Dover, Ben Flashcards
Injections into CFOI
investment
gov spending
exports
Withdrawals from CFOI
saving
taxes
imports
Components of AD
consumption (C)
investment (I)
gov spending (G)
exports minus imports (x-m)
Causes of shifts in short run agg supply
wage rates raw materials prices taxation exchange rates productivity
Causes of shifts in long runn agg supply
technological advances change in relative productivity of competing economies changes in education and skill changes in gov regulations demographic changes and migration competition policy enterprise and risk taking factor mobility economic incentives institutional structure of the economy
What are some causes of an increase in AD in the short run?
fall in interest rates
fall in exchange rate
income tax lower
What are some causes of a shift of supply left in the short run?
wage rate increase
raw material price increase
tax on goods raised
When is the labour maret in equilibrium?
when the demand for labour is equal to the supply
What is cyclical unemployment?
unemployment due to a lack of demand e.g. recession
What is real wage unemployment?
when real wage rate is above the market clearing price for labour
When the market is in equilibrium what type of unemployment can occur?
frictional
seasonal
structural
When the market is in disequilibrium what type of unemployment can occur?
cyclical
real-wage unemployment
Natural rate of unemployment
the proportion that choses voluntarily to be unemployed when in equilibrium.
What does the long run Phillips curve suggest?
in the long run the Philips curve is vertical. Attempts by the government to reduce unemployment below the natural rate of unemployment will be successful in the short term, but in the long run will only result in higher inflation.
Government policy objectives
national economic performance economic growth unemployment inflation the current account balance government objectives balance of payments budgets income distributions
What is the output gap?
economic measure of the difference between the actual output and the potential output.
What are the 4 components on the business cycle?
expansion
peak
recession
trough
What is a recession?
business cycle contraction which results in a general slowdown of economic activity
What are the causes of long term economic growth?
land-countries with high natural resources
labour-quality/quantity, immigration
capital-increased overtime to be sustainable
technology-cuts average cost of production
efficiency-way in which factors of production are used together
agg demand-export led growth
What are the benefits of growth?
life expectancy more disposable income housing standards education health
What are the impacts of growth?
consumers-rising incomes overtime, but does this actually increase living standards?
firms-existing firms increasing sales, but technology could see markets disappearing
government-tax levels increase, more gov spending
the economy-growth in GDP
current and future living standards-depends who is affected, if only the richest in society, then it wont improve those of everyday households.
Causes of unemployment?
frictional-moving jobs
seasonal-change in TandP
structural-demand for labour less than supply
cyclical-demand deficient
Relationship between cyclical unemployment and the output gap
cyclical unemployment occurs if the actual level of income is blow the long run trend level
Costs of unemployment
costs to the unemployed and their dependants-money, skills, motivation etc.
cost to local communities-crime violence
cost to government-benefits, taxpayer, training
cost to the economy–output productivity now and when they come back
Measures to deal with unemployment
monetary policy fiscal policy supply side policies geographical subsidies lower min wage more flexible labour markets
What is inflation?
sustained rise in prices across the economy
What is deflation?
a sustained general fall in prices
What is disinflation?
a fall in the rate of inflation
How to measure inflation?
consumer price index (CPI)
Causes of demand pull inflation
excess demand price level rises: consumer spending rises, interest low, confidence high firms increase investment increase in gov spending or lower taxes demand for exports may rise
Causes of cost push inflation
occurs due to rising costs: increase in wages (main cause) imports could rise in price profit increased by firms by raising price gov raise indirect tax or stop subsidies
Effects of inflation
growth and unemployment competitiveness redistribrutional costs psychological and political costs menu prices
Effects of deflation
low confidence buy cheaper in the future interest rates low, but real cost of borrowing high asset values encourages saving
Measures to deal with inflation
monetary policy supply side policy's fiscal policy exchange rate policy wage control monetarism
What are the 2 components of the balance of payments?
Current account
financial account
What is the current account?
where the payments for the purchase of goods and services are recorded
What is the financial account?
flows of money associated with saving, investment, speculation and currency stabilisation are recorded
What are the main components of the current account?
trade in goods-visibles
trade in services-invisibles
primary and secondary income-primary is loan of factors of production abroad. Secondary is a range of mainly gov transfers to and from overseas organisations
Causes of changes in the current account balance
trade in goods and services price in national goods or services may change productivity goods and services are homogeneous AD may change
Disadvantages of a current account deficit
instability-funded through borrowing
hot money flows-confidence falls, these hot money flows dry up which bursts the confidence bubble
financial account surplus-foreigners have an increasing claim on your assets
over reliant on consumer spending
loss of confidence-especially foreign investors
Advantages of a current account deficit
good during a time of inward investment-creates jobs and increases confidence
floating exchange rate-causes devaluation, reduces def
indicates a strong economy
Evaluation of running a current account deficit
depends on the size of deficit
depends on how your financing it
depends on the country in question
Evaluate approaches to dealing with a current account deficit
devaluation-increase demand for exports, reduce imports. However only effective if combined PED>1 (Marshal Learner, J curve) ST<1 LT>1
deflationary policies-raising IR and taxes, less DI to spend on imports. Low inflation increases competitiveness of exports. However, must have a high (MPM)
Supply side policies-reduce labour cost, increase investment, increase skills of labour force. However, always long term, could take decades.
