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 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 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 AD

Investment Businesses spending money on? Equipment, machinery, buildings, vehicles etc 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 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 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! CPI Real Output Full employ ment – AS Vertical Y YF P AD What is YYF? Why is this bad?

AD LEFT OR RIGHT SHIFT? 1.Taxes increase 2.Interest rates fall 3.House prices increase Which of these would have a quick effect? Remember time lags is an EVAL point.

AS LEFT OR RIGHT SHIFT? 1.Confidence of business owners increases 2.Technology used more by businesses 3.Interest rates increase 4.There is a 10% in petrol and diesel prices Which of these would have the most immediate effect?

Equlibrium What could have caused this? What macro effects? AS AD AD2 p2p2 y2y2 p y CPI Real output o

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

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 ? Often multiplier can be used as an EVAL point

Government Macro – Economic Objectives 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 1.Limited by budget problems 2.Budget only once a year 3.Opportunity costs – e.g. more spending here but …. 4.Changing income tax affects incentives to work 5.Some out of governments control e.g. benefit spending rises automatically when unemployment 6.Poor data to make decisions on – how much to spend, cut 7.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!!!!!!!!! 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 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 ? Produce a plan for question c