ent account 1) Trade in goods
food riots, stealing and riots 2) Trade in services
3) Net flow of investment income
42. Costs of - Negative multiplier effect
4) Transfers of money
Unemployment - Fall in demand for goods and services as
on businesses incomes fall 49. Cyclical/demand - Fall in AD relative to potential GDP leading
- Fall in demand for businesses further down deficit to a loss of RNO, employment
supply chain unemployment - Labour is a derived demand - AD falls
- Quantity of labour decreases therefore labour falls
50. Definition of - M0 to M4
- +ve: bigger pool of surplus labour, less money - Narrow money M0
pressure to pay higher wages, reduced trade - Broad money M4
union/strike power - Near money
43. Costs of - Increased spending on unemployment - A rise in any might cause a rise in AD
Unemployment benefits (OC) 51. Delay in
on government - Fall in tax revenues from spending - Unemployment is a lagged indicator
unemployment - Expensive to pay off contracts
- Fall in corporation tax - less profits (lagged
- Cost of rehiring & training is expensive
- May lead to more gov borrowing (budget indicator)
- Cut wages to pay off debt
deficit)
52. Demand for
44. Costs of - The amount people wish to hold as cash
- Loss of income money (MD)
Unemployment as opposed to other assets
- Fall in living standards
on individual 53. Demand-pull
- Health risks - When there is excess AD (positive output
inflation
- Social alienation gap)
definition
- Loss of marketable skills - Firms raise prices to make the most of
high demand
- Mainly in Boom phase
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54. Demand-pull 62. Effects on - Firms invest past profits but at an OC

inflation diagram Investment (4 - Increase of productive capacity
(classical view) things) (Capital stock is prod. plant and machinery)
- Interest rates rise: 1) Cost of borrowing
inc. (puts off investment) 2) OC of investing
past profits inc. (as profits could be saved
in interest bearing account)
- Inflation: high inflation (boom) =
uncertainty = discourages investment
63. Evaluation of - Depends on which rate of income tax is
fiscal policy changed (MPC increases for poor)
- Range of goods covered by VAT
- Changing rules about how tax is paid
- LRAS would be a straight line at Y1
- Recognition lags and policy time lags
55. Demand-pull - (takes time to recognise, implement and
inflation diagram have an effect)
(Keynesian view) - Imperfect information (may stimulate a
56. Demand-side bubble - overstimulate demand)
- Real GDP growth (growth
factors - Crowding out (increase in government
means inflation)
considered by the spending means private firms have to raise
- Estimate of output gap (if negative =
MPC (eval) cost of borrowing therefore reducing private
deflation)
investment)
- AD components (C, G & X-M etc)
64 . Expend it ur e - Depreciation of the exchange rate -
- House prices (wealth effec t) sw it chi ng o
- Unemployment decreases price of exports (eval: depends
make expo(t s
on elasticity & may end up reducing BOP)
- Money & credit data mo e rt
con dence - Reducing relative inflation - exports
- Business and consumer fi r
compe ve
57. Demand side appear cheaper/imports more expensive
dence titi )
factors effecting - Changes in business confi - Campaigns ("buy British")
n dence
GDP (mainly SR) - Changes in consumer co fi - Structural change - Supply-side reforms to
n o AD
- Changes in any compone ad t ng f pa ne s raise productivity and lower unit labour
- Changes effecting UK's tro cy i Rsrt and
r costs
- UK monetary and fiscal p li (I - Subsidies to businesses - increases R &
taxes) D + infrastructure
58. Disposable
