lesson 3 Flashcards
explain why rising interest rates will result in the RPI rising more quickly than the CPI?
RPI and CPI are both weighted indexes that measure inflation. the RPI matters to people more because it includes housing costs. mortgages are the biggest housing cost. if interest rates go up so does mortgage costs for housing
what is the circular flow of income?
movement of spending and income throughout the economy
what does an economic shock result in?
results in a change around the trend
four typical phases of an economic cycle
boom
recession
slump
recovery
what happens when we are going through a boom?
high inflation
the economy is hot
good employment levels (high)
imports will be flowing into the UK
hard for businesses ton recruit workers (Which could force up wages)
what happens when we are going through a recession?
high unemployment
economy is slowing
businesses may be worried and stop investing
doom and gloom in the papers
what happens when we are going through a slump?
economy is in trouble
many may be unemployed (low employment)
confidence is low
economic activity is low
what happens when we are going through a recovery?
economy is picking up again
firms start hiring again
confidence growing
people start spending again
what does output equal?
output = income = expenditure
what does income equal?
output = income = expenditure
what does expenditure equal?
output = income = expenditure
sum to figure out balance of payments deficit
imports (m) - exports (X)
sum to figure out budget deficit
government spending (G) - taxation (T)
how do you figure out consumption in the economic cycle?
payment of factors - household
what are the leakages in the economic cycle?
savings
taxation
imports
what are the injections in the economic cycle?
investments
government spending
exports
what happens when we inject too much in the economic cycle?
the economy grows and we get inflation
what happens when there are too many leakages in the economic cycle?
the economy shrinks/deflates and we get unemployment
when do we get macroeconomic equilibrium?
the sum of the injects ( S+T+M) equals the sum of the leakages (I+G+X)
when we have more government spending what type of policy do we have?
expansionary fiscal policy
what is actual growth associated with?
demand
short run
what is trend growth associated with?
supply
long run
what is the governments main challenge when going through a boom phase?
to slow things down as this creates inflation
what is the governments main challenge when going through a recession phase?
to speed things up as this phase creates unemployment
when leakages exceeds injections what do we have?
a shrinking economy
when injections exceeds leakages what do we have?
a growing economy
when we have a BOP deficit we are referring to…
imports and exports
when we have a budget deficit we are referring to…
taxation and spending
