IB Economics SL - T2: Macroeconomics

Costs Of Deflation

3DUB - Deflationary spiral, deferred consumption of goods, debts are more difficult to pay off, unemployment, and business confidence goes down.

Lorenz Curve

A curve used to show the degree of income inequality in an economy, in which the diagonal line in the diagram represents perfect equality in income distribution.

Disinflation

A decrease in the rate of inflation.

International Trade Effect

A fall in domestic price level makes exports cheaper, leads to larger amounts of exports demanded and lower amounts of imports demanded. As a result, there is downward movement on the AD curve.

Inflationary Gap

A situation where real GDP is greater than potential GDP due to excess aggregate demand.

Deflationary Gap

A situation where real GDP is less than potential GDP due to insufficient aggregate demand.

Full Employment

A situation where the AD curve intersects the SRAS curve at the level of potential GDP.

Gini Index

A summary measure of income inequality that has a value between zero and one. The closer the value is to one, the greater the income inequality. Calculating it involves dividing the area between the diagonal and the Lorenz curve by the entire area under the diagonal.

Deflation

A sustained decrease in the average price level of an economy.

Inflation

A sustained increase in the average price level of an economy.

Good Deflation

A type of deflation caused by an improvement in productivity, resulting in an increase in SRAS and LRAS.

Bad Deflation

A type of deflation caused by changes in the determinants of AD, resulting in a decrease in AD.

Automatic Stabilizers

A type of fiscal policy that is designed to offset fluctuations in a nation's economic activity without any additional intervention by the government, such as progressive taxes and unemployment benefits.

Cost-Push Inflation

A type of inflation caused by an increase in the costs of FOPs, resulting in a decrease in SRAS.

Monetary Inflation

A type of inflation caused by an increase in the money supply of an economy, resulting in an increase in AD.

Demand-Pull Inflation

A type of inflation caused by changes in the determinants of AD, resulting in an increase in AD.

Price/Wage Inflation

A type of inflation where cost-push and demand-pull inflation compound themselves causing an inflationary spiral.

Relative Poverty

A type of poverty that involves comparing income to that of the median level incomes.

Absolute Poverty

A type of poverty that involves living on less than $2 per day.

Tax Deductions

Amounts that can be subtracted from your tax payments.

Core Inflation Rate

An adjusted inflation rate that excludes food and energy prices to eliminate the effect of sudden swings in prices.

Income Approach

An approach that adds up all the income earned by the factors of production that produce all goods and services within a country over a time period.

Expenditure Approach

An approach that adds up all the spending to buy goods and services produced within a country over a time period (C + I + G + (X - M)).

Output Approach

An approach that calculates the value of all the goods and services produced in a country over a period of time.

Trickle-Down Effect

An effect where tax cuts for the rich and corporations leads to more investment, jobs, and incomes for the rest, increasing the potential of the economy.

Interest Rate Effect

An increase in the price level increases the demand for money, therefore, increasing the interest rate. An increase in interest rate decreases the spending by consumers and businesses, an upward movement along the AD curve.

Consumer Price Index (CPI)

An index that measures the change in prices of a basket of goods and services consumed by the average household.

Producer Price Index (PPI)

An index that measures the changes in prices of factors of production.

Regressive Taxation

As income increases, the fraction of income paid in tax decreases. There is a decreasing tax rate.

Progressive Taxation

As income increases, the fraction of income paid in tax increases. There is an increasing tax rate.

Proportional Taxation

As income increases, the fraction of income paid in tax remains constant. There is a constant tax rate.

Determinants Of Investment

Business confidence, interest rates (monetary policy), technology, business taxes (fiscal policy), the level of corporate indebtedness, and legislation.

Determinants Of Consumption

Consumer confidence, interest rates (monetary policy), wealth, personal income taxes (fiscal policy), and the level of household indebtedness (debt).

Limitations Of National Income Figures

DUHBISQUE - Distribution of income, unreported economic activity (LEDCs), happiness, black markets, inaccuracies, sustainability, quality of life, usefulness of what is produced, and externalities.

Problems With CPI

Different income earnings, regional or cultural factors, changes in consumption patterns due to relative price changes, discounts, or new products, changes in product quality, international comparisons, and comparability over time.

Depression

Economic downturn that lasts for several years.

Business Cycles

Fluctuations in the growth of real output, consisting of alternating periods of expansion (increasing real output) and contraction (decreasing real output).

Real GDP

GDP measured with an adjustment for inflation or changes in the price level.

Green GDP

GDP minus the value of environmental degradation.

Distribution Of Unemployment

Geographical, gender, ethnic, and age disparities.

Wealth Effect

If the price levels increase, the real value of wealth falls, so people feel worse off and cut back on spending. If the price level decreases, the real value of wealth increases, so people feel better off and increase their spending.

Methods To Promote Equity

Taxes, tax deductions, transfer payments, subsidized or direct provision of goods, and government intervention in markets.

Government Budget

The amount of money a government has to spend (Tax Revenue - G).

Equity

The condition of being fair or just.

Quantitative Easing

The introduction of new money into the money supply of an economy.

Injections

The investment, government spending, and export revenues that add spending to the circular flow of income (I + G + X).

