Chapter 15: Introducing macroeconomics


A2 Economics (MACROECONOMICS) Flashcards on Chapter 15: Introducing macroeconomics , created by callum_j.smith on 23/12/2014.
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Question Answer
Define Microeconomics A branch of economics which studies the behavior of individuals and small impacting organizations in making decisions on the allocation of limited resources
What types of questions are asked in microeconomics ? ''What determines the price of a good?'' ''How many workers might an employer wish to hire?''
Microeconomics studies the small components of the economy. Who are the 4 main components ? Consumers, firms, markets, industries
What is macroeconomics ? Involves the study of the whole economy at the aggregate level
What does macroeconomics attempt to explain How the whole economy works
What type of questions does macroeconomics attempt to answer? 'What determines the average price level?'' ''How do we explain the overall levels of employment and unemployment in the economy ?''
Rather than the small components of the economy, Macroeconomics examines what ? The aggregate, such as aggregate levels of output, income, prices, employment and unemployment, trade flows which make the balance of payments
How does ceteris paribus apply to macroeconomics ? Holding all factors in the economy constant when examining one part of the economy
Economists from different schools of thought hold different views on what two main things ? 1) Macroeconomic problems 2) type of government policy needed to reduce or solve the problems
Define free-market economists Hold that economic problems can and should largely be solved at the microeconomic level and that government intervention in markets is generally not necessary.
What do free-market economists believe about the economy provided what factor occurs ? The economy is self-adjusting as the market mechanism automatically brings about economic growth and full employment provided that at the microeconomic level markets are allowed to function freely and are competitive
Free-market economists believe that optimal resource allocation in a competitive market economy can be achieved by what ? Decentralized decision making without the need of government intervention
In competitive markets, what automatically ensures the economy is on its production possibility frontier ? The market mechanism
What do competitive market forces bring about ? (aim to achieve) Full employment equilibrium (occuring on the PPF)
Define the Keynesian school of thought Keynesians justify government intervention in the economy to achieve the government's macroeconomic objectives
Keynesian economists believe what about the link between unemployment and spending ? People save too much and spend too little of their incomes, meaning that unemployment persists in the economy as long as people continue to spend too little
Too little spending and too much saving means the economy produces where in the PPF ? Inside the production possibility frontier, under-full employment equilibrium
Consumer income stimulates and causes what ? Stimulates demand which causes economic growth
When economic growth is lacking, what do Keynesian economists believe should happen ? The government should stimulate demand
What is the Keynesian opinion of markets ? They are imperfect and are not self-sustaining
Define 'depression' Generally defined as a long and deep recession
In the 1920s and 1930s, economics was dominated by what school of thought ? Free-market or neoclassical orthodoxy
During the time between the 1920s and 1930s, Free-market economists generally believed what about the outcome of a competitive market economy ? Believed that in a competitive market economy, market forces would automatically deliver full employment and economic growth
Define competitive market A market where large numbers of producers compete with each other to satisfy the needs and wants of a large number of consumers
What was the problem with free market forces in the UK and wider economies in the 1920s and in the USA in the 1930s ? They did not deliver full employment or economic growth
What did unregulated markets produce ? Produced economic stagnation and mass unemployment
When did the Great depression begin ? Around 1930 lasting for several years
In 1933, unemployment rose to almost 25% in what country ? USA
In 1931, unemployment rose to around 24% in what country ? UK
What argument did Free-market economists put across as a response to the great depression ? Free-market economists argued that markets were not to blame for persistent large-scale unemployment; mass unemployment was caused by institutional and governmental factors which prevented markets from operating freely.
Who did free-market economists blame particularly ? why ? Trade unions because they used monopoly power to prevent the wage cuts deemed necessary to price the unemployed into jobs
In the 1920s and 1930s, free-market economists believed that persistent mass unemployment was caused by what ? wage rates being too high
Draw an AD AS diagram illustrating the economy's aggregate labour market to show what happens with high wage rates
The 1920s was a period of what in the USA ? growing national prosperity
In the 1920s, free-market economists believed what about labour markets and full employment? Provided labour markets were sufficiently competitive, market forces would deliver full employment by eliminating excess supply of labour in the economy's aggregate labour market
Explain what an aggregate labour market in equilibrium is Occurs when the market-clearing wage is achieved and full-employment occurs. The number of workers firms wish to hire exactly equals the number of workers who wish to work. There is no excess supply of labour and hence no unemployment
What happens when trade unions restrict the supply of labour in order to fix a real wage rate higher than the market-clearing wage rate ? More workers wish to supply labour but firms wish to demand less labour, meaning the number of jobs decreases
State a labour market imperfection which prevents the unemployed being priced into jobs The monopoly power of trade unions demanding higher wage rates
What are inflexible wage rates also known as ? 'Sticky' downwards
In the 1920s and 1930s, free-market economists believed that the most important cause for mass unemployment was what instead of governments ? Trade unions and excessive and inflexible wage rates
John Maynard Keynes started his career as what type of economist ? A free-market economist
Did Keynes believe that the economic system is self-adjusting? No, without purposive direction.
