Macroeconomics Flashcards

Question

What are examples of injections in the circular flow of income?

Answer 1

Investment in capital goods Exports of Goods and services Government Spending

Answer 2

Savings out of disposable income Imports of goods and services Taxation

Answer 3

Gross domestic product measures the total value of national output of goods and services produced in a given time period.

Answer 4

Gross national income is GDP plus net property income from overseas assets.

Answer 5

Investment in factories, shops and other businesses in another country.

Answer 6

Remittances are transfers of money across national boundaries by migrant workers.

Answer 7

Countries with strong net inflows of remittances will see their gross national income rise- this helps to reduce extreme poverty by lifting GNI per capita.

Answer 8

Income is money received as payment for work. Real income show the value of income adjusted for inflation. Real income are a guide to how living standards have changed and the true purchasing power of someone's income.

Answer 9

Total level of planned real spending on goods and services produced within a country in a given time period.

Answer 10

As the price levels falls, the real value of income rises and therefore consumers are more able to buy what they want or need.

Answer 11

Fall in net exports Cuts in real level of government spending Higher interest rates Fall in the supply of credit Decline household wealth and confidence

Answer 12

Depreciation in the value of exchange rate Cuts in the rate of direct and indirect taxes Increase in average house prices and share prices Expansion of supply of credit Lower interest rates.

Answer 13

Exports are good and services traded from one country to another. They are an injection into the circular flow of income.

Answer 14

Relative prices of export in world markets The exchange rate Non price demand factors, e.g. design and branding Strength of AD in a nations key export markets.

Answer 15

A trade surplus means that exports are greater than imports.

Answer 16

A trade deficit means that imports are greater than exports.

Answer 17

A net trade balance is the total value of exported goods and services minus the total value of imported products.

Answer 18

Real Disposable income Employment and Job security Household wealth Expectations and Sentiment Interest rates

Answer 19

Consumer confidence is the outlook that consumers have towards the economy and their own personal financial situation and also their views on making major purchases such as a new car or financing desired home improvements.

Answer 20

Income after the deduction of direct taxes and the addition of state welfare benefits.

Answer 21

The FTSE-100 tracks share prices of the 100 largest companies listed on the London stock exchange.

Answer 22

Money borrowed by individuals, usually from banks or financial institutions. This includes mortgages, personal loans, student loans and credit card balances.

Answer 23

The ratio of personal saving to household disposable income.

Answer 24

The marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption.

Answer 25

Marginal propensity to save (MPS) refers to the proportion of any extra income that is saved by consumers.

Answer 26

The percentage of disposable income that is saved.

Answer 27

The real interest rate is the nominal interest rate – inflation rate.

Answer 28

Consumers expectations on where they believe prices will go.

Answer 29

Spending on capital goods including plant and machinery, computer hardware and infrastructure.

Answer 30

Capital goods are fixed assets which are used in the productive process in order to produce a finished ‘consumer’ good. Capital goods are not bought for their own utility; they are bought in order to be used in the productive process.

Answer 31

``` Factories Offices Machines Printing press Combine harvester Assembly line ```

Answer 32

It is the total amount that economy spends on new capital goods

Answer 33

Gross investment minus capital consumption e.g. depreciation.

Answer 34

Actual and expected demand- when expected demand is high planned capital investments tends to rise Cost of capital, the rate of interest on a loan or the opportunity cost of using retained profits Businesses taxes, such as corporation tax which affects the post tax returns on investment projects Business confidence Pace of change of technology.

Answer 35

Injection into the circular flow of income New capital can increase productivity and creates additional capacity to supply Creates extra demand in capital goods and industries Can lead to strong multiplier effects on the level of GDP Investment will support a country's competitiveness and therefore improve the trade balance in goods and services.

Answer 36

The accelerator effect happens when an increase in GDP results in a proportionately larger rise in capital investment spending. In other words, we often see a surge in capital spending by businesses when an economy is growing quite strongly.

Answer 37

If firms see a rise in demand and expect this demand to be maintained, then they will soon start to reach full capacity. Therefore, to meet the future demand, they will respond by investing now. To meet a growth in demand may require considerable investment outlay. Because of economies of scale in investment, it is more efficient to make a significant investment (e.g. increase capacity 20%) – rather than small annual increases in investment of 2%. Therefore, firms will wait for promising economic conditions, before embarking on investment decisions.

Answer 38

Potentially high multiplier effects from multi-billion investment projects- can result in increases in AD and create new jobs. Lack of infrastructure may discourage foreign direct investment Increases the capital stock per worker/ adds to a country's long run productive potential

Answer 39

Spending on new sewers, roads, wind farms, telecommunication networks and ports by both the private and public sector. They tend to have high upfront costs and benefits that add up over many years.

Answer 40

Is the quantity of goods and services that producers in an economy are willing and able to supply at a given level of prices in a given time period.

Answer 41

SRAS is the relationship between planned national output and the general price level.

Answer 42

If prices rises in the economy, producers should produce more as there is more chance to make profit.

Answer 43

The output gap is a measure of the difference between actual output (Y) and potential output (Yf). A positive output gap means growth is above the trend rate and is inflationary. A negative output gap means an economic downturn with unemployment

Answer 44

The unit labour costs will not increase as the increase in the cost of labour is matched by the increase in output per laborer.

Answer 45