income - Income minus tax, adding on any - Strength of AD (too much demand =
65. Factors
benefits (transfer payments - payments demand pull inflation, too little =
considered
which are received in exchange for recession/deflation)
when
nothing) - Housing market (prices too strong =
manipulating
59. Economic Growth - The country can produce more IRs demand pull inflation, weak could lead to
- Incomes rise increasing spending power recession - 2009)
- Increased consumer spending power - Labour market (wage spirals? If so, IRs
encourages firms to produce more rise to discourage firms from raising wages
above inflation levels)
60. Economic Growth - AS: expansion of the productive
- Inflation from overseas (import costs -
Definition capacity of an economy
e.g. oil)
- AD: increase in total value of goods and - Trends in the exchange rates (SPICED)
services produced in an economy in any
given year 66. Factors - Skills of workforce
effecting SRAS - Efficiency of capital
61. Effects of fall in - AD falls as X falls
- Quantity of capital
exports on - Negative multiplier
- Cost of raw materials
economy - Slowdown/recession
- Cost of workforce
- Reduced profits
67. Factors - Exchange rates (SPICED)
- Reduced producer confidence (could
effecting trade
lead to reduced capital investment) - Inflation (High inflation = less competitive)
- Unemployment (jobs & plants/resources) - Income (High UK income = more
- Tax revenues decrease (less G, AD imports, high foreign income = more
falls) exports)
- Might worsen regional inequality (some - Investment (increases productivity
regions more reliant on exports) increasing exports but could also reduce
exports because the cost may be passed
onto the consumer)
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68. Factors effecting - Exchange Rates (inc. means exports 77. GDP (National - Total value of all goods and services
trade (4 things) less competitive - appear more income, national produced in a year
expensive) SPICED output or aggregate - Primary (agriculture), secondary
- Inflation (inc. inflation means red. demand) (manufacturing) and tertiary (services)
competitiveness) sectors
- Income (disposable income inc. leads - Real GDP is adjusted for inflation
to more imports) - Nominal GDP has not been adjusted
- Investment (inc. investment means for inflation
better quality goods but more - Value = price x quantity
expensive)
78. Government - All Gov. spending
69. Factors on - Wealth of households (property, Expenditure - Budget Deficit: Gov spends more
Consumption (4 shares) than it receives
things) - Wealth effect on consumption (more - Budget Surplus: Gov receives more
wealth, confidence, consumption) than it spends
- Inflation brings consumption (spending
79. Government - Budget Deficit: when government
decisions) forward
Expenditure (E) spends more than it receives (taxes)
- Interest rates rise 1) Cost of borrowing
- Budget Surplus: when the
inc. 2) Benefits of saving inc. 3) Value
government spends less than it
of assets may rise
receives
70. Factors shifting AS - Migration - Government spending = autonomous
right (increasing - Technology advances (acts independently within AD)
productive - Capital goods
capacity) 80. Growth effecting - Increased growth means government
- More resources (land) can supply more welfare
We lf ar e
- (Think factors of produ c tion ) - Pensions
71. Falling - Benefits (sickness, disability)
- Circular flow of income g rows
Unemployment
- Positive multiplier - Support (maternity, holidays)
leads to...
- Increase in demand for M - Housing
- Higher tax revenues - Infrastructure (homes for elderly)
- Inflation - Funded by taxes

