Macro Flashcards
What does the laffer curve show?
It shows the relationship between Tax revenue(£) and Tax rate(%), and what happens beyond point ‘t’.
Who created the Laffer Curve?
Economist Arthur Laffer
How should the Laffer Curve be drawn?
Draw Y and X axis.
Y= Tax revenue (£)
X= Tax rate (%)
Draw Curve, point ‘t’ and zero under intersection.
What IRL example shows the effects of the laffer curve, and beyond point ‘t’?
In 1973, Denis Healey, former Chancellor of the Exchequer, increased income tax from 33% to 35%. This led to incentives to work decreasing so much that tax revenue also decreased, the opposite of what he intended to happen. This created a huge UK budget deficit in the following years.
What is the long-run Philip’s curve?
It shows the relationship between the inflation rate and the unemployment rate in the long run.
What causes a shift left in the long run Philip’s curve, and how does this affect the NRU?
Successful supply side policies shift the long run Philip’s curve to the left. They reduce the natural rate of unemployment.
How to draw the long run Philip’s curve?
Labels:
● Inflation rate for Y-axis
●Unemployment rate for X-axis
Draw 2 vertical lines acting as curves:
●LRPC1 shifts LRPC2 left
Then, label line Un1 shifting line Un2 left
Zero under the under the intersection of the axis
Trade balance definition? (Value of)
A trade balance is the total value of exports minus the total value of imports.
Definition and examples of indirect tax?
Indirect taxes are levied on goods or services rather than an individual/firm. For example, VAT and tariffs.
Definition and examples of direct taxes
Direct taxes are paid directly to the government by consumers or suppliers. For example, income and corporate tax.
What are tariffs? (Define)
A tax you have to pay on imports (indirect tax)
What is the EU?
The European Union(EU) is a customs trade union
What is the common external tariff?
A tariff controlled by the EU that is charged on all goods/services that are imported from non-EU countries.
What is the effect on the trade balance if there is a decrease in direct tax?
A decrease in income tax will increase disposable income, which will increase the demand for imports, which will worsen the trade balance.
Does indirect taxes affect the UK’s trade balance? And why?
Most indirect taxes won’t affect the UK’s trade balance as they won’t affect the price of foreign goods and services.
Which type of indirect tax will affect the trade balance?
Tariffs
What does FDI stand for?
Foreign Direct Investments
What would lead to FDI flows increasing?
An increase in indirect taxes would lead to increased FDI flows as suppliers would keep more of the income, thus increasing the incentives to invest.
Define Wealth
Define Income
(SUM)
Wealth is the sum of all your assets
Income is the sum of your money at the end of each year
Define progressive tax
With a progressive tax, the proportion of income, profit, or price you pay in tax will increase as your income, profit, or price increases.
Define regressive tax
With a regressive tax, the proportion of income, profit, or price you pay in tax will decrease as your income, profit, or price increases.
Define proportional tax
With a proportional tax, the proportion of income, profit, or price you pay in tax will stay the same as your income, profit, or price increases.
What effect do indirect taxes have? (Progressive/Regressive)
Economists often say that indirect taxes have regressive effects, as poorer households have to spend a higher proportion of their income on VAT.
What is narrow money?
Narrow money is the money in debit or credit card accounts that can be accessed immediately.
What is broad money?
Broad money is narrow money and money in savings accounts, cheques, or bonds. They are harder to access and therefore can’t be spent immediately.
What are the 3 types of financial markets?
Money market
Capital market
Foreign exchange market
What is the money market?
The money market is where you can buy and sell short-term financial assets, such as overdrafts.
What is the capital market?
The capital market is where you can buy and sell long-term financial assets.
An example of this would be Apple requesting a £3bn loan as the bank would grant this over time.
What is the foreign exchange market?
The foreign exchange market is where you can buy and sell foreign currencies. For example, trading your british pounds for US dollars.
What is debt?
Debt is when you borrow money from banks through a loan or investors by issuing corporate bonds.
What is equity?
Equity is the percentage of a company that is owned.
What is maturity?
Maturity is the date where a bond needs to be paid back with its interest.
What is the coupon rate?
The coupon rate is the annual interest rate received on a bond as a percentage of its original price.