Gross Domestic Product (GDP)

The market value of all goods and services produced in a country over a time period (usually a year).

Labor Force

The number of people of working age who are willing and able to work and either have a job or are seeking work.

Unemployment Rate

The number of unemployed people as a percentage of the labor force.

Short Run (SR)

The period of time when prices of resources are roughly constant or inflexible (they do not change much in response to supply and demand).

Long Run (LR)

The period of time when the prices of all resources, including the price of labor (wages), are flexible and change along with changes in the price level.

Leakages

The savings, taxes, and imports expenditure that remove spending from the circular flow of income (S + T + M).

Equality

The state of being equal with respect to something.

Gross National Income (GNI)

The total income received by the residents of a country, equal to the value of all goods and services produced by the factors of production supplied by the country's residents.

Aggregate Supply (AS)

The total quantity of goods and services produced in an economy over a particular time period at different price levels.

Aggregate Demand (AD)

The total quantity of real output that all buyers in an economy want to buy at different possible price levels, ceteris paribus (C + I + G + (X - M)).

Evaluation Of Expansionary Demand-Side Policies

Time lags, demand-pull inflation, negative impact on savers, size of the output gap, consumer confidence, business confidence, crowding out (fiscal policy only), and government budget status (fiscal policy only).

Recession

Two consecutive quarters of negative growth.

Natural Unemployment

Unemployment that exists when an economy is producing at its full employment level of output, which is caused by people that are not necessarily willing and able to work in the jobs that are available at the moment. It consists of frictional, seasonal, and structural unemployment.

Structural Unemployment

Unemployment that occurs as a result of changes in demand for particular types of labor skills or changes in the geographical location of industries.

Cyclical Unemployment

Unemployment that occurs during the downturns of the business cycle or recessionary gaps, which is caused by a fall in AD.

Seasonal Unemployment

Unemployment that occurs when the demand for labor in certain industries change at particular times of the year because of variations in needs.

Disequilibrium Unemployment

Unemployment that occurs when there are conditions that prevent the labor market from clearing. It consists of classical and cyclical unemployment.

Frictional Unemployment

Unemployment that occurs when workers are between jobs.

Classical Unemployment

Unemployment that results from wages being higher than the market-clearing level, which is caused by minimum wage or trade unions.

Evaluation Of Expansionary Supply-Side Policies

Very expensive, time lags, no guarantee, and ineffective when spare capacity is present.

Costs Of Inflation

WHEEL - Worker unrest, higher interest rates, effects on savings, exports are less, and loss of purchasing power.

Crowding Out

When a government deficit drives up the interest rate and leads to reduced investment spending.

Output Gaps

When actual output exceeds or falls under the long term growth trend.

Hidden Unemployment

When some unemployed have gone unaccounted for.

Balanced Government Budget

When tax revenue is equal to government spending.

Government Budget Surplus

When tax revenue is greater than government spending.

Government Budget Deficit

When tax revenue is less than government spending, leading to public debt.

Causes Of Poverty

Low income, unemployment, low levels of capital, discrimination, geography, age, and limited social services.

Consequences Of Poverty

Low living standards, lack of access to healthcare and education, higher mortality, higher levels of preventable diseases, and inability to realize one's full potential.

Macroeconomic Objectives

Low unemployment, low and stable rate of inflation, economic growth, equity in the distribution of income, and international stability.

Costs Of Unemployment

Lower standard of living, stress, anxiety, drug use, alcoholism, crime, vandalism, increased government spending, and lower AD.

Determinants Of Net Exports

National income abroad, exchange rates (the price of currency increases, other country exports less), and the level of trade protection (restrictions decreases exports).

Transfer Payments

Payments made by the government to individuals specifically for the purpose of transferring income from those who work and pay taxes towards those who cannot work and need assistance.

Discouraged Workers

People that are unemployed but have given up seeking work.

Monetary Policy

Policies carried out by the central bank that aims at changing interest rates to influence the investment and consumption components of AD.

Demand-Side Policies

Policies that attempt to change AD in order to achieve goals of price stability, full employment, and economic growth, while minimizing the severity of the business cycle.

Supply-Side Policies

Policies that attempt to increase productivity and shift LRAS to the right by increasing the quantity and quality of FOPs.

Interventionist Supply-Side Policies

Policies that involve government-led attempts to increase the productive capacity of the country.

Fiscal Policy

Policies that involve manipulations by the government of its own expenditures and taxes to influence the level of AD.

Market-Based Supply-Side Policies

Policies that involve reducing government intervention in markets to provide more incentives for firms to produce or to make it easier for them to produce.

Expansionary Policies

Policies used when there is a recessionary gap.

Contractionary Policies

Policies used when there is an inflationary gap.

Determinants Of Government Spending

Political priorities, and economic priorities (deliberate efforts to influence aggregate demand i.e. fiscal policy).

Determinants Of SRAS

Price and availability of factors of production, cost of production, wage rates, cost of raw materials, price of imports, business taxes, subsidies offered to businesses, legislation, and supply-side shocks.

Determinants Of LRAS

Quantity and quality of factors of production, technology, health, education, efficiency, and unemployment rate.

Unemployment

Refers to people of working age who are jobless but are willing and able to find and take a job.