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Economics Unit 2 > Economics Unit 2 > Flashcards

Economics Unit 2 Flashcards

0
Q

Circular Flow Model (BEGH)

A
  • Households
  • Businesses
  • Government
  • External Sector
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1
Q

Key Objectives of Macroeconomic Policy (PSFHIE)
FIEPSH
SHIEPF

A
  • Price Stability i.e. Low Positive Inflation
  • Sustainable Growth of Real GDP (National Output)
  • Falling Unemployment
  • Higher Average Living Standards
  • Improved Global Competitiveness
  • Equal Distribution of Income and Wealth
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2
Q

National Income

A

Measures the monetary value of the flow of output of goods and services produced in an economy

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3
Q

Income

A

A flow of money going to factors of production

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4
Q

Wealth

A

The current value of a stock of assets owned by someone or society as a whole

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5
Q

Examples of Income

A
  • Wages and salaries from jobs
  • Rental income from property
  • Interest from savings
  • Profits flowing to shareholders
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6
Q

Examples of Wealth

A
  • Savings in bank accounts
  • Ownership of property
  • Shares/ Stocks in businesses
  • Wealth held in pension schemes
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7
Q

Aggregate Demand

A

Consumption + Investment + Government Spending + (Exports - Imports)

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8
Q

Factors Affecting Consumer Spending

A
  • Real Disposable Income
  • Employment and Job Security
  • Household Wealth
  • Confidence (Animal Spirits)
  • Market Interest Rates
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9
Q

Factors Affecting Household Saving

A
  • Real Interest Rate
  • Price Expectations
  • Availability of Credit
  • Unemployment
  • Consumer Confidence
  • Taxation of Savings
  • Trust in Banks
  • Need to Pay Back Debt
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10
Q

Factors Affecting Investment

A
  • Profits and Taxes
  • Business Confidence
  • Interest Rates + Availability of Finance
  • Actual & Expected Demand
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11
Q

Rise in Business Investment

A
  • New capital can boost productivity and creates additional capacity to supply
  • Extra demand in investment goods and can lead to strong multiplier effects on the level of GDP
  • Boost a country’s competitiveness and improve trade balance
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12
Q

Evaluation of High Investment

A
  • Some of the investment (capital) goods might be imported, leakage from the circular flow
  • Might be a lengthy time lag between workers getting more capital and productivity rising
  • Some capital investment replaces labour and therefore might cause short term unemployment
  • Level of the exchange rate affect competitiveness
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13
Q

Reasons for Low Investment

A
  • Weak business confidence
  • Low profits
  • High level of spare capacity
  • Exports hit by weak demand in overseas markets
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14
Q

Shifts in SRAS (Input costs)

A
  • Wage costs per unit of output
  • Labour productivity
  • Raw material and component prices
  • Interest rates, business rents, fuel and energy costs
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15
Q

Shifts in SRAS (Business taxes, subsidies and imported costs)

A
  • VAT, environmental charges/ employment taxes
  • Scale and size of government subsidies to certain industries
  • Costs of meeting business regulations
  • Cost of imported components (affected by exchange rate + fluctuations of world commodity prices)
16
Q

Examples of Supply Shocks

A

Hurricanes, Tsunami and Droughts can have an effect on a country’s national output

17
Q

External Factors affecting AS

A
  • World Oil and Gas Prices
  • Energy Prices/ Costs
  • Foodstuff Prices
  • Import Tariffs
18
Q

Factors affecting LRAS

A
  • Higher Productivity of Labour and Capital (rise in output per person employed)
  • Increased Labour Market Participation (growing labour supply and a rise in the number of people in work)
  • Gains from Innovation and Enterprise (determine competitiveness)
  • Capital Investment (capital spending by businesses, inward investment from abroad and the government)
19
Q

Increasing LRAS (Productive Potential)

A

Changes in

  • Labour supply available for production
  • Stock of capital inputs
  • Efficiency of allocations of factor inputs
  • Quality of factor inputs/ Productivity of inputs
  • State of technology
20
Q

AS Productivity

A
  • Fall in labour productivity leads to a rise in firms’ costs of production
  • Higher productivity allows businesses to pay higher wages and achieve increased profits at the same time
21
Q

Fall in AS

A
  • Outward migration of workers
  • Collapse in business capital investment
  • Higher production costs
  • Effects of a major natural disaster
22
Q

Consequences when AS falls

A
  • Cause higher inflation
  • Reduce real GDP/ National Output
  • Reduce unemployment
  • Increase BoP current account deficit
23
Q

Negative Output Gap (II)

A
  • When actual GDP is less than potential GDP
  • Some factor resources are under utilised
  • Higher unemployment
24
Q

Positive Output Gap (II)

A
  • Actual GDP is greater than potential than GDP
  • Some resources working beyond usual capacity
  • Main problems is rising inflationary pressures
25
Q

Causes of Recession

A
  • Rise in global commodity prices
  • Higher interest rates leading to more expensive loans
  • A rise in taxation / Cut in government spending
  • Steep decline in the level of house prices
  • Lower business confidence cuts investment and may lead to job losses
  • Declining consumer confidence leads to less spending and more saving
26
Q

Shocks

A

Unexpected events cause changes in the level of demand, output and employment

27
Q

External Shocks to AD

A
  • A large rise or fall in the exchange rate
  • A recession or boom in one or more main trading partner countries
  • A slump in the housing market or a change in the level of share prices
  • A event such as the global financial crises which caused a fall in the supply of credit
28
Q

Short Term Effects of Recession

A
  • Falling demand can cause more businesses to fail and profits fall
  • Planned investment declines, hitting industries that make capital goods
  • Drop in AD causes a fall in demand for labour
  • Recession causes a decline in tax revenues and more welfare spending (increases the budget deficit)
29
Q

Long Term Economic/ Social Effects of Recession

A
  • Rising structural long term unemployment
  • Low investment can reduce the capital stock
  • Persistent budget deficit and rising national debt
  • Falling real wages reduces living standards
  • Widening inequality of income and wealth
  • Social costs from rising relative poverty
30
Q

Costs of High House Prices

A
  • Worsens affordability for first time buyers
  • Increases level of mortgage debt
  • Increases wealth inequality
  • Causes an increase in demand for and cost of renting property
  • Worsens geographical mobility of labour
31
Q

Benefits of House Prices

A
  • Increases wealth of home owners
  • Boosts consumer confidence
  • Stimulates an expansion of new house building
  • Increases tax revenues from stamp duty
  • Improves the financial stability of the banks
32
Q

Multiplier Effect

A

A change in one of the components of AD can lead to a multiplier final change in the equilibrium level of GDP

33
Q

Housing Markets (AD)

A
  • Unemployment rises
  • Labour intensive, demand and output have large multiplier effects
  • Low consumption, high savings
  • Falling house prices, fall in consumption
  • House affordability is high
34
Q

Multiplier Effect (AS)

A
  • When AS is highly elastic, multiplier effect likely to be high
  • When AS is inelastic, hard for AS to expand to meet rising AD
35
Q

High Multiplier Value

A
  • Economy has plenty of spare capacity

- Propensity to import and tax is low

Economics Unit 2 (1 decks)

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