protectionism-tariffs quotas to reduce imports good in ST. However, internationally uncompetitive in the LR, business no incentive to improve productive capacity.
What are the 2 types of budget deficits?
cyclical deficit-gov spending and revenues fluctuate through the trade cycle
structural deficit-that part of the fiscal deficit which exists even when the structural deficit is 0 at the top of a boom
What is discretional fiscal policy?
the deliberate manipulation of government expenditure and taxes to manipulate the economy
What are automatic stabilisers?
are expenditures that automatically increase when the economy is going into a recession and fall when incomes rise.
What are the concerns with high levels of debt?
interest rates-borrowing leads to higher interest rates which could crowd out private sector spending. However, increase in gov borrowing tends to be small and if QE is in operation gov can borrow at virtually 0 interest rates.
debt servicing-depends on rate of interest on current borrowing
rate of inflation-won’t increase if gov borrow, because priv sector spending will fall. Only increase if more money is printed.
credit ratings-increase in national debt can lower the governments and companies credit score.
What is Keynes view on unemployment?
Keynes maintained that unemployment is the result of insufficient demand
Keynes view on multiplier effect?
Keynes said there will be a multiplier effect where £1 extra deficit or reduced surplus will lead to a more than £1 increase in GDP
Evaluate demand side fiscal policy
speed of adjustment-Keynes argue gov could be in ST disequilibrium for years due to lack of demand. Classical argue this is down to failure of supply side policies.
conflicting policies-in high unemployment times, Keynesian economists argue that gov should use fiscal and monetary policies. Whereas after 2008, economists have argued that fiscal should be contractionary and monetary should be expansionary.
national debt-in a recession, expansionary fiscal policy is used to increase demand but this creates more debt. Economists argue that the cost of the long run debt outway the benefits of the short run gain. Keynesian argue as long as inflation doesn’t increase its fine.
Size of multiplier-classical=0 Keynesian=large if well targeted
time lags
fine tuning
Outline supply side policies
incentives-tax on income, cut benefits, subsidise workers, R&D
competition-privatisation, deregulation, competition policy, industrial policy
reforming labour markets-flexibility, trade union power, migration, min wage.
skills-education and training
infrastructure
growth of small businesses
Effects of monetary policy
consumer durables-many buy durables on credit, higher the IR the higher the monthly repayments
housing market-usually bought on mortgage, more affordable on low interest rates which encourages investment on houses. Moving house also stimulate purchasing of durables.
wealth effect-increased demand for houses raises house prices which creates wealth effect.
saving-high interest rates encourages saving
investment-lower the rate, more profitable it looks
exchange rate-low interest rates, value of exchange rate falls, foreign goods more expensive, Britain more cheap. Boosts AD through exports.
higher real interest rates-appreciation of currency`
What is QE?
central bank buys financial assets in exchange for moneyin order to increase borrowing and lending.
What is FDI?
form of controlling ownership of a business in one country, by an entity based in another country
When was FFL introduced and what does it do?
2012, £1 of cheap funding for every £20 outstanding loans. Banks get thus fee at 0.25% points a year. Any bank that increases its net lending will be allowed to access more cheap lending at this cost
What was the financial sectors role in the 2008 financial crisis?
growing too big up until 2008 which led to FC.
What is an asset bubble?
an asset it something that has value that can be bought or sold. Asset bubbles occur when the price of an asset goes far beyond its long term value. Asset bubbles burst when investors realise that the price is too high and so sell.
Why are regulations used for financial stability?
prevent harm to customers
prevent collapse
systematic risk
What is the exchange rate?
the rate at which on currency can be converted
3 main reasons why foreign exchange rate is bought and sold
international trade in goods and services needs to be financed
long term capital movements occur
enormous amount of speculation
How is the equilibrium exchange rate determined?
where demand for your currency meets supply
What causes shifts in demand and supply curves UK a currency?
rise in UK exports rise in UK imports rise in UK interest rates inflow of investment speculation
Impact of a fall in the exchange rate
rise in the value of exports
fall in the value of exports
improved current account
If demand is inelastic, what will a rise in the exchange rate lea to?
a rise in expenditure
What type of inflation does devaluation lead to?
cost push
