macro Flashcards
characteristics of money
durability, portable, divisible, hard to counterfeit, acceptable, valuable, scarce
greshams law
bad money drives out good money
functions of money
medium of exchange, store of value ,unit of account, standard of deferred payment
fishers equation
mv=pt (m= money supply, v= velocity of circulation, price level, t= number of transactions
M0 (money supply)
notes and coins and central bank reserves
MzM
notes and coins plus all sight deposits held by the non bank private sector
M2
notes and coins plus all retail deposits held by the non bank private sector
M4
notes and coins, deposits, certificates of deposits securities with a maturity of less than 5 years held by the non bank private sector
narrow money
definition of money supply ->measure of the value of the coins and notes in circulation and other money equivalents that are easily converted to cash
broad money
measure of the total amount of money held by households and companies in the economy( mostly made up of commercial bank deposits, and currency)
motives for holding money
precautionary motive, transaction motive, speculative motive
precautionary motive
to help face unforeseen circumstances
transaction motive
money held for everyday trransactions
speculative motive
money held to grow your wealth
factors affecting supply of money
open market transactions(QE) reserve requirement , policy interest rates
reserve requirements
the % of deposits made by customers at a bank that must be held instead of being lent out
factors affecting demand of money
interest rate, number/ value of transactions we expect to carry out, changes in GDP, extent to which it is is possible to use credit/debit cards, anticipated rate of inflation
money market
market for short term finance, for businesses and households, money borrowed and lent for about 12 months, includes inter bank lending, includes short term gov borrowing
Capital market
(hot money) market for medium to, long term finance, shares and bonds issued here, includes long term gov bonds
Foreign exchange market (forex)
market where currencies are exchanged
role of financial markets in the wider economy
facilitate saving, lends to businesses and individuals, facilities exchange of goods and services, provide forward markets in currencies and commodities, provide market for equities (stocks and shares)
monetary policy tools
interest rates, money supply, exchange rate, reserve requirement, forward guidance
reasons for interest
reward for risk, inflation, pay for admin of loan
debentures
corporate bond
gilts
government bonds
debt financing
borrowing money from an outside source with the promise of paying back the borrowed amount plus interest
long term business finance
finance whole business for years e.g. share capital, retained profits, venture capital, mortgages, long term bank loans
medium term business finance
finances major projects or assets with a long life e.g. bak land, leasing, hire purchase, government grants
short term business finance
finances day to day trading of the business e.g. bank overdraft, trade creditors, short term bank loans, factoring
public sector debt
debt owned by central and local government and public corporations
private sector debt
debt owned by private businesses and households
financial debt
debt that is also part of the private sector, the outstanding debts of banks and financial corporations
consequences of debt
constraint on future spending power for individuals, banks with high debt can’t issue new loans this reduces business investment, in an economy with a high debt : GDP ratio deflation of prices and wages will worsen the debt problem and if interest rate rises debt payments are harder to make
coupon of a bond
the amount paid to the bearer of the bond this is a fixed amount
yield of a bond
the % of the the price of the bond that the bond pays. This varies inversely with the market price of the bond
GDP
gross domestic product, the value of the the output of the goods and services produced in an economy in a year
GNP
gross national product, GDP+ net property incomes from abroad/net income flows
standard of living
the amount of goods and services consumed by households in one year. Higher standards of living means households consume more goods and services
ppp
power purchasing parity, measures a how many units one countries currency are need to buy exactly the same basket of goods and services as can be bought with a given amount of another’s currency
problems with using GDP as an indicator of standard of living
doesn’t take into account quality of life, public server provision, non market activities, informal economy, environmental factors, distribution of gap, cost of living
benefits of economic growth
boosts standards of living, reduction of unemployment, increased tax revenue for Gove spending, improved business confidence is attractive to foreign investors, accelerator process, leads to improved technology
risks of economic growth
bad for environment, widening income gap,
how the government can encourage higher output
privatisation, deregulation, encourage enterprise, encourage business investment, trade union reform, increase spending on education and training, lower income tax, reduce benefits, introduce minimum wage
unemployment
the % of people who are able and willing to work who can’t find a job
methods of measuring unemployment
claimant count, labour force survey
types of unemployment
seasonal, structural, frictional, cyclical
cyclical unemployment
aka demand deficient unemployment, caused by a fall in ad
frictional unemployment
transitional unemployment due to people moving between jobs
structural unemployment
arises from a mismatch between skills and job opportunities
seasonal unemployment
regular seasonal changes in employment
economic and social effect of high unemployment
lost output/ efficiency (inside ppf), fall in real incomes + standards of living, drop in tax revenue, decline in labour supply as people emigrate, increase in poverty, extra demands on NHS,
benefits of unemployment
reduced risk of inflation, rise in self employment, unemployed labour available for growing business
labour scarring effects of high unemployment
loss of work experience, loss of current and future income, changes in pattern of jobs in the economy
