Transcript Unit 2 - Hartismere

Macro- Economics
• Key ideas linked to exam
questions
Total activity in the economy
• GDP stands for?
• Gross domestic product – total value of goods
and services produced in the country
• Measured by incomes, output of goods,
spending on them
• Circular flow of income – measures £ going
around the economy between households and
businesses
Circular flow of income
• Diagram
Injections and leakages
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Injections are?
Where money is added to the circular flow
Main injections are?
Investment, government spending, exports
Leakages are?
Where money is taken out of the circular flow
Main leakages are?
Saving, taxation, import spending
Aggregate demand
• Total spending on goods and services in the
economy at a price level
• Formula is?
• AD=
• AD=C (spending by families)
• AD=C+I (investment by businesses)
• AD=C+I+(g-t)(government spending – taxation)
• AD=C+I+(g-t)+(x-m) (exports – imports)
• LEARN THIS FORMULA - AD=C+I+(g-t)+(x-m)
Consumption
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Influenced by?
Incomes – real, disposable income
Confidence – animal spirits. At moment?
Wealth – value of house, shares, jewellery. More
wealth, feel better off, spend ?
• Interest rates
• Because?
• Cost to borrow, cost of mortgage payments,
affects attractiveness of saving. VERY
IMNPORTANT
QUIZ
1. What are interest rates at the moment?
2. Who came up with the idea of animal
spirits?
3. Can you name two types of tax on spending?
4. If a person spends 60p of extra £ they get
then there marginal propensity to consume
is 0._?
5. Who saves more the Germans or the Brits?
6. On scrap paper write down the formula for
Investment
• Businesses spending money on?
• Equipment, machinery, buildings, vehicles etc
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Influenced by
Animal spirits
Interest rates – businesses also borrow £
Profits that could be made – in recession?
Exam question a2)
• Explain how a change in interest rates might
affect the level of investment (6)
• Definition 2 marks
• 2 steps or effects 4 marks
Government spending
• How many billions are governments spending
more than they are getting in tax revenue at
moment per year?
• BUDGET DEFICIT
• Spending influenced by –
• Government priorities – health, education –
cuts in defence, environment etc
• What is the national debt?
Exports - Imports
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Known as the –
Balance of payments
Exports influenced by –
Their price (inflation)
Quality, design
Exchange rates – low value of £ like at moment makes
exports _________?
• UK tends to import more _______ and export more
_________
• Overall we have a trade deficit on the current account
Aggregate Supply
• Total supply of goods and services in the
economy at a price level
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Businesses supply these goods and services
Influenced by –
Costs of production – wages, oil prices etc
Animal spirits – confidence of firms
Productivity of workers – due to training, use of
technology etc – higher output per worker better
The Key AS – AD diagram
• Always worth 4 marks in any question
• Label carefully!
AD
•What is YYF?
CPI
Full
employ
ment –
AS
Vertical
•Why is this bad?
P
Y
YF
Real Output
AD LEFT OR RIGHT SHIFT?
1. Taxes increase
2. Interest rates fall
3. House prices increase
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Which of these would have a quick effect?
Remember time lags is an EVAL point.
AS LEFT OR RIGHT SHIFT?
1.
2.
3.
4.
Confidence of business owners increases
Technology used more by businesses
Interest rates increase
There is a 10% in petrol and diesel prices
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Which of these would have the most
immediate effect?
Equlibrium
• What could have caused this? What macro
AS
effects?
CPI
p
p
2
AD
AD2
o
y
2
y
Real output
Question b2
• Using aggregate demand and supply analysis,
explain the likely impact on the equilibrium
price level and level of real output of an
increase in the savings ratio. Refer to figure 3
in your answer. (10)
• Diagram – 4
• Refer to data – 2
• Discuss impact on price and output - 4
Often multiplier can
be used as an EVAL
point
Multiplier Effects
• When an injection of money into economy leads to a
greater increase in national income overall
• E.g 1bn extra spent on a new road but economy
grows by 2bn as a result
• Multiplier value here is _______
• Road builders spend in local shops and services who
make more £ and spend on ……….
• Multiplier is stronger if money is kept in the circular
flow and does not leak out much through
• 3 Leakages are ?
Government Macro – Economic
Objectives
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Low unemployment
Rate at moment?
Low inflation
Rate at moment?
High economic growth
Current rate of growth?
Balance of payments surplus
Current deficit is?
EVAL point – prioritise – which is most important for
the government at the moment?
• Have we missed anything?
Policies to Achieve Objectives –
Monetary Policy
• Monetary policy – policies to change the
demand for and supply of money
• Demand – interest rates. MPC. TARGET
• Transmissions mechanism – if interest rates
are changed what happens next?
Transmissions Mechanism
• Changing interest rates affects ………………….
EVAL points with Monetary Policy
• Base interest rate stuck at _____for over 3
years
• Changing interest rate affects exchange rate –
higher IR ----------- higher ER
• Banks may not change their rates quickly after
• Different groups affected differently –
pensioners like ____ Irs, younger people and
families like _____ IR’s
Fiscal Policy
• Changes in taxation and government spending
to achieve macro objectives
Fiscal Policy
• Inflationary fiscal policy ___________ AD. For
example by
• Deflationary fiscal policy ___________ AD.
For example by
• Budget deficit – deficit for _____ year
• National debt – total debt over years
Eval Points for Fiscal Policy
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Limited by budget problems
Budget only once a year
Opportunity costs – e.g. more spending here but ….
Changing income tax affects incentives to work
Some out of governments control e.g. benefit
spending rises automatically when unemployment
Poor data to make decisions on – how much to
spend, cut
Multipliers in economy make it difficult to change
things by correct amount
Supply Side Policy
• Make it easier or cheaper for businesses to
produce more. AS shifts to the _______
• Examples –
• Higher spending on education and training
• Cut minimum ______
• Reduce benefits
• Lower business tax
• Cut red tape for business
Eval Points for Supply Side Policies
• Many of them are fiscal policies
• Time lags – take a long time to work e.g.
education and training
• Many cost £ we don’t have
• Incentives can be affected – e.g. lower taxes
• Some have nasty side effects e.g. lower
benefits to encourage people to work – lower
AD
General EVAL points
• TOP BEARD!!!!!!!!!
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T – Time lags
O – opportunity cost – spend more here, lose ….
P – prioritise – more imp, less imp
B – budget deficit – limits policies
E – economy – slow growth, high unemployment
A – AS curve – effects depend where on the AS curve AD is
R – Reliability of data that decisions are based on is dodgy
– growth rates and trade data inaccurate
• D – different effects on different people, types of
businesses, areas etc
Question Technique / Structure
• Look out for key words / marks
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Use figure 1 – then include data for 2 marks
Explain two points – chose your best 2!
Use a diagram – always AS AD diagram
2 main points for 10 or 12 markers
Assess, analyse, evaluate, consider in question –
need eval points. These will be over 10 marks.
• Need 2 eval points unless on 30 marker, then 3
30 Marker
• 2 marks for a ?
• 4 marks for a ?
• 12 marks for 3 ?
• 12 marks for 3 ?
• Produce a plan for question c