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Economics > 1.6 The level of overall economic activity > Flashcards

1.6 The level of overall economic activity Flashcards

1
Q

What are the factors of production

A
  1. Interest
  2. Wages
  3. Rent
  4. Profit
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2
Q

Injections

A

Putting money into the economy. (Investment, government spending, export expenditure).

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3
Q

Leakages

A

Taking money out of the economy. (Saving, taxes, imports)

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4
Q

GDP

A

the total value of all final goods and services produced in a country during one year.

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5
Q

GNI

A

It is the GDP produced by nationals + NET income.

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6
Q

AD

A

total demand for goods and services in an economy at a given time (AD= C+ I+ G+ (X-M))

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7
Q

Why does AD slope downwards?

A

When average PL increases, consumers will buy less goods and services. (There is a negative relationship between pice and demand )

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8
Q

What causes movements of AD?

A

Changes in PL

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9
Q

What causes AD to shift?

A

when when of the components that make up AD increase or decrease.

Consumption: consumer confidence, interest rates, wealth, disposable income, income tax, level of household debt

Investment: Interest rates, Business confidence, level of technology, business tax, level of corporation tax.

Government spending: Policy choices of the government.

Net exports: Income of trading partners, Value of home currency, value of foreign currencies, level of protectionism.

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10
Q

Unemployment

A

all people of working age that are not working and are

actively looking for a job.

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11
Q

What are the Economical Consequences of unemployment?

A
  • Loss in GDP (drop in production).

• Loss of tax revenue, because
unemployed people have less income to
pay taxes.

• Increased cost of unemployment
benefits. (Which affect the government)

• Loss of income for individuals.

• Greater differences in income
distribution.

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12
Q

What are the Personal Consequences of unemployment?

A

-Increased crime rates, using crime to
increase money to spend.

• Increased stress levels; worries over
money

• Increased indebtedness.

• Being unable to pay for housing;
homelessness.

• Family breakdown.

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13
Q

Cyclical unemployment

A

Occurs during the downturns of the business cycle, when the economy is in a recessionary gap.
- Low AD

(Example: GDP falls, so demand for jobs falls as well)

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14
Q

Frictional Unemployment

A

when between jobs

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15
Q

Seasonal unemployment

A

Not being able to work due to the season

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16
Q

Structural unemployment

A
  1. Change in demand for a particular labour skills
  2. Movement of firms
  3. Labour market rigidities
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17
Q

Inflation

A

a sustained increase in the level of prices

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18
Q

Disinflation

A

a persistent fall in the rate of inflation

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19
Q

Deflation

A

a persistent fall in the level of prices

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20
Q

What are the consequences of inflation?

A
  • Greater uncertainty: what will prices
    do in the future?

• Decrease in purchasing power:
people can buy less due to higher
prices.

• Less savings: people want to spend
money now, because it is decreasing
in value.

• Damage to export competitiveness:
foreign countries will buy less goods
from the country that has inflation
due to increasing prices in this
country
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21
Q

What are the consequences of deflation?

A
  • Deferred consumption: consumers
    will wait to spend money, because
    prices are decreasing: goods bought
    in the future will be cheaper.

• High level of cyclical
unemployment: less consumption
will lead to less production and
therefore causes unemployment.

• Bankruptcies: less consumption will
cause profits of firms to decline. This
may result in them having to shut
down.

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22
Q

Demand pull inflation.

A

A type of inflation caused by an increase in AD

23
Q

Cost push inflation.

A

A type of inflation caused by a fall in AS, in turn resulting from increases in cots of production. (only occurs in the classical model)

24
Q

How could the government decrease inflation?

A
  • Increase taxes / reduce government spending (fiscal policy): this will cause incomes
    of people to decrease, reducing spending and thus reducing demand pull inflation.
  • Raise interest rates: this will cause people to save more (they will get more interest) and
    spend less, this reduces demand pull inflation.

-Reduce money supply (monetary policy): when there is less money in circulation, the
value of money will increase. So less money is needed to buy something and the
price is reduced.

  • Supply-side policies – shift supply curve to the right: (e.g. education, invest in
    technology etc.) this will reduce the cost for producers, reducing cost-push inflation.
25
Q

What are the consequences of economic growth?

A
  • Increase in living standards, due to higher GDP per capita, increase in wealth.

• Decrease in unemployment, more workers needed for the increased production.

• Possible increase in inflation; when caused by a higher demand prices may rise due
to demand pull inflation.

• Possible reduction in inequality (using taxation). Governments can increase their
tax revenue and redistribute more.

• Increase in exports and imports: more production may lead to a higher export
potential, more demand may lead to a higher import potential.

• Possible increase in sustainability. When GDP is growing there is more money
available to work on sustainable technologies / when GDP growth is caused by
technological advance, part of that technological advance may be used for a more
sustainable production.

• Possible decrease in environment: a higher GDP means production has increased.
Production may be polluting the environment.

26
Q

What does equity mean?

A

fair distribution of income.

27
Q

Equality

A

equal distribution of income.

28
Q

How do you promote equity?

A

Taxation to redistribute income:
• Direct vs. indirect taxes
– Direct: imposed directly on income, wealth and profit. (e.g. income tax)
– Indirect: imposed over consumer spending (e.g. VAT)

• Progressive, regressive and proportional taxation
– Progressive: the higher the income, the higher the average tax rate.
– Regressive: the higher the income, the lower the average tax rate.
– Proportional: same tax rate for all incomes.