For example, if a bond were to pay 4% every 2 years, its coupon rate would be 2% as this is the annual interest.
What is bond yield?
Bond yield is the interest received on a bond as a percentage.
What are commercial banks?
Commercial banks deal with everyday tasks, such as allowing consumers to withdraw cash through their bank provider, for example, Barclays and Natwest.
What are investment banks?
Investment banks make investments to make money by buying and selling shares at higher prices. Although, they can also perform some of the tasks of a commercial bank.
What is a bank’s balance sheet?
It’s a record of their finances and contains assets and liabilities.
What is an asset and liability for a bank? Define
An asset is the money it has, and a liability is the money it owes.
What is profit-liquidity trade off?
It is the tradeoff between keeping cash but making no profit, or loaning it out to make a profit.
What does liquidity measure?
Liquidity measures the amount of cash a bank has and how easily its assets can be turned into cash.
What is a liquidity ratio?
A liquidity ratio is the ratio of a bank’s liquid assets to its deposits.
What is the formula for liquidity ratios?
Liquidity ratios= Liquid assets/Deposits
What do capital ratios measure?
Capital ratios measure the amount of capital compared to loans.
What is capital for a bank?
Capital for a bank is the amount of money it’s owner owns.
What is the economic cycle?
The economic cycle refers to fluctuations between periods of expansion and contraction.
What do contractions in an economy lead to?
Contractions lead to: rises in unemployment, less GDP and productivity, and budget deficits.
What are contractionary fiscal policies?
They are when a government raises tax and cuts it’s expenditure in order to improve it’s budget deficit.
How does ‘crowding out’ occur?
Crowding out occurs through a government expansion as they borrow money and drive up prices for land, labour, and capital. It leads to a shift left in the SRAS as all firms face higher costs.
What is a budget deficit/surplus?
A budget deficit is when government expenditure exceeds it’s revenue. On the other hand, if the opposite were to occur, there would be a budget surplus.
What are the balance of payments?
A record of all the economic transactions that take place between a country and the rest of the world over a specific period, with the use of exports/imports.
How to draw a short run Philip’s Curve?
Inflation(%) labels Y-axis
Unemployment(%) label X-axis
Label curve SRPC
The curve decreases
exponentially:
It starts off very steep and then becomes much flatter
What does the short-run Philip’s Curve depict?
It shows the relationship between the unemployment rate and the inflation rate in the short run.
Which economist’s view links to the LRPC?
According to Milton Friedman’s view of expectations, the long run Philip’s curve (LRPC) is completely vertical at the natural rate of unemployment (NRU).
What are the 5 characteristics of globalisation?
●Increased international movement of labour
●Increased international movement of financial capital
●Increased specialisation
●Increased international trade
●Increased Trade-to-GDP Ratio’s
How do you calculate trade to GDP ratio as percentage?
(Total value of trade÷Total Value GDP)×100
What are the 4 causes of globalisation? (C IT II TL)
Containerisation
Improvements in Transport
Improvements in IT
Trade liberalisation
What is a trade barrier?
A trade barrier is a restraint placed by a government/country on the import of foreign goods, for example, tariffs.
What is Globalisation?
Globalisation is an increase in the integration of economies around the world.
What is Foreign Direct Investment? FDI is…
FDI is an investment made by a firm in one country into a firm in another country in order to gain control.
What are ad valorem taxes?
A tax you pay as a percentage of a good/services price.
What is transfer pricing?
It occurs when parent tnc’s move profits to minimise the tax they have to pay.
What is the Diderot effect?
It states that obtaining new possessions often creates a spiral of consumption, which leads to you wanting to buy more new things.
What is the applied example for the impact of globalisation on workers? (Hartlepool)
In Hartlepool, which used to produce ships and steel, structural unemployment (as a result of globalisation) has meant that 30% of working-aged households have nobody in work.
How do you calculate bond yield?
(Payoff ÷ bond market price) ×100
What is the relationship between the bond price and its yield?
There is an inverse relationship between the bond price and its yield.
What happens to the unemployment rate as inflation decreases in the (short run)+what is the relationship between them ?
As inflation decreases, the unemployment rate increases (in the short run) as there is an inverse relationship between them both.