72. Fiscal policy - Influencing the level ofeconom ic 81 . How Rs I e fec t a ss - Higher interest rates increase
definition activity through manipulation o f p rices f et onreturn
savings in banks - discourages
government income and expend it u re investment in alternatives such as
(shifting AD) property or shares
73. Fiscal policy - Wealth effect: if demand for assets
...
diagram fall, the asset holders lose out and
therefore spending confidence
74. Fiscal policy
- Influences AD in ST but AS in LT - Vice Versa
effects on AS (in
- Education and health (productivity +
LT) 82. How IRs effect cash - Increases the amount of money
capacity increases)
flow (amount of cash savers have from interest-bearing
- Poverty reduction (Increased benefits) consumers have accounts or building societies
- Welfare reform (decreased benefits) available) - Increases the amount people who
- Investment (capital goods increase) take out loans have to pay back
75. Frictional
- Unemployment between jobs - Vice Versa
Unemployment
- Includes new and returning entrants 83. How IRs effect - Hot money flows: if IRs in UK
(e.g. starting a family) exchange rates increase compared to other countries,
- Information flows decrease attracts foreign investors (strengthens
unemployed time the £)
- Effected by incentives (min wage) and - Can be influenced by speculation
disincentives (benefits) to look for work that might not actually happen
- Good for economy because pool of - Vice Versa
workers keeps wage inflation down
84. How IRs effect - Attractiveness of spending today
76. GDP - The total value of output of goods and
spending and saving compared to tomorrow
services produced in the UK in a year
decisions - Inc. leads to saving more attractive
- Can be used to measure national
and borrowing less attractive (reduces
income, national output and AD
C & I)
- GDP per capita = GDP per head
- Vice Versa
- GNP is all money earnt including UK
businesses abroad
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85. How LRAS works 1) AD curve shifts right (inc. C)
2) SRAS shifts left (workers demand higher
wages)
3) AD shifts left (prices increase to pay for
higher wages)
4) SRAS shifts right (wages cut due to
decreased C)
86. How to reduce - Increase direct taxes
expenditure - Increase IRs
- Higher import tariffs
- Decrease benefits
- All could have a negative impact on AD
87. Hyperinflation - Ridiculously high demand for cash
- Money becomes worthless
- Same effect of collapse of consumer and
business confidence in a recession
- Savings become worthless
88. ILO - Out of work for 4 weeks, ready to start in
2 96.
- Face to face interview then phone survey
of 60,000 households (regional issues)
- 16 to 65 year olds
- Takes into account stude n ts look i ng f or
part time work (not wholly accur at e)
89. ILO - Out of work for 4 weeks, ready t o r et ur n
(International in 2
Labour - Face to face interview then phone sur vey
Organisation) of 60,000 households
- 16 to 65 year olds
- Published once a month so is out of dat e
- 60,000 people is only a s ma ll pr oporti on
of the UK pop and also peop le cou d l e as
li it is a survey
90. Impacts of IR - Effects different industries & sectors
changes - Elasticity of demand (e.g. food sector)
- Trading sector (exchange rates)
- Regional economies
- Impacts/benefits savers/borrowers
91. Importance of - Boosts GDP (30% of UK GDP)
exports
- UK 2nd largest exporter of services
- Jobs created down the line
- Regional economies (some regions more
dependent than others on exports)
- Injection of AD
92. Increasing
- Firms increasing capital goods by building
economic growth
more factories and machinery (LT)
- Government or firms spending more on
education or training (LT)
- Spending on infrastructure (ST)
- Firms investing in research and
development (new tech) (ST)
- Government subsides and banks
investing in firms
93. Inflation - The sustained increase in the general price
level over a period of time
- Measures your purchasing power so if
inflation increases, prices increase meaning
you have less purchasing power
- Doesn't fall (deflation)
- Disinflation is the decrease in inflation
- Affects the outcome of economic decision
making. If it's anticipated, changes in prices
can accommodate the changes in prices, if
un-anticipated, it can cause shocks and
problems arise
94. Inflation - A sustained increase in the general/average
Definition price level of a country
- Government target is 2% +/-1
95. Inflation in a - Low inflation/deflation
recession - Prices fall to attract C
- Exchange rate decreases in recession
An injection - Exports
- Goods and services sold abroad with funds
coming into UK
- Raises AD
97 . In te res t - Direct and indirect effect on C
Ra tes - If IRs increase, borrowing (C) decreases -
less affordable
- IRs increase, C decreases - more beneficial
to save
- IRs increase, value of assets may rise so
more money to spend increasing C
- Prices low, IRs tend to be low
98 . In te res t
Ra tes on AD - IRs tend to follow price level
- Therefore a rise in price level/IRs =
decreased AD
99. Interest Rate - The process by which a change in interest
Transmission rates feeds through to AD
mechanism - Individuals, firms (unemployment),
mortgages, savings, exchange rates
(SIMFER)
Investment
100. - Expenditure undertaken by firms to add to
Definition capital stock
101. Investment - Expenditure undertaken by firms to add to
(I) capital stock (machinery and plants)
- Increases economy's productive capacity
- Firms can use past profits to invest - an
opportunity cost
- If IRs increase, borrow decreases so
investment may be put off
- If IRs increase, investment using past
profits may increase because they can be put
into a high interest bearing account
- Amount invested depends on the expected
return (point on business cycle - best at
upturn)
- High inflation = uncertainty = discourages
investment
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102. Keynesian AS - Curve = SRAS 110. Monetary - Attempts to influence the level of economic
