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Economics > Macro > Flashcards

Macro Flashcards

1
Q

What does the laffer curve show?

A

It shows the relationship between Tax revenue(£) and Tax rate(%), and what happens beyond point ‘t’.

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2
Q

Who created the Laffer Curve?

A

Economist Arthur Laffer

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3
Q

How should the Laffer Curve be drawn?

A

Draw Y and X axis.
Y= Tax revenue (£)
X= Tax rate (%)
Draw Curve, point ‘t’ and zero under intersection.

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4
Q

What IRL example shows the effects of the laffer curve, and beyond point ‘t’?

A

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.

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5
Q

What is the long-run Philip’s curve?

A

It shows the relationship between the inflation rate and the unemployment rate in the long run.

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6
Q

What causes a shift left in the long run Philip’s curve, and how does this affect the NRU?

A

Successful supply side policies shift the long run Philip’s curve to the left. They reduce the natural rate of unemployment.

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7
Q

How to draw the long run Philip’s curve?

A

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

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8
Q

Trade balance definition? (Value of)

A

A trade balance is the total value of exports minus the total value of imports.

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9
Q

Definition and examples of indirect tax?

A

Indirect taxes are levied on goods or services rather than an individual/firm. For example, VAT and tariffs.

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10
Q

Definition and examples of direct taxes

A

Direct taxes are paid directly to the government by consumers or suppliers. For example, income and corporate tax.

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11
Q

What are tariffs? (Define)

A

A tax you have to pay on imports (indirect tax)

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12
Q

What is the EU?

A

The European Union(EU) is a customs trade union

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13
Q

What is the common external tariff?

A

A tariff controlled by the EU that is charged on all goods/services that are imported from non-EU countries.

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14
Q

What is the effect on the trade balance if there is a decrease in direct tax?

A

A decrease in income tax will increase disposable income, which will increase the demand for imports, which will worsen the trade balance.

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15
Q

Does indirect taxes affect the UK’s trade balance? And why?

A

Most indirect taxes won’t affect the UK’s trade balance as they won’t affect the price of foreign goods and services.

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16
Q

Which type of indirect tax will affect the trade balance?

A

Tariffs

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17
Q

What does FDI stand for?

A

Foreign Direct Investments

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18
Q

What would lead to FDI flows increasing?

A

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.

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19
Q

Define Wealth
Define Income
(SUM)

A

Wealth is the sum of all your assets
Income is the sum of your money at the end of each year

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20
Q

Define progressive tax

A

With a progressive tax, the proportion of income, profit, or price you pay in tax will increase as your income, profit, or price increases.

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21
Q

Define regressive tax

A

With a regressive tax, the proportion of income, profit, or price you pay in tax will decrease as your income, profit, or price increases.

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22
Q

Define proportional tax

A

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.

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23
Q

What effect do indirect taxes have? (Progressive/Regressive)

A

Economists often say that indirect taxes have regressive effects, as poorer households have to spend a higher proportion of their income on VAT.

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24
Q

What is narrow money?

A

Narrow money is the money in debit or credit card accounts that can be accessed immediately.

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25
Q

What is broad money?

A

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.

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26
Q

What are the 3 types of financial markets?

A

Money market
Capital market
Foreign exchange market

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27
Q

What is the money market?

A

The money market is where you can buy and sell short-term financial assets, such as overdrafts.

28
Q

What is the capital market?

A

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.

29
Q

What is the foreign exchange market?

A

The foreign exchange market is where you can buy and sell foreign currencies. For example, trading your british pounds for US dollars.

30
Q

What is debt?

A

Debt is when you borrow money from banks through a loan or investors by issuing corporate bonds.

31
Q

What is equity?

A

Equity is the percentage of a company that is owned.

32
Q

What is maturity?

A

Maturity is the date where a bond needs to be paid back with its interest.

33
Q

What is the coupon rate?

A

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.

34
Q

What is bond yield?

A

Bond yield is the interest received on a bond as a percentage.

35
Q

What are commercial banks?

A

Commercial banks deal with everyday tasks, such as allowing consumers to withdraw cash through their bank provider, for example, Barclays and Natwest.

36
Q

What are investment banks?

A

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.

37
Q

What is a bank’s balance sheet?

A

It’s a record of their finances and contains assets and liabilities.

38
Q

What is an asset and liability for a bank? Define

A

An asset is the money it has, and a liability is the money it owes.

39
Q

What is profit-liquidity trade off?

A

It is the tradeoff between keeping cash but making no profit, or loaning it out to make a profit.

40
Q

What does liquidity measure?

A

Liquidity measures the amount of cash a bank has and how easily its assets can be turned into cash.

41
Q

What is a liquidity ratio?

A

A liquidity ratio is the ratio of a bank’s liquid assets to its deposits.

42
Q

What is the formula for liquidity ratios?

A

Liquidity ratios= Liquid assets/Deposits

43
Q

What do capital ratios measure?

A

Capital ratios measure the amount of capital compared to loans.

44
Q

What is capital for a bank?

A

Capital for a bank is the amount of money it’s owner owns.

45
Q

What is the economic cycle?

A

The economic cycle refers to fluctuations between periods of expansion and contraction.

46
Q

What do contractions in an economy lead to?

A

Contractions lead to: rises in unemployment, less GDP and productivity, and budget deficits.

47
Q

What are contractionary fiscal policies?

A

They are when a government raises tax and cuts it’s expenditure in order to improve it’s budget deficit.

48
Q

How does ‘crowding out’ occur?

A

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.

49
Q

What is a budget deficit/surplus?

A

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.

50
Q

What are the balance of payments?

A

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.

51
Q

How to draw a short run Philip’s Curve?

A

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

52
Q

What does the short-run Philip’s Curve depict?

A

It shows the relationship between the unemployment rate and the inflation rate in the short run.

53
Q

Which economist’s view links to the LRPC?

A

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).

54
Q

What are the 5 characteristics of globalisation?

A

●Increased international movement of labour
●Increased international movement of financial capital
●Increased specialisation
●Increased international trade
●Increased Trade-to-GDP Ratio’s

55
Q

How do you calculate trade to GDP ratio as percentage?

A

(Total value of trade÷Total Value GDP)×100

56
Q

What are the 4 causes of globalisation? (C IT II TL)

A

Containerisation
Improvements in Transport
Improvements in IT
Trade liberalisation

57
Q

What is a trade barrier?

A

A trade barrier is a restraint placed by a government/country on the import of foreign goods, for example, tariffs.

58
Q

What is Globalisation?

A

Globalisation is an increase in the integration of economies around the world.

59
Q

What is Foreign Direct Investment? FDI is…

A

FDI is an investment made by a firm in one country into a firm in another country in order to gain control.

60
Q

What are ad valorem taxes?

A

A tax you pay as a percentage of a good/services price.

61
Q

What is transfer pricing?

A

It occurs when parent tnc’s move profits to minimise the tax they have to pay.

62
Q

What is the Diderot effect?

A

It states that obtaining new possessions often creates a spiral of consumption, which leads to you wanting to buy more new things.

63
Q

What is the applied example for the impact of globalisation on workers? (Hartlepool)

A

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.

64
Q

How do you calculate bond yield?

A

(Payoff ÷ bond market price) ×100

65
Q

What is the relationship between the bond price and its yield?

A

There is an inverse relationship between the bond price and its yield.

66
Q

What happens to the unemployment rate as inflation decreases in the (short run)+what is the relationship between them ?

A

As inflation decreases, the unemployment rate increases (in the short run) as there is an inverse relationship between them both.

Economics (3 decks)

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