Did Keynes believe that the source of our economic troubles lied in the conditions of supply or the conditions of demand ? The conditions of demand
Keynes believed that the failure of effective demand to reach the full potential of supply was due to what ? More fundamental causes
The Keynesian era extended from the late 1940s and early 1950s to when ? 1970s
Keynesian revolution of 1930s replaced what ? Free-market economics
Overall, Keynesian economic policy centers on what ? Managing the level of aggregate demand in the eocnomy to prevent large-scale unemployment and inflation
More than 2 decades after the late 1940s, the UK government used what two types of policy to increase aggregate demand ? Fiscal policy Monetary policy
Keyensian economists focused on increasing aggregate demand to be rid of what ? Demand-deficient unemployment
Expansionary policies sometimes created what consequences ? Created too much demand- leading to inflation
To relieve inflationary pressures in the economy, governments had to do what in the Keynesian era ? Reduce aggregate demand
In the 1930s, free-market economics gave way to what ? Keynesian revolution
After WW2, Keynesianism dominated as long as keynesian demand-management policies delivered what? 1) Full employment 2) economic growth 3) stable price level
In the 1970s, what happened in terms of macroeconomic policy objectives and Keynesian economics Keynesianism simultaneously failed to achieve any of the standard objectives such as full employment and control of inflation
The 1970s became a decade of what for Keynesian economics Decade of crisis
The failure of Keynesianism led to what ? The free-market counter-revolution
What was an important part of the free-market revival in the 1970s and 1980s ? Monetarism
Monetarists believe what about inflation ? Caused by a prior increase in the money supply
Monetarists believe that if a government wishes to control inflation, they must do what first ? Control the rate of growth of the money supply
In the monetarist era, which policy was elevated to become the main macroeconomic policy ? Monetary policy
Instead of being used to manage aggregate demand, monetary policy was solely used to control what ? Control the rate of the money supply to control the rate of inflation
In 1985, the UK government largely abandoned what type of policies and why ? Monetarist policies because they did not work
The relationship between the money supply and what broke down after the UK government attempted to tightly control the growth of the money supply Relationship between the money supply and inflation
On 18th October 2015, the financial times ran the headline 'Monetarism is dead' in response to what governmental decision ? Admission that targeting the money supply would no longer be practiced in any meaningful way
Free-market theories continued to dominate macroeconomic agenda, however, they were rebranded as what ? Supply-side theory
To separate them from supply-side policies advocated by free-market economists, Keynesian demand-management policies are usually called what ? Demand-side policies
What is supply-side economics ? A branch of free-market economics arguing that government policy should be used to improve the efficiency and competitiveness of markets. They are used to try and increase the productive potential of the economy
Are supply-side policies more macroeconomic or microeconomic ? Microeconomic
In the early days of supply-side economics, the UK government argued for what ? A redefinition of the respective roles of macroeconomic and microeconomic policies
What did the government argue for macro policy ? Argued that it should be restricted to the limited role of controlling inflation
The government argued that micro policy should be used to promote what ? Promote growth and employment
give 3 examples of supply-side policies used for enterprise 1) Incentives for business start-ups/ angel investors 2) TAX incentives for research and development 3) Lower business taxes on profts arising from patents
Give 2 examples of supply-side policies used for Capital 1) Infrastructure spending (including telecoms, environmental assets) 2) Tooling up industries with new capital
Give 2 examples of supply-side policies for Human factors 1) Tax reforms and work incentives 2) Quality of education and training for all
Give 2 examples of supplys-side policies for Markets 1) Creating extra competition between businesses 2) Openness to trade and investment overseas
From 2003 - 2008 the UK felt what in terms of economic growth ? Continuous economic growth
What were conflicts like between free-market economists and Keynesian economists ? There were less conflicts
What did members of both schools of thought agree about ? 1) the importance of supply-side economics 2) The need to control inflation at the macro level
Many free-market economists accepted what Keynesian argument? That governments should manage the level of aggregate demand through the use of monetary policy NOT fiscal policy
What is used to achieve the inflation rate objective set by the government ? Interest rates are raised or lowered
From 2003 - 2008, what was allowed to expand so there was sufficient demand in the economy to absorb the extra output that successful supply-side policies enabled the economy to produce ? Aggregate demand
During the years of 2003 - 2008, what type of policies were used to supplement supply-side policies ? Demand-side policies
2 years following the onset recession in 2008, what was this period called ? the fiscal stimulus period
There was contemporary revival in using what type of policy to manage aggregate demand in the 2 years following the 2008 recession ? Keynesian fiscal policy
Why was fiscal stimulus quickly abandoned after 2010 ? Change in government and the emergence of a completely new sovereign debt problem
In 2013, the UK experienced the opposite policy of fiscal austerity, called what ? Fiscal restraint
Instead of being raised or lowered, the Bank of England's interest rate has kept at what rate ? 0.5%
In a new monetary policy, what two things may be targeted rather than inflation ? Economic growth and employment
With the help of a productive possibility diagram, explain one cause of unemployment (12 marks)
Explain how monetary policy is currently implemented in the UK (12 marks) -
A few years ago, a British chancellor of the exchequer claimed that his policies had eliminated the problem of 'boom and bust' in the UK. Assess the extent to which this was true (25 marks) -
''Mass unemployment and recessions are perhaps the most significant of all market failures'' ''governments, and not markets, are responsible for mass unemployment and recessions'' Evaluate these two statements. (25 marks) -
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