2015 specimen AS paper Flashcards
define ‘economic growth’
- an increase in real GDP
* an increase in an economy’s productive capacity/potential
define ‘marginal propensity to consume’
• the proportion of one additional unit of income
that is spent
• ΔConsumption/ΔY
multiplier formulae
m = 1/mpw
m = 1/1-mpc
mpw = 1-mpc
mpw=mps+mpt+mpm
cause of an increase in the value of an economy’s multiplier
a decrease in the marginal propensity to import
define ‘inflation’
an increase in the average/general price level
limitation of using the CP to measure the rate of inflation
- CPI is not fully representative as it is a figure for the ‘average’ household
- CPI does not include mortgage interest payments/ it also excludes council tax, TV licences etc which may be a considerable expense to some households
- may suffer from sampling bias either in Living Costs and Food (LCF) Survey, or price survey
- difficult to account for the changing quality of goods and services so inflation may be overestimated.
budget deficit
- when government spending is greater than tax revenues
- reducing the deficit can be achieved by tax increases or cuts in government spending or a period of GDP growth which brings about a rise in direct and indirect tax revenues.
define ‘productivity’
output per unit of input
Keynesian long-run AS curve implies
that an economy may have a negative output gap in the long run
define real investment
- Investment is an increase in the capital stock
* Real means adjusted for inflation
likely effect of an appreciation of the £ against the US$ on the volume of UK imports from and exports to, the USA
Knowledge
• An appreciation means that one pound becomes
worth more US dollars
Application
• the pound has appreciated from £1 = $1.52 on 1
July 2013, to £1 = $1.65 on 1 January 2014.
Analysis
• The British pound price of goods and services
imported from the US will be lower
• The US dollar price of goods and services
exported from the UK will be higher
reasons consumer spending rose in 2013
• delayed impact of the cut in the bank rate to 0.5%, making borrowing cheaper and providing less incentive to save
• the Funding for Lending Scheme meant that
high street banks became more willing to lend to consumers/to lend at lower rates of interest, reducing the cost of borrowing
• rising consumer confidence: the FLS led to rising house prices, which created a positive wealth effect/raising consumers’ confidence and making them more likely to spend.
importance of interest rates in determining the level of business investment in the UK (KAA)
• willingness of banks to lend to firms (FLS)
• company profitability
• level of cash held by firms
• business confidence
• sustained consumer spending (may be linked to
rising real incomes)
• rate of depreciation of capital
• inflation rate (current and future expectations)
• cost of raw materials / wage rates.
interest rates
- current rates will influence the cost of servicing loans (interest payments)
- expectations of future interest rates may influence cost projections and project viability
effects of raising interest rates PERSONAL
1) increased cost of borrowing (e.g. loans more expensive so less disposable income so C falls)
2) improved return for savers (incentive to save rather than spend as higher interest rates)
3) higher mortgage interest payments (C falls)
4) banks may be more willing to lend
5) could reduce confidence of borrowers (less willing to take out risky investments and purchases)
effects of raising interest rates ECONOMY
1) currency will appreciate/increase in value (making exports less competitive, imports cheaper = reduced AD), due to hot money flows, investors more likely to save in British banks if IR higher
2) inflation - will tend to be lower
3) economic growth - will tend to be slower
4) unemployment - could rise
5) gov will see rising borrowing costs
6) Government debt interest payments increase. Higher interest rates increase the cost of government interest payments. This could lead to higher taxes in the future.
higher interest rates overall
reduce consumer spending and investment -> fall in AD:
- lower economics growth
- higher unemployment (If output falls, firms will produce fewer goods and therefore will demand fewer workers.)
- Improvement in the current account. (Higher rates will reduce spending on imports, and the lower inflation will help improve the competitiveness of exports.)
real interest rate
nominal interest rate - inflation
importance of interest rates in determining the level of business investment in the UK (Ev)
- Expectations of future values as important as current values (e.g. interest rates).
- Weighing up of different factors – extract implies confidence is the most important.
- Different factors may be more important for different firms/different regions of the UK.
effect of lack of investment on ‘inflationary measures’ in the UK (KAA)
- a lack of new investment may mean that depreciation occurs at a quicker rate than investment, reducing the productive potential of the economy
- this could lead to a decrease in the economy’s level of aggregate supply/an inward shift of its PPF
- candidates may draw an AS/AD diagram to show the effects of a reduction in (LR)AS
- cost-push inflationary pressures would build in the economy.
effect of an appreciation (stronger pound) of the £ on ‘inflationary measures’ in the UK (KAA)
• a stronger pound makes imports cheaper. The price
of imported goods in the CPI basket should fall, reducing inflationary pressures
• cheaper imports and more expensive exports may
lead to a worsening of the trade balance, reducing UK aggregate demand (this may be illustrated on an AS/AD diagram). This would lead to a fall in demand-pull inflationary pressures
• imported raw materials become cheaper (particularly oil, which is priced in US dollars). This could reduce firms’ production costs, leading to an increase in (SR)AS, and a reduction in cost-push inflationary pressures.
likely impact of lack of new investment and an appreciation of £ on ‘inflationary pressures’ in the UK (Ev)
• It depends on the rate of depreciation of capital.
• It depends on the level of spare capacity in the
economy.
• It depends on the elasticity of the AD curve, and/or
whether a lack of investment reduces AD too.
• Comment on the significance of the appreciation.
• The effect on the trade balance and hence AD of the appreciation depends on the PED for imports and exports.
evaluate whether the UK gov should focus on achieving economic growth as its key macroeconomic objective METHOD 1
Explanation of the likely benefits and costs of economic growth to: o consumers o firms o the government o income distribution o the environment o current and future living standards
evaluate whether the UK gov should focus on achieving economic growth as its key macroeconomic objective METHOD 2
• Explanation that economic growth may support the achievement of some of the government’s other macroeconomic objectives:
o low unemployment
o balanced government budget
o achieving environmental goals
• Explanation that economic growth may conflict with the achievement of some of the government's other macroeconomic objectives: o balance of payments equilibrium o low, stable inflation o reduced income inequality o achieving environmental goals