Governemnt Objectives Flashcards
Direct tax
tax payed directly to the government
What is a government bond
a security which the government will pay the value of on the maturity date to the holder od the bond
where are bonds traded
sold on the primary financial markets and are then traided on secondary capital markets
what are bonds
the coupon of a bond is the rate regualr interest payment
Deflation
a sustained decrease in the general price level
deflationary spiral
AD shifts left
consumption and Inflation rate decreases
AD shifts left again
Benign Deflation
When a firms cost decreases and SRAS shifts left
This is a good result of an increase in output/ productivity
Malign Deflation
Fall in confidence by firms and households demand decreases
Difference between real and nominal income
nominal is adjusted for inflation
Inflation rate
% change in the price level
CPI
- basked of the most commonly consumed 650 goods in the economy
- Weighted
Office of national statistics living costs and food survey
7000 households are asked the most common good
% income spent in the economy
Process of finalising the price level
1- survey ‘office of national statistics costs and food survey’
2- price analysis to find the average price
3- weighted average of all prices
this leaves us the price level
Index EQ
Current Number / Base number X 100
Disinflation
Inflation is falling but still positive
4 challenges with CPI
- Unsusal spending habits
- changes in quality
- time lag
- doesn’t include mortgages
Time lag as a challenge of CPI
COVID
As CPI is annual due to covid changing consumption CPI was out of date
Changes in quality an example of a challenge with CPI
Consumers might purchase a higher quality product which might benefit consumption and does not represent inflation
Morgage
A Mortgage is loan for a house which repayments is available to be payed and are variable based on interest rate
RPI vs CPI
RPI includes mortgage repayments
(not all of the population ownes homes)
Inflation
where there is a sustained increase in the price level
Demand Pull Inflation
When an increase in AD lead to an increase in the price level causing inflation
Main dagner of negative inflation
Deflationary spiral
When prices fall and consumers choose to delay their purchases
Price wage spiral
High inflation
workers negotiate higher wages
this leads to higher costs of production
higher costs of goods (inflation)
Impact of inflation on wages
lower real costs of employment
decreased real wages
the govt saves money and then can invest money and invest in other forms
How can inflation increase the risk of investment
If inflation is high profits will become more unpredictable which means investment mist increase with risk
this is referred to as heard behaviour
Pros of inflation
1 protect from deflationary spiral
2 lower value of dept
3 decreases real wages
Con of inflation
1 lead to price wage spiral
2 lower value of money leads to a lower value of savings
3 lower inflation
target of inflation
2% of inflation plus minus 1%
4 macro objectives + 2 more
-inflation on target
-full employment
-balance of trade
-steady growth
-balanced budget
-inequality
How do we measure output
real GDP
Real GDP
made from the quality of goods and services value adjusted for infatlion
Why is real GDP misleading
fails to show the affluence of members of UK population
UK GDP- 3.34 trillion
Big Mac index
cost of a Big Mac in differnt countries