Curve - Vertical line = LRAS policy activity (AD) through changes to the amount of
- Flat line = recession (price level stays definition money in circulation and the price of money
same even though RNO is increasing) - IRs & Quantitative easing
- Unemployment is distance between - Used to control inflation (+-2%)
horizontal and vertical parts on the curve - Official rate ('base rate') set by the B of E
103. Length of time - A change in the official Bank Rate takes influences the structure of other IRs
for IRs to have about 2 years to have its full impact on - Eval: has little effect on LRAS, fiscal policy
an impact inflation (due to fixed wages, contracts, also has an impact, changes in rates depend
credit cards, fixed IRs) on anticipation, confidence & the world
- Exchange rate changes have instant economy
effects on C 111. Monetary - Manipulates AD only meaning only inflation is
- Mortgages and savings take longer to policy affected and nothing else
have an effect on C diagram
104. Limitations of - Not accurate representation of whole 112. The - The ratio of the change in real income to the
CPI economy (doesn't take into account top Multiplier amount of expenditure (spend £1bil on HS2 and
and bottom 4% - however this does remove get £5bil back in increased productivity, trade,
abnormalities) communication etc)
- An average (people's spending habits - Greater return on investment (ROI) (positive
different - vegetarians) multiplier)
- Doesn't include mortgage payments - Depends on the size of the withdrawals and
105. Limitations of leakages (how much of increased income is
- Time lags (IRs always take 18-24mths
manipulating s aved, spent on imports or taxed)
to have an impact - not have ec eff n STt i
IRs (eval) ) doesn't
a on 113 . The - Equilibrium output changes by more than the
directly determine infl ti Multi pli er o riginal increase in expenditure
- Fixed rate mortgages e no mpac E ffec t - E.g. Gov Exp leads to improvements which
- Rented property owners se change i at es De fi niti on then lead to other improvements (e.g. income
- Credit-card lenders may not r t boost) more than the original expenditure
immediately w h spa e
114 . Multi pli er - When the change in AD is greater than the
- If businesses are running no it eadr o e ff ec t a utonomous change which brought it about
capacity, a fall in rates may t l t
de fi niti on
increased capital investment) nd ng a e on
- Many sources of capital fu i r 115. Nominal - Growth in output not including any adjustment
fixed rates Growth for price changes expressed as 'current prices'
- Lower IRs cause saver's disposable (price at time of measurement)
106. Loose incomes to fall - The growth in output not including any
116. Nominal
monetary - When IRs are low to encourage spending Growth adjustment for price changes (inflation)
policy (economic expressed as 'current prices'
(e.g. when inflation is below target)
107. Macroeconomic growth) - The price used is the price at the time of the
costs of measuement
- Loss of output (inside PPF)
unemployment 117. Nominal NOMINAL = Real + inflation
- Market failure (labour not efficiently
allocated) Value - Doesn't include inflation in its value
- Labour leaves force permanently - LT (fall - Based on current prices
in potential GDP) 118. Opportunity - Depends on the type of country (level of
108. Marginal - Increase in inequality cost of development)
propensity to
- Proportion of income increase spent on growth - Necessity of generating growth by using
consume (MPC)
Consumption (proportion of pay increase resources (scarce resources)
109. Measure of you spend) - Makes population poorer in SR because there
Economic are less consumer goods available at first
- Inflation
Performance - Sacrifice vs Gain
- Unemployment
- Growth (GDP) 119. Policies to - Self-correcting - Cylical (as demand falls,
- Balance of Payments reduce imports fall)
trade gap - Lower exchange rate (time lag and doesn't
- Sustainable Growth
work if inelastic)
- Income Equality
- Above can be done by:
1) Expenditure-reduction (reducing AD)
2) Expenditure-switching (changing the UK's
relative prices)
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120. Policies to - Lower IRs 131. Real wage - Real wages above market eqm (wages are
reduce - Lower direct taxes unemployment too high so market can't clear - excess
unemployment - Gov spending on infrastructure/projects supply of labour e.g. national min wage in
(demand side) regional areas)
(direct employment)
- Employment subsidies (New Deal) - Causes: trade unions (drive wages above
- Incentives to encourage foreign FM level), rise in min wage (labour shedding
investment in UK (create high skilled jobs) in labour intensive industries), globalisation
121. Policies to (good cheaper elsewhere)
- Increased spending on education and
reduce 132. Reasons for a - Stronger economy than trading partners
training
unemployment trade deficit (e.g. euro zone countries still in recession)
- Increase info on job vacancies
(supply side) (demand side) - - High marginal propensity to import due to
- Changes to tax and benefits - incentives
to look for work mainly ST lack of domestic substitutes & high levels
- Reduce trade union powwe of borrowing (need to import)
122. Potential - Strong exchange rate
- There is now an excess in supply of
benefits of 133. Reasons for a - Insufficient capacity from producers (LT =
labour
Unemployment trade deficit
- Downward pressure on labour - people deindustrialisation)
(supply - Inadequate non-price competitiveness
are willing to do a job whatever the salary
side/structural) (quality) - research and development gap +
is like (benefits capital owners)
- mainly LT lack of investment on inovation and design
- Businesses gain by paying out less
wages - Changing comparative advantage in the
- Productivity may also rise as workers global economy (emergence of lower cost
are scared of losing their jobs competition - China)