``` Wage costs changes Labour productivity Raw material and component prices Energy costs Vat Employment taxes Government subsidy Cost of meeting Business regulations Exchange rate Unexpected supply shocks ```

Answer 46

World Energy Prices World prices for food Import tariffs/Quotas-(BREXIT)

Answer 47

A rise in a country's productive potential capacity.

Answer 48

Changes in labour supply available for production Changes in labour mobility Changes in the stock of capital inputs (gross capital investment) Changes in the efficiency of allocation of factor inputs Improvements in quality of inputs/productivity Advances in the state of technology/innovation

Answer 49

Productivity measures the efficiency of the production process.

Answer 50

Lowers inflation as unit costs falling causing an outward shift of supply if productivity is rising faster than wages.

Answer 51

Increased productivity results in higher economic growth as there gains in aggregate supply and expansion in AD. Improvements in labour productivity enable firms to produce more for lower costs.

Answer 52

Reduces unemployment as in the long run creates new jobs.

Answer 53

Improved balance of trade as exports are more competitive, meaning there is an injection of aggregate demand into the circular flow.

Answer 54

Higher business investment as business profits will have increased giving them more resources to fund capital spending.

Answer 55

Productivity gains in government will help reduce state spending thus increased value for money.

Answer 56

Skills shortages eased Increased labour supply Higher tax revenues Innovation and enterprise

Answer 57

Social tensions Pressure on public services Risk to domestic jobs and wages Higher house prices and rent.

Answer 58

Damaging effects of a natural disasters Loss of factor inputs caused by conflict Large scale net outward labour migration Trend decline in productivity

Answer 59

No change in general price level as output is not close to full capacity.

Answer 60

A sharp increase in the general price level because AS is now inelastic.

Answer 61

When AD intersects with AS.

Answer 62

A positive multiplier is a when an initial increase in an injection or a decrease in a leakage leads to a greater final increase in real GDP.

Answer 63

When an initial decrease in an injection or an increase in a leakage leads to a greater final decrease in real GDP.

Answer 64

An initial change in an injection or leakage can have a greater final impact on equilibrium national income.

Answer 65

Injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending- because "one person's spending is another's income". This leads to a bigger final effect on the level of national output and also employment in the labour market.

Answer 66

1/(sum of propensities to save+tax+important)

Answer 67

The government injecting £200m in a project to build thousands of affordable houses.

Answer 68

E.g New house building project injects £200m of extra demand and output into the economy. Many businesses benefit directly including building supplies industries, architects. Constructing new houses generates a new flow of factor income- including wages and profits. Creating a multiplier effect.

Answer 69

Will the extra incomes stay inside the circular flow of income and spending.

Answer 70

When the economy has plenty of spare capacity to meet higher aggregate demand Marginal propensity to import and tax is low When there is a higher propensity to consume any extra income

Answer 71

When the economy is close to it's capacity limits (During a boom phase of the economic cycle) Propensity to import goods and services is high- this means extra demand leaks from circular flow. Higher inflation causes rising interest rates which can then dampens the other components of aggregate demand.

Answer 72

Low, it is harder for AS to expand to meet rising demand.

Answer 73

The change in consumption following a change in gross income.

Answer 74

Change in total consumption/Change in gross income.

Answer 75

£4000/£5000=0.8 | Change in total consumption/Change in gross income.

Answer 76

A change in savings following a change in gross income.

Answer 77

Change in total savings / Change in gross income

Answer 78

Change in savings £1000 | Marginal propensity to save= £1000 / £5000=0.2

Answer 79

Where an assumption is made when calculating the multiplier that there are no tax or imports, savings is the only leakage.

Answer 80

Simple multiplier= 1/(1-0.8)= 1/0..2 | =5

Answer 81

A multiplier with three leakages,, savings, imports and taxation.

Answer 82

1/(0.7)= 1.43

Answer 83

The sum of the MPS+ MRT+MRM

Answer 84

It is a sustained rise in a country's productive potential and real national output.

Answer 85

Expanding the capital stock. Increasing the active labour supply Extracting and