Key Terms

Question 1

Gross Domestic Product

Answer 1

Total UK output of goods and services, which is equivalent to total incomes earned in making UK output and total expenditure of buying UK output.

Question 2

Nominal GDP

Answer 2

Value of GDP using the prices of goods and services in the year that the output is produced.

Question 3

Real GDP

Answer 3

Measures the value of GDP overtime excluding any effects of general price inflation.

Question 4

Consumer Disposable Income

Answer 4

Total household gross income minus income tax and national insurance. The net income available to households for expenditure.

Question 5

Consumer Confidence

Answer 5

Measured by surveys to households reflecting views that people have concerning future financial situations and the economic outlook. Linked to levels of consumption.

Question 6

Consumer Savings Ratio

Answer 6

Saving is the part of disposable income that is not spent on goods or services. Total savings to total disposable income. Accumulation of wealth or payment of debt.

Question 7

Precautionary Saving

Answer 7

Saving motivated by anxiety about economic future. Falling consumer confidence will generate this type of savings.

Question 8

Wealth Effect

Answer 8

Value of wealth rising due to asset bubbles meaning that people feel wealthier in terms of the assets that they own causing greater spending, however this wealth is not material.

Question 9

Credit Crunch

Answer 9

Finical stress in the banking sector causing a reduction in the level of lending to households and firms, thus reducing consumption and investment and causing a recession.

Question 10

Interest Rate

Answer 10

The financial reward for savers and the price that borrowers have to pay for credit. Incentives that people have to save, borrow, invest or spend are all manipulated by interest rates.
The base rate is set by the BofE MPC.

Question 11

Investment

Answer 11

Done by firms to increase capital stock through the purchase of new equipment such as capital goods and education and training in human capital. Aim to increase productive potential.
Investment can be in new capital projects or to replace worn capital.

Question 12

Government Spending

Answer 12

Spending by government at a local or national level. A key part of fiscal policy:

• Current Spending is spending on welfare payments.
• Capital Spending is on large scale infrastructure projects.

Question 13

Productivity

Answer 13

Output per unit of factor of production over a period of time.

Labour Productivity is output per worker over time- key to the longer term success of the economy

Question 14

Inflation

Answer 14

A sustained increase in the price level over a period of time as measured by the Consumer Price Index. A rise in inflation will cause a fall in the value of money.
Demand Pull- AD growing at a faster rate than the grow of production.
Cost Push- inflation caused by a leftward shift in the SRAS curve due to rising cost of factor of production.

Question 15

Circular Flow of Income

Answer 15

The macro-economic cycle whereby output generates income, which in turn generates expenditure.

Question 16

Wage Price Spirals

Answer 16

Wages rise as employees and trade unions attempt to increase their income which raises the cost of production and thereby prices which puts further upward pressure on prices.
1970 income policies

Question 17

Inflationary Expectations

Answer 17

The rate of inflation which people expect to occur- affecting future behaviour.
High inflation expectations cause wage price spirals as people believe that prices will be higher in the future.

Question 18

Deflation

Answer 18

Decrease in the price level as measured by CPI and an increase in the value of money.
Causes deferred spending as people believe that they can buy more for there money in the longer term.

Question 19

Benign Deflation

Answer 19

Deflation caused by shifting out LRAS- Supply Side policies that occur at either below full employment or when there are downside pressures from supply.
Eg. in 2015 due to low oil price of around $30 per barrel, a supply side policy would have caused benign deflation.

Question 20

Unemployment

Answer 20

People out of work but actively looking for employment and so still in the labour market.

1) Demand Deficient at below Fe- suffering from a NOG and so inadequate demand for labour.
2) Structural Unemployment- Unemployment caused by skills gap due to changing patterns in demand.
3) Frictional- People between jobs.

Question 21

Current Account on the Balance of Payments

Answer 21

Balance of payments of the UK with the rest of the world. Looking at the imports and exports of the UK in goods and services as well as investment income and transfers.

• Surplus
• Deficit

Question 22

Exchange Rate

Answer 22

The value in £ in terms of a foreign currency, the amount of currency that sterling can buy. Caused by the supply and demand for one currency affected by:

1) Trade
2) Interest
3) Confidence and Expectations.

Question 23

Demand Management/ Demand Side Policies

Answer 23

Government policies to manipulate demand in order to maintain macro economic stability and performance

Question 24

Fiscal Policy

Answer 24

Manipulation of tax and government spending to affect AD. Use of the government budget.
Government spending on capital goods and infrastructure will boost AD in the short term as it is part of the AD calculation and LRAS in the longer term by increasing productive potential

Question 25

Monetary Policy

Answer 25

Manipulation of interest rates and money supply by the MPC at the BofE. Policies affect Macr-Economic stability and the exchange rate.

Question 26

Supply Side Policies

Answer 26

Policies that are aimed at increasing the productive potential of the economy by shifting the LRAS curve to the right.
When the economy reaches Fe, LRAS curves will enabled macro economic stability to be achieved, if it is done below Fe, it can have a negative effect on the economy.

Question 27

Trade Off/ Conflict between Policies

Answer 27

The extent to which the government is not able to achieve all 4 macro economic objectives. One policy/objective may have an opportunity cost in terms of another.
Eg Unemployment and Trade

Question 28

Rebalancing

Answer 28

Need for the economy to move away from excessive dependence on the growth of consumption and government spending towards investment and exports to reduce household debt and promote globalisation and long run growth.
Mark Carney