How the Economy Works Flashcards
What are the factors influencing interest rates?
The factors influencing interest rates are:
- Economic growth - rates go up
- Unemployment - rates go down when high
- Wage inflation - rates go up
- Exchange rate
- House prices
- Consumer confidence
What factors affect how people spend?
The factors that affect how people spend are:
- Age
- Gender
- Habits
- Taxation levels
- Wealth
- Consumer confidence
- Interest rates
What factors have recently affected consumer spending?
The factors that have recently affected consumer spending are:
- The market crash 2007/2008 caused real incomes to fall, and therefore spending to fall
- Greater availability of credit
- People are conscious of consuming healthily
- Changes in technology
- Social patters (e.g. fewer children so more disposable income to spend on other items)
What factors impact borrowing?
The factors that impact borrowing are:
- Interest rates
- A person’s relative wealth
- The availability of credit
What are the impacts of a rise in interest rates on consumers?
The impacts on consumers are:
- People will be encouraged to save more as the reward is greater
- People are less likely to take out loans as the cost of borrowing has risen
- Monies paid into investments like shares are likely to decrease as people are more likely to put money into savings accounts
- People are less likely to spend and more likely to save
What are the impacts of a fall in interest rates on consumers?
The impacts on consumers are:
- People will be encouraged to save less as the reward has decreased
- People are more likely to take out loans as the cost of borrowing has decreased
- People are more likely to invest in shares
- People are more likely to spend and less likely to save
What are the impacts of a rise in interest rates on producers?
The impacts on producers are:
- Producers are likely to save more as the reward has increased
- They are less likely to take out loans as the cost of borrowing has increased
- Producers are less likely to invest and borrow money to expand their business or buy machinery
What are the impacts of a fall in interest rates on producers?
The impacts on producers are:
- Producers are less likely to save as the reward has decreased
- They are more likely to take out loans as the cost of borrowing has decreased
- Producers are more likely to invest and borrow money to expand their business or buy machinery
What factors determine investment?
The factors that determine investment are:
- Future expectations (firms must meet demand if it will rise in the future)
- Economic outlook (firms must meet the demands of a wealthier society if the economy grows)
- If the cost of goods is likely to increase or decrease
- Technological change (if technology improves businesses will invest to be more efficient)
What are the main areas of government spending?
The main areas of government spending are:
- Social protection
- Health
- Education
- General public services (transport, housing, social services)
- Defence
- Public order and safety
- Local government
What are the four government objectives?
The four government objectives are:
- Maintaining full employment
- Ensuring price stability
- Achieving economic growth
- Having a balance of payments
How does the government attempt to maintain full employment?
The government attempt to maintain full employment by supporting businesses to ensure they can employ people and helping individuals to attain the skills they need to become employable
Why does the government try to ensure price stability?
The government attempt to ensure price stability as steady rise in prices is often an indication of economic growth, but if wages are below the rate of inflation, in “real terms” this can create uncertainty in the economy. Individuals will reduce spending on consumption and businesses may reduce investment.
Why does the government attempt to achieve economic growth?
The government attempts to achieve economic growth as it allows the government to provide more and more public services to the population
What does the government attempt a balanced current account on the balance of payments?
The government attempts a balanced current account on the balance of payments as they wish to achieve an equilibrium between the inflows of money from exports and the outflows of money from imports, which are reflected in the current account
How are the government objectives quoted in the UK?
The government objectives are quoted in the UK as follows:
- Full employment is a target of 4% rate of unemployment
- Ensuring price stability is keeping an inflation rate of 2%
- Economic growth is targeted at a sustainable level of approx. 2.5% per annum
- The current account should not permanently be in deficit
Aside from the main four, what other objectives do the government hold?
Aside from the main four, the government also attempts to:
- Reduce inequality (reduce the gap between the lowest and highest paid workers, as well as the least and most wealthy households)
- Managing environmental change (e.g. attempting to ensure that economic activity has a less negative impact on the environment)
In what ways do government objectives conflict each other?
Government objectives conflict each other in the following ways:
- Maintaining full employment versus price stability: Full employment will increase spending power and demand, thus causing an increase in prices
- Economic growth versus price stability: Stable prices may not encourage businesses to increase output, and hence GDP as there is less of an incentive for profit
- Economic growth versus balance of payments: Economic growth may result in higher incomes and increased spending power, increasing demand for goods an services abroad. More spending on imports will increase the imbalance on the current account
- Economic growth versus reducing inequality: Economic growth is achieved through thriving businesses, often meaning greater rewards for entrepreneurs to a greater extent than other employees. This can result in an increased gap between the highest and lowest earners.
What is economic growth?
Economic growth is the growth of GDP over time
What is GDP?
GDP is the total market value of goods and services produced in an economy in a year