123. Potential growth - The overall capacity of the economy if it 134

.
Reasons for - Low cost-push pressures (wage demands,
used all of its resources 1 ffi i tl l i fl ti shocks, expectation, improved tech)
00% e c en y ow n a on
124. Potential Growth - Low demand-pull pressures (recession,
- The overall capacity of the economy
(economic greater competitive pressure in many
(how much it could produc e if it used all of
growth) industries)
its resources)
- Strong pound
125. Problems of a
- Structural weakness - sign o f LT l oss of - Expectations of inflation fallen
persistent trade
competitiveness within the in te rna tional
'payments 135 . RPI - Retail Price Index
markets (manufacturing + expo rt s l ow)
deficit' - Used prior to CPI
- Unbalanced economy - mo re M t han X
(high consumer spending vs low industrial - Includes mortgage interest payments
sector) which the CPI doesn't
- Unemployment - More useful on a national scale but CPI is
- Loss of output used when comparing to other countries
- May fall in comparison to the CPI for
- Cost push inflation - lower exchange rate
instance due to a fall in interest rates
(M more expensive = inflation) eval:
current low oil prices 136. Seasonal - Seasonal changes in labour
Unemployment demand/employment
126. Production - Land
- Only effects certain industries so doesn't
Factors - Labour
effect whole economy
- Capital
137. Shifts in AD - Caused when RNI rises but price level
127. Purchasing - Prices low, purchasing power is high
stays the same
power of income (you can do more with income)
on AD - Inc. national income - economic growth
- Low prices indicate high levels of income
- Assuming ceteris paribus, suggests inc. 138. SRAS Curve - The total production of goods and
C and leading to increasing national Definition services available in an economy at
income different price levels while some resources
128. Real Growth - Growth in GDP taking into account produced are fixed
changes of the price level expressed as - Upward sloping
'constant prices' - When prices increase, employees will
naturally work harder increasing RNO
129. Real Growth - Growth in output including adjustments
139. SRAS & LRAS - Classical LRAS curve (vertical/completely
(economic (inflation) to take into account the price
inelastic because in the LR, markets will
growth) level expressed as 'constant prices'
clear meaning no unemployed resources
130. Real value REAL = Nominal - inflation meaning whatever inflation, LRAS will
- Takes into account the changes of remain the same)
prices of goods due to inflation - Keynesian curve (flat bit = SRAS, steep
- Based on changing prices over time bit = LRAS)
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140. Structural - Due to changes in focus of economy 148. Supply side - Intention to shift AS curve right increasing
Unemployment - Mismatch of skills policy the LT productive capacity of the economy
- Involuntary unemployment definition with minimal impact in ST
- Occupational immobility (major cause) - Impact productivity and efficiency by
- Long-term unemployment opening up markets
- Regional decay 149. Tight - When IRs are high to restrict spending
- To reduce it, keep people in education monetary (e.g. when inflation is above target)
141. Supply of money policy
- The amount of money in circulation in
(MS) the economy
150. Trade in - Exports: injections that raise AD (goods
142. Supply-side - Wages and earnings Goods and and services sold abroad)
factors - Unit labour costs (cost of labour) Services - Imports: withdrawals that lower AD (goods
considered by - Labour shortages and services bought abroad)
the MPC (eval) - Import prices 151. Trade in oil - UK was importer until 1970s (North Sea oil
- Commodity prices
turned UK into an exporter)
143. Supply side - Size of population - Early high surpluses in 80s diminish as NS
factors effecting - Productivity increase oil decreases
GDP (mainly LR) - Investment - UK is now a net importer again
- Increasing potential (capital goods)
152. Trade on AD - Assuming Ceteris Paribus, when UK prices
144. Supply side - Reform of 14-19 education low compared to foreign countries = more
government - Apprenticeships competitive
policies - - Expansion of vocational qualifications - Opposite of SPICED
Education & - Expansion of university access - Therefore national income rises (AD rises)
training
153 . Types of - Consumer durables (household goods,
145. Supply side tr adeab l e motor vehicles, PCs)
- Cutting corporation tax
government - Capital goods / technology / software
- Subsidies to develop ne w t echno l ogy - goods
policies - - Commodities (oil and other fuels)
investment
Incentives and
- Regional policies to enco u rage - Components & basic raw materials
technology
enterprise, investment, loc a tion , - Foodstuffs and beverages
expansion 154 . Types of - Tourism & travel (inc. civil aviation)
- Privatisation tr adeabl re
- Insurance and business consultancy
146. Supply side
- Deregulation (remove 'red tape' se vi ces services
government
restrictions and bureaucracy) - Banking and accountancy services
policies - Labour
- Reduce trade union power (less strikes - - Data processing & other information
market
productivity inc., reduced bargaining services
power - productivity inc./dec., working - Music & entertainment
conditions fall - demotivation) - Shipping
- Flexible labour markets (0 hour 155. Types of
contracts - reduces firm's costs, may - Frictional Unemployment: ST
Unemployment
reduce AD because unstable income) unemployment between jobs
- Contracts (ST contracts promote fear of - Demand Deficient/Cyclical
sack, may reduce incentive to work) Unemployment: When in a recession,
- Terms and conditions (performance demand decreases meaning labour is
incentives - company car etc) derived leading to unemployment
- Pay - Technological Unemployment: Changes in
147. Supply side technology lead to people put out of a job
- More strict benefit regime (application: - Seasonal Unemployment: Caused by the
government
£3,500 disablilty benfit decrease) seasonal nature of some types of
policies - Tax &
welfare reform - Reduce income tax (incentive to work - employment
gap between workers and non widens, - Real Wage or Classical Unemployment:
increase labour supply, however real wage levels too high for firm to afford (above
incomes may fall AD falls) the market clearing level)
- Increase min wage (incentive to work) - Structural Unemployment: LT
- Increase retirement (increase productive unemployment caused by changes in the
capacity, decrease pension payments, structure of industry in the economy (skills
however less work for students) mismatch, closing down mines to invest in
- 'New Deal' scheme (help young into services, closing down call centres to other
jobs) countries where labour is cheaper)
- Decrease min wage
156. UK - Recession is two consecutive periods of
Performance negative economic growth
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157. Unemployment - The number of people of working age out of a job