Direct government expenditures:
• Provide money directly to people
• Subsidies (e.g. subsidize certain sectors in order to employ more people).

Transfer Payments : (e.g. unemployment benefits, pensions)

29
Q

What are the arguments for income redistribution

A
  1. Taxes are important revenue for the
    government
  2. Taxes can help reduce market
    failure (see microeconomics).
  3. Redistribution makes the
    distribution of income more fair
30
Q

What are the arguments against redistribution?

A
  1. Full efficiency can only be reached
    without government intervention
  2. Taxes may discourage people to work
    or engage in entrepreneurial activities
  3. Taxes have negative effects on growth
  4. Transfer payments cost a lot of
    money which could also be used
    elsewhere
31
Q

Absolute Poverty

A

the inability to fulfill the basic economic needs.

32
Q

Relative poverty

A

being poor relative to others around you.

33
Q

What are the causes of poverty?

A
  • Low incomes

• Unemployment

• Lack of human capital, not having
enjoyed enough education may lead
to unemployment and low incomes.

34
Q

What are the consequences of poverty?

A
  • Low living standards

• Lack of access to health care and
education

35
Q

fiscal policy

A

government intervention by either adjusting taxes or adjusting
government spending

36
Q

Expansionary fiscal policy

A
  • Reducing taxes

• Increasing government spending

• AD increases: a move from AD1
to AD2

37
Q

contractionary fiscal policy

A
  • Increasing taxes
  • Decreasing government spending

• AD decreases: a move from AD1
to AD3
.

38
Q

How does fiscal policy promote long term economic growth?

A
  • Government expenditure can help to create an economic environment favorable
    to investment. (e.g. investing money in infrastructure). Making the the economy more stable.

• Direct investments by the government may lead to a more efficient production
(e.g. by providing companies with the means to do more research & development)

39
Q

What makes up government revenue?

A

-Taxes

• Sale of goods and services

(e. g. by companies that belong to the
government) .

• Sale of state owned enterprises

40
Q

what makes up government expenditure?

A

Current expenditures = recurring
expenditures
(e.g. wages of civil servants, interest
on government debt).

• Capital expenditures = one-time
payments
(e.g. building a new school).

• Transfer payments = payments to
citizens (e.g. welfare, pensions).

41
Q

Monetary policy

A

government intervention by adjusting interest rates or

money supply

42
Q

Expansionary monetary policy

A
  • Increasing the money supply, this
    will decrease the price paid for
    money (which is interest) so interest rates
    will decrease.

• AD increases: a move from AD1
to AD2
.

43
Q

contractionary monetary policy

A
  • Decreasing the money supply, this
    will decrease the price paid for
    money (which is interest) so interest
    will decrease.

• AD decreases: a move from AD1
to AD3

44
Q

What are the responsibilities of the central bank?

A

Controlling inflation

  • Controlling money supply
  • Influencing exchange rates
  • Regulating commercial banks
  • Controlling interest rates
45
Q

What are supply side policies?

A

government intervention by affecting the production
side of the economy

⇒ changing the quantity or quality of the factors of production.

46
Q

Interventionist supply side policy

A

-Investment in human
capital (e.g. providing education).

  • Investment in new technologies.
  • Investment in infrastructure.

• Policies that favor industrial
companies, e.g. tax cuts, subsidies

47
Q

Market based supply side policy

A
  • Incentive-related policies: involve cutting various types of takes, which are expected to change the incentives faced by taxpayers.
  • Labour market reforms: Increasing labour market flexibility, intended to make labour markets more competitive, to make wages respond to the forces of supply and demand to lower labour costs and increase employment by lowering the natural rate of unemployment.
  • encourage competition: greater competition among firms forces them to reduce costs, contributing to greater efficiency in production and improving the allocation of resources, the the possible benefit of improving the quality of goods and services.
48
Q

What are the positives of fiscal policy?

A

+ Positively affects
growth

+ Ability to target specific
sectors

+ Direct impact on AD

+ Works well in a
recession

49
Q

What are the negatives of fiscal policy?

A
  • It takes time to
    work (time lag)

− Can’t influence the
supply side of the
economy

− Negatively influences
government budget

− Raise in government
spending can increase
interest rates

⇒ less consumption
and investment
(crowding out)

50
Q

What are the positives of monetary policy?

A

+ Easy to increase interest
rates

+ Interest rates can be
increased step-by-step (incrementally)

+ Positively affects
growth

51
Q

what are the negatives of monetary policy?

A

-Takes time to
work (time lag)

− Doesn’t work well in a
recession

− Conflict of interest
with inflation targets

52
Q

What are the positives of supply-side policies?

A

+ Positively affects
growth

+ Creates employment

+ Reduces inflationary
pressure

53
Q

What are the negatives of supply-side policies?

A

− Takes time to
work (time lag)

− Can negatively
influence equity

− May be politically
undesirable

− May negatively
influence the
environment

54
Q

what are demand-side policies:

A

Policies that focus on changing AD, or shifting AD curve to achieve the goals of price stability, full employment, and economic growth.

Economics (10 decks)

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