2.1 government and the economy Flashcards
Inflation
The rate of a a general and continuing rise in price over a period of time
Consumer Price Index (CPI)
Measure of the general price level, excluding mortgages and insurances.
Retail price index
Measure of the general price level, including insurance and mortgages
Demand pull inflation
Inflation caused by too much demand. As an economy reaches an economic boom people will have more money to spend, because of this companies are able to rise the price knowing people can still afford it.
Cost push inflation
Inflation caused by rising business costs. If a resource was to become more scarce, companies cost will be risen as it’s tricker to get it. This means companies need to raise pries to still receive profit (eg Russia and oil 2022)
Impact of Inflation:
Prices - as prices rise there is a reduced power of purchasing
Wages - some workers are able to increase their wages to compensate for the increase in price, this can lead to a price/wage spiral developing. This spiral could result in conflict between employers and employees and they could both loose out.
Balance of payments - If inflation in the domestic country is greater than in foreign countries, firms will find it tricker to sell in overseas markets causing a decrease in exports. Consumers will try to maximise their benefits and buy from the cheap overseas markets, causing an increase in the inports. This will lead to a balance of payments deficit.
Unemployment - In demand pull inflation, there is a lot of people spending because there is a lot of people working. Governments may have to accept increased unemployment in order to control inflation.
Increased menu costs
Increased shoe leather costs
Uncertainty - if inflation is high, businesses cannot predict what will happen long term, this means they may invest less or get deals wrong with supplier contracts
Business & Consumer Confidence - Inflation might make consumers and businesses cautious, this means consumers will borrow less money and businesses won’t be confident selling at times of high inflation this usually puts a halt in economic activity.
Unemployment
When this activity seeking work are unable to find a job
How can we measure unemployment
Labour force survey (LFS) - a small form sent out to all people in a nation, asking them if they are employed and if they are looking for a job
Types of unemployment
Cyclical unemployment- unemployment as a result of a downturn in an economic cycle. As economic activity decreases firms do not need a lot of workers to match aggregate demand, as a result they will lay off workers.
Structural unemployment - unemployment caused by the decline of a sector in an economy (eg primary)
Seasonal unemployment - unemployment in industries made for. only certain times of the year (eg Santas grotto)
Frictional unemployment - short term unemployment as people move from one job to another
Voluntary unemployment - unemployment when people choose no work (eg bitcoin millionaires)
Technological unemployment - unemployment from technology replace humans
Impacts of unemployment
Output - unless it’s technological unemployment, as unemployment rises the productive potential of the country will decrease, this will slow down the economic growth
Poverty - will all lead to higher crime rate
Increased government spending on benefits
Decrease in tax revenue
Consumer confidence - people who are unemployed and people afraid of getting laid off will spend less in order to save more money. This will cause even more cyclical unemployment
Business confidence - remaining workers may be demotivated because they fear they will get made redundant. tHis will cause a decrease in sales
Bad Society - spirit of community will be damaged
Fiscal policy
Adjusting levels of taxation and government spending to influence aggregate demand
Fiscal surplace
When government expenditure is less than government revenue
Fiscal Deficit
When Government expenditure is is more than government revenue
National debt
Total amount of money owed by a country
Types of Fiscal Policies
Expansionary - stimulating demand by lowering tax and/or increasing government spending
Contractionary - reducing demand in an economy by increasing tax and/or decreasing government spending
Impact of Fiscal policies on Macro - Economic objectives
HUDSON CHECK THIS ONE AS HARD TO READ
Inflation - Contractionary fiscal policy can be used to decrease demand pull inflation. This is because increasing taxation will decrease peoples disposable income, making them spend less money. This will therefore receive inflationary pressure. Also if the government reduces it’s spending, there will be less money in the economy, so people will not be able to spend as much and inflation will go down.
Economic growth - Expansionary fiscal policy can ??? economic growth, this is because increasing the aggregate demand and increasing government spending ( which could be in the form of subsidies) will allow other ? to invest more money in themselves. Therefore there will be an increase in the quantity and levels of output of products in the economy, therefore stimulating economic growth
Balance of payments - contractionary fiscal policy can be used to stop a balance of payments deficit. As aggregate demand decreases this will reduce the demand for imports.
Environment - If contractionary fiscal policy is introduced, aggregate demand is reduced and people will be spending less. As a result companies won’t be producing as many products. As a result they will stop harming the environment.
Monetary Policy
Use of interest rates and money supply to control aggregate demand in an economy
Money Supply
Amount of money that is currently circulating in an economy
Interest Rates
The price of borrowing and reward of saving money
Base Rate
Rate of interest set by the government or central bank for lending to other banks.
Central Bank
A central ban is the one main bank in a nation/economy. They play an important role by:
-implementing a governments monetary policy
- lending money to a commercial bank
- controlling inflation and stabilising the nations currency
How does changing interest rates affect consumers and firms
Consumers - If there is a decrease in interest rates, consumers will be able to borrow more money easily and they won’t see reasons to save money. This will result in an increase of the money supply and an increase in aggregate demand
Firms - Lots of firms borrow money for things such as investments, loans and mortgages. If there is an increase in interest rates, firms will not see reason to borrow and invest. Therefore there will be a decrease in economic activity.
Affect of changing interest rates on macro-economic objectives
Inflation - changing interest rates can control demand-pull inflation. This is because when interest rates increase and therefore aggregate demand decreases, firms know people won’t be able to afford the product at the current price. Firms will therefore decrease prices and inflation will be controlled
Unemployment - As interest rates decrease, aggregate demand will increase and there will be more sales. Therefore businesses will hire more workers to help match the demand.
Balance of payments - If a government were to increase interest rates and reduce aggregate demand, they would reduce the spending of imports
Economic growth - If interest rates are raised, and therefore investment is reduced, there will be less economic activity. This will cause a halt in economic growth.
