Macroeconomics flashcards

Macroeconomics examines the economy as a whole rather than individual markets. Students must understand the key macroeconomic objectives governments pursue: low and stable inflation, low unemployment, sustainable economic growth, and a satisfactory balance of payments position. Central to this topic is the aggregate demand and aggregate supply model, which explains how the overall price level and real output are determined. Students must also grasp how fiscal policy and monetary policy are used to manage the economy, the causes and consequences of inflation and unemployment, and how economic growth is measured using GDP. Understanding the difference between short-run and long-run outcomes, the Keynesian versus monetarist perspectives, and the trade-offs between objectives is essential. The topic also covers the business cycle, income distribution, and the limitations of using GDP as a measure of living standards.

1. Card 1

   What is aggregate demand (AD) and what are its four components?

   Aggregate demand is total spending on a country's goods and services. Its components are consumption, investment, government spending, and net exports (exports minus imports).

2. Card 2

   What is the difference between short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS)?

   SRAS is upward sloping, showing output rises with the price level short-term. LRAS is vertical at full employment output, meaning the price level does not affect long-run productive capacity.

3. Card 3

   What is the multiplier effect in macroeconomics?

   The multiplier effect occurs when an initial injection of spending leads to a proportionally larger final increase in national income, because each round of spending becomes someone else's income.

4. Card 4

   What is the difference between demand-pull and cost-push inflation?

   Demand-pull inflation results from excessive aggregate demand. Cost-push inflation arises from rising production costs, such as higher wages or raw material prices, shifting SRAS leftward.

5. Card 5

   What is the natural rate of unemployment?

   The natural rate of unemployment is the level of unemployment that exists when the labour market is in equilibrium, consisting of frictional and structural unemployment, with no cyclical unemployment.

6. Card 6

   What is the difference between expansionary and contractionary fiscal policy?

   Expansionary fiscal policy involves increasing government spending or cutting taxes to boost AD. Contractionary fiscal policy reduces spending or raises taxes to lower AD and reduce inflationary pressure.

7. Card 7

   What is monetary policy and how does a central bank use interest rates?

   Monetary policy involves managing the money supply and interest rates. Lowering interest rates reduces borrowing costs, encouraging consumption and investment, thereby increasing aggregate demand.

8. Card 8

   What is the business cycle?

   The business cycle describes the recurring pattern of fluctuations in real GDP over time, moving through phases of expansion, peak, contraction (recession), and trough around a long-run trend growth rate.

9. Card 9

   What are the limitations of using GDP to measure living standards?

   GDP ignores income distribution, unpaid work, environmental damage, and leisure time. It may overstate or understate actual living standards as it only measures monetary value of output.

10. Card 10

    What is the difference between actual and potential economic growth?

    Actual growth is the increase in real GDP in a given period. Potential growth is the expansion of an economy's productive capacity, shown by an outward shift of the production possibility frontier.

11. Card 11

    What is the Phillips Curve and what trade-off does it suggest?

    The Phillips Curve suggests a short-run trade-off between inflation and unemployment: policies that reduce unemployment tend to raise inflation, and vice versa, though this relationship breaks down long-run.

12. Card 12

    What is the difference between a government budget deficit and national debt?

    A budget deficit is when government spending exceeds tax revenue in one year. National debt is the accumulated total of all past deficits, representing the government's total outstanding borrowing.

• Many students confuse a movement along the AD curve with a shift of the AD curve, forgetting that only a change in the price level causes movement along it, while changes in its components shift the whole curve.
• Students often incorrectly assume that economic growth always improves living standards, overlooking that GDP per capita can rise while inequality worsens and environmental quality declines.
• A common error is treating all unemployment as cyclical, when in fact structural and frictional unemployment persist even at full employment and cannot be resolved simply by boosting aggregate demand.

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