- Problems: defining working age, housewives/husbands, disabled, survery
- Measured from the Claimant Count and ILO

158. Unemployment definition - People able, available and willing to find work actively seeking work - but not employed
- Claimant Count
- Labour Force Survey (ILO)

159. Unemployment Diagram - AD shifts left

- Unemployment is the distance between Y and Y1

160. Wealth Effect - Dependent on the wealth of households (property, shares)

- If wealth increases, confidence increases because households have more money to fall back on, this
means that consumers will spend more increasing C
161. What determines size of - Size of withdrawals & leakages
multiplier - How much of increased income is saved
- How much is spent on imports
- How much of inc income is taxed
162. What fiscal policy effects - AD (taxes)
- Unemployment
- BOP
- Inflation
- Economic growth

163. What GDP misses - Self-sufficiency (don't sell or buy goods)

- Doesn't include any sub tr ac ti ons ( har mf ul subs t ances, pollution, environment degradation)
- Doesn't include in fo rmal/ bl ack economy ( subsi st ence farming, cash in hand, bartering & illegal activities)
164. Why a AD curve goes - Purchasing pow e r (low pri ces = hi gh pp = hi gh l eve l s of income therefore meaning increased consumption
from left to right and assuming CP, inc reases AD i nc r eas i ng RNI)
- Interest rates (low pri ces = l ow I Rs , if p rices ri se , so do IRs, discouraging borrowing therefore spending
decreasing consu mpti on/i nves t ment/ competiti veness)
- Trade (low UK prices = mor e competiti ve, mor e export s meaning higher national incomes)
165. A withdrawal - Imports
- Goods and servi ces bough t ab r oad wit h an outfl ow of funds from UK
- Reduces AD
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