flashcards
What is the multiplier effect?
a
When the initial injection into the circular flow causes a larger increase in real GDP
When is the multiplier high?
Project is labour intensive and when equipment is sourced domestically
What is the multiplier coefficient?
Final change in real GDP / Initial change in real GDP
q
What is a negative multiplier effect?
a
When an initial withdrawel or leakage of spending in the circular flow leads to knock on effects as results in a bigger drop in GDP
What is the calculation for simple multiplier
1/1-MPC
What is capital spending?
Government spending on items from which we will benefit in the future e.g infrastructure, education
What is a positive accelerator effect?
When an increase in the rate of demand leads to a rise in planned capital investment by businesses
When is the multiplier high?
Economy has plenty of spare capacity to meet higher AD
MPT and MPI is low
MPC is high
What does QE involve?
Creating money electronically to buy assets (mainly bonds) from financial institutions such as the major insurance companies, pension funds and comercial banks
Order the events of QE
Creates money electronically and puts in on a balance sheet
–>
Purchases government bonds causing a price of bonds to increase
–>
This results in lower yields for bond owners so owners look for assets with larger yields such as stocks
–>
Commercial banks get money from these purchased assets and increases their liquidity.
–>banks lend out and stimulate economy
What is current spending
Government spending on items from which we will benefit in the current financial year
What are transfer payments?
Government payments to individuals in which no service is given in return e.g. benefits
Define a trade off
a
A trade off is a situation where achieving one macroeconomic objective could lead to damagine another macroeconomic objective
What is a an improvement in the current account?
When a deficit gets smaller or a surplus gets larger or we move from deficit to surplus
What is a deterioration in the current account
When a deficit gets larger or a surplus gets smaller or we move from a surplus to a deficit
Define fiscal policy
The use of government spending and tax to influence the pattern of economic activity and affect the level and growth of AD, output and employment
Why is taxation used?
Provide public services
Influence AD
Influence spending patterns
Redistribute income and wealth
Protect jobs in UK - imports.
What do the 6 canons of taxation mean?
Equity - based on ability to pay
Economy - more revenue then administration costs
Certainty - easy to calculate
Convenience - easy to pay
Efficiency - achieve what it is set out to achieve
Flexibility - tax should easily be able to change
What are the arguments against borrowing?
Cost
Intergenerational inequity
What are the 6 canons of taxation
Equity
Economy
Certainty
Convenience
Efficiency
Flexibility
What is the rate of tax?
tax/income times 100
What is progressive tax?
As incomes rise, the average rate of tax increases - pay a larger proportional amount based on income
What is proportional tax?
As incomes rises, average rate of tax remains the same
What is regressive tax?
As income rises, the average rate of tax falls - indirect taxes
What is net primary income?
Investment income
What is net secondary income?
Money paid by money to EU, IMF , WB
