Macro

Question 1

Government role in the economy

Answer 1

-government sets the rules which economic agents must follow e.g. health and safety standards for food manufacturers
-rules are designed to protect citizens and promote positive economic outcomes
-also produces some goods and services
- can provide support to businesses

Question 2

Industry role in the economy

Answer 2

-produce goods and services
- SMEs = small and medium enterprises , most businesses, not too small or large 50-250 people)
-majority focus on domestic market
-larger companies are usually multinationals

Question 3

Consumers role in the economy

Answer 3

Buyers of goods and services, some economies are more reliant on consumers than others, confidence of consumers can have a large impact on economy performance in these cases

Question 4

Central bank role in the economy

Answer 4

Sets interest rates and acts as banker to banks

Question 5

Civil society role in the economy

Answer 5

Groups outside of government and business, they play various roles in the economy e.g. trade unions fight for improved working conditions, affecting business and government

Question 6

Methods of finance profit

Answer 6

• retained profit (after paying dividends) can fund investment (spending on capital goods) or expansion

Question 7

Key issues for government and economy - economic growth

Answer 7

The size of the economy determines the amount of goods and service available to citizens,
The quality of a country’s infrastructure and public services is also determined by the size of the economy.
Expanding the size of the economy is a vital objective for governments.
The conventional measure for size of an economy is gross domestic product.

Question 8

Key issues for government and economy - employment

Answer 8

Most people of working age rely on jobs for income and sense of purpose.
Therefore, employment is important.
Large numbers of unemployed people has potential to lead to severe social unrest.

Question 9

Key issues for government and economy -inflation

Answer 9

Inflation is a rise in general price level for goods and services.
High inflation erodes living standards if wages do not keep up.
Governments and central banks try to keep inflation low.

Question 10

Key issues for government and economy - trade

Answer 10

National economies are only capable of producing a limited range of goods and services.
Natural resources and climate mean some goods are unavailable.
Some countries have weak technological capabilities, limiting production.

Question 11

Macroeconomic objectives

Answer 11

Governments attempt to manipulate economy to improve economic performance.
Different economies perform in different ways.

Question 12

Governments typically have macroeconomic objectives relating to four variables:

Answer 12

Economic growth
Unemployment
Inflation
Current account on balance of payments

Question 13

Economic growth

Answer 13

Governments attempt to maximise the growth rate of their economies.
Low and middle income countries can reach higher rates of growth than high income countries, as high income ones have already been through industrialisation and are at forefront of technological developments.
A number of high income countries face a rapidly ageing population, where number of workers in economy is falling.

Question 14

Unemployment and employment

Answer 14

Governments prefer minimal unemployment without inflationary pressure in the economy.
Zero unemployment is impossible as there is always frictional and seasonal unemployment.
Uk government has no official target.
Recent governments have been keen to expand employment, as higher employment should increase tax revenues and reduce benefits.

Question 15

Inflation and deflation

Answer 15

Central banks and governments in the industrialised world tend to set inflation targets of 2%. This is low but positive inflation.
Higher inflation causes the fear that it will increase further.
Governments want to avoid deflation as it is seen as linked to recession and low or negative economic growth.

Question 16

The balance of payments on current account

Answer 16

Governments aim for the balance of payments on current account to be broadly in balance over time.
Economies where current account is persistently in surplus are seen as strong whereas persistent deficits are seen as struggling or weak. However reality is more complex.
Countries can run surpluses but have low economic growth rates and vice versa.
Very large current account deficits measured as % of GDP can be dangerous as if borrowers reach a point where they cannot repay loans, there will be an economic crisis and sudden large fall in GDP.

Question 17

Methods of finance

Answer 17

• retained profit
  -borrowing
  -issuing shares
  -bonds

Question 18

Methods of finance borrowing

Answer 18

• borrowing may be used to finance day to day operations or to fund investment

Question 19

Methods of finance issuing shares

Answer 19

-issuing shares is attractive to investors as capital gains can be made, dividends an income stream, can take over company. Provides share capital to business.

Question 20

Methods of finance bonds

Answer 20

• bonds provide business with funds, provides creditors with interest and money back once bond matures

Question 21

Government budgets terminology

Answer 21

Balanced budget : spending = revenue
Budget deficit : spending > revenue
Budget surplus : spending < revenue

Question 22

Government budgets sustainability

Answer 22

If a country is growing at around 2.5% a year and there us 2% inflation and low interest rates, a fiscal deficit of around 3% per year will probably maintain a stable level of national debt as a % of GDP.
Fiscal deficits that grow to over 10% of GDP are unsustainable in the long term as governments have to borrow far more money than they expect to pay with interest in the future.
Large fiscal deficits are sustainable so long as the deficit is reduced to manageable levels over time.

Question 23

The environment

Answer 23

Environmentalists tend to be anti-growth, believing that any increased economic activity will damage the planet.
Pro growth economists argue that increases in output and improvements in technology allow economies to clean up their environments and reduce pollution.
We need sustainable growth.

Question 24

Income distribution - right wing

Answer 24

Right wing economists and politicians argue that inequality is positive as it increased incentives to work and to take economic risks.
This increases economic growth rates, raising incomes for all.
They are against policies which reduce inequalities, particularly taxing higher earners and businesses.

Question 25

Income distribution - left wing

Answer 25

Left wing economists and politicians argue that on principle of fairness, everyone should have access to a certain standard of living and that free markets lead to high levels of inequality.
Therefore, governments need to intervene and reduce inequality(e.g. by setting minimum wages or maximum prices on essentials).
They can also provide some goods and services, funded by taxes, especially on higher earners.
They argue individuals will work and take risks even if marginal rates of tax are high.

Question 26

Consumer price index

Answer 26

Measure of inflation, deduced by comparing the cost of a basket of essentials