policies to reduce unemployment - labour demand
low interest rates, depreciation in exchange rate, cutting cost of employing workers- reductions in tax, financial support for apprenticeship programs, business grants,
policies to reduce unemployment - labour supply
reducing occupational immobility, improving geographical mobility, better work incentives
NAIRU
non accelerating inflation rate of unemployment, -> no involuntary unemployment , no cynical unemployment, natural rate of unemployment
factors affecting the natural ratio unemployment
level of benefits, level of income tax, level of wage controls, trade union power, degree of power mobility, social attitudes and institutions
ways to briefly of beyond LRAS
imports(bad for balance of payments) overtime, stock from previous years
cost of inflation
people of fixed incomes loose out, loss of international competitiveness, lenders loose out, difficult for business to plan
people on fixed incomes loose out eval
this could incentives people to work, some pensions are triple lock protected
loss of international competitiveness eval
depends on foreign exchange rates, PED of our goods, could lead to a fall in a the pound
lenders loose out eval
depends on interest rates, borrower gains
difficult for firms to plan eval
reduced effect due to contractual arrangements, all firms affected
limitations of the CPI
represents the spending of the average household, changing quality of the goods (harmonic adjustments), weighting given to goods, doesn’t include housing
causes of demand pull inflation
increase in money supply, depreciation of exchange rate, reduction in tax rates, increase in wealth effect, booms in economies of trading partners
causes of cost push inflation
economy wide increases in costs of production e.g. rising labour costs, higher indirect taxes, wage price spirals, depreciation of the exchange rate
says law
supply creates its own demand (to supply something you demand things to make it)
monetarist theory of inflation
inflation is always caused by an increase in the supply of money as mv=pt and v and t are relatively static
planned gov revenue comes from
tax, fines prescription charges congestion charge etc
ways to fund a deficit
selling gov assets, surpluses, borrowing-bonds
wage price spirals
rising wages increases disposable income, thus raising the demand for goods and causing prices to rise. Rising prices cause demand for higher wages, which leads to higher production costs and further upward pressure on prices, creating a spiral
fiscal drag
deflationary effect of a progressive tax system
benign deflation
usually are a result of technological change, price of a good falls due to increased productivity
Malign Deflation
falling prices caused by a down in economic activity
laffer curve
shows the relationship between tax revenue and the tax rate. first tax rate rises but then it falls as people have a disincentive to work
incidence of tax
on whom the burden of paying the tax falls, consumer or producer - depends on PED
canons of taxation
a good tax should be economical, equitable, convenient, certain and efficient and flexible
arguments for direct taxation
inventive effects, flexibility - can choose which goods to tax, choice- people can choose what goods to buy, corrects externalites
arguments against indirect taxation
inflationary effects, gaffer curve, crime(people void tax via cinema means. lacks equity
theory of second best (eval for indirect taxes)
the idea that in a free market resources are employed where they are most productive. Applying an indirect tax redirects resources to there second best use
what the OBR (office for budget responsibility) does
produce forecasts for the economy and public finances, evaluating performance against targets, asses long term responsibility , Evaluate fiscal risks, scrutinising tax and welfare policy costing
credit rating
evaluation of the credit risk of a prospective debtor predicting their ability to repay the debt
sovereign credit rating
credit rating of a country/ national government, takes into account qualitative factors such as political stability
comparative advantage
when for a country the relative opportunity cost pf production is lower than in another country. (a country is more productively efficient than another)
factor endowment
countries have different factors of production in different quantities and qualities
absolute advantage
country with the biggest output of a particular good or service
weaknesses with the theory of comparative advantage
assumes all factors of production are equally productive, assumes all factors of production can be switched easily to produce other things, assumes there is only one type of a product, transport costs, fluctuations in exchange rates, barriers to trade exist
whats more important than the Ethan gerate
how the exchange rate changes
j curve
refers to the trend of a county’s balance of trade following a depreciation of their currency (gets worse before it gets better)
effective exchange rate
weighted index of sterlings value against a basket of currencies the weights are based on the importance of trade between the uk and each country
free floating currency
where the external value of of a currency depends wholly on the market forces of supply and demand
managed free floating currency
when the central bank may choose to intervene in the foreign exchange markets to affect the value of a currency to meet specific macroeconomic objectives
fixed exchange rate system
a currency peg either as part of a currency board system or membership of the ERM II for countries intending to join the Euro
reserve currency
an anchor currency, a currency that national govenrments and other institutions to hold as part of their foreign exchange reserves, acts as a global pricing system of commodities
requirements for a reserve currency
credible government that won’t default on its debt or attempt to debase its currency by printing money
factors that determine a currency’s value
trade balances, FDI, portfolio investment, interest rate differentials
impact on currency depreciation
higher import prices could increase inflation (cost of production), stimulus for economic growth (higher net exports), unemployment falls (increased productivity from more exports), balance of trade- possible j curve effect,
