Economics Unit 2 Flashcards
What are banks and building societies?
Financial institutions that accept deposits and make loans
What is money?
Anything that is generally acceptable as a medium of exchange
What is interest rates?
The reward for saving and the cost for borrowing
What does money do?
Makes exchange quick and easy
Money can be saved
Provides a measure of value
Are cheques and bank accounts money?
No, there just a way of transferring money
Why is the rate for saving lower than the rate for borrowing?
The banks act as a intermediary between the savers and borrowers, the difference between the two rates pays for its cost and makes a profit
What are the difference between banks and building societies?
Banks are owned by shareholders who expect a dividend therefore their interest rates on borrowing may be higher and saving lower than a building society who are owned by the savers and borrowers which the interest rates will be slightly higher for savers and lower for borrowers
What factors affect saving rates?
The greater the minimum deposit for the accountant
The longer the time that the money is tied up
Whether the saver is committed to a regular saving plan
Wether the saver is committed to another type of account within the same bank
What factors affect rates on loans?
Risk
- a decrease in risk means interest rates will be lower
Security
- an increase in security means the interest rates will be lower
What are the objectives of the government?
Full employment
- everyone who is willing and able to work is
Economic growth
- would like to achieve a steady rate and avoid cyclical changes in GDP
Price stability
- keeping inflation low
Balancing exports and imports
- deficits some years and surpluses other years
What are the main policies of the government?
Fiscal
- aimed at changing the level of total aggregate demand in the economy through the changes in taxation and the governments spending
Interest rate
- aimed at changing the level of total aggregate demand by changing the interest rate
Supply-side
- aimed at increasing the economy capacity to produce more goods and services
What is economic growth?
Growth in output of the economy overtime
What is gross domestic product?
The total value of goods and services produced in the country in a year
What is GDP per capita?
GDP divided by the total population
What is economic growth measured in?
Rise in output
What are the causes of economic growth?
Investment
- spending on capital goods so the economy has the capacity to produce more goods and services in the future
Changes in technology
- technical progress means the quality if capital goods improves so more output is produced
A larger workforce
- economy can produce more if it has more workers (immigration/school levers)
Education and training
- if you increase human capital, you will increase productivity and quality and output
Natural resources
- oil
Government policies
- takes responsibility
What is the evaluation of the causes of economic growth?
Increasing the economies capacity to produce more may not lead to a rise in real GDP unless the demand for its good and services is also rising
What are the benefits of economic growth?
A rise in material living standards
- if GDP rises at a faster rate than the population than GDP per capita rises and everyone has more output available to consume than before
A rise in the welfare of the population
- as the economies capacity rises the government is able to put more resources into health and education which improved the general welfare of the economy
A rise in employment and a fall in unemployment
- as output rises more workers will need to produce it and meet the extra demand
A reduction in poverty
- as output rises so does income the government is able to take more higher income groups and give them to the lower group
What is the cost of economic growth?
Environmental costs
- greater output can lead to more pollution of the land
Congestion
- economic growth is usually concentrated in one area so transport usually has a higher strain
Loss of non-renewable resources
- economic growth uses resources that cant be replaced
A lower quality of life
- it changes peoples life they may lead a more stressful life
Inequalities of income and wealth
- benefits of growth are unevenly spread
Inflation
- rate of economic growth is too fast for the economy to respond without a rise in the general price level
Evaluate the consequence of economic growth?
Quality of life, leisure time and the environment we live in
What is full employment?
When all those who are willing and able to work are in paid employment at the current wage rate
What is unemployment?
When workers who are able and willing to work are unable to find employment at the current wage rate
How do you measure unemployment?
Claimant count
- measure unemployment according to the number of people claiming unemployment related benefits
Labour force survey
- a survey of a sample of households, counting people as unemployed if they are actively seeking work but do not have a job
Is the labour force survey or claimant count better?
The labour force survey is more reliable as they are much larger than the claimant count as not everybody who is unemployed is seeking JSA
What are the causes and types of unemployment?
Voluntary - causing by people not choosing to work Seasonal - seasonal workers not being employed at certain times of the years Frictional - moving between jobs Structural - long term changes in the structure of industries when some industries decline, usually long term Technological - capital taking place of labour Cyclical - total fall in aggregate demand in the economy so the fewer workers are needed to produce output and some will be laid of, then the demand will fall and so on. This can lead to mass unemployment
What are the consequences of unemployment?
Labour resources are wasted
- the economy is not using all of its resources to full capacity so the economy could produce more goods and services
Lower living standards
- workers suffer a lower income due to employment so there living standards are better
Excluded workers
- some people are unemployed for so long they become excluded and employers become reluctant to take them on
Cost to taxpayers
-increased unemployment increase the cost to taxpayers
Budget deficit
- gov spending increases, so tax revenues decrease
Regional problems
- unemployment is not spread evenly through the country
Social problems
- unemployment- loss of self esteem and status
What id s the evaluation of the effect of unemployment?
Frictional unemployment is necessary for a healthy economy to adapt
- it causes serious problems
What is inflation?
A sustained rise in the general price level over time
What is price stability?
When the general level of prices is kept constant or grows at an acceptably low rate over time
What is the rate of inflation?
The rate at which the general price level rises over time
How is inflation measured?
Consumer price index
- finds out the spending pattern of average families in the country and records the prices of everything families buy each month
- if prices rise from one month to the next the prices are recorded
- those goods and services that take a higher proportion of family spending are more important in measuring the rate of inflation
What are the causes of inflation?
Demand pull
Monetary inflation
Cost push
Define demand pull inflation?
Inflation caused by the excess demand in the economy
How does demand pull inflation work?
This is caused when the total aggregate demand in the economy increases, the supply of good and services cant rise to match the increase in demand so prices are pulled up
Can come from consumers and firms or the gov spending more
( some economists believe that demand cannot rise unless the supply of money to finance the demand rises therefore it is monetary inflation)
Define monetary inflation
Inflation caused by growth in the economy’s money supply
Define cost push inflation
Inflation caused by a rise in the costs of the country
How does cost push inflation work?
The cost of production rise therefore causing prices to rise, mainly due to wages for example if wages rise quicker than productivity then the cost per unit of output will rise therefore the higher prices are likely to reflect a raise in the price of some goods
What are the benefits of price stability?
Can plan spending as we know what we can and cant afford
Save our money and make a larger purchase later
What are the benefits of inflation?
2% inflation rate allows flexibility in a growing economy than just 0% as it allows relative prices to adjust
Low inflation rate acts as an incentive for businesses to invest as they can increase their profits and prices
Debtors gain in times of inflation as the real value of their debt decreases
What are the costs of inflation?
Show leather - spend more time shopping and looking around
Menu costs - firms have to adjust their prices more often when there is inflation
Income redistribution problems - people with low fixed incomes are worse off as their income fails to keep up with the rising price level
Labour market problems - workers will want to keep up with the rising price level and ask for higher wage while their employers are facing a fall in sales and profits
Balance of payments problem -inflation will be lower in other countries that we trade with making us less competitive
Unemployment - can’t afford to keep workers on
Hyperinflation - wage price spiral will continue leading to wage price spiral
What is the evaluation of the consequences of inflation?
Low rate beneficial
Other than a low rate it is harmful
Hyperinflation could lead to an economy collapse
What is hyperinflation?
A rate of inflation so high that the value of money becomes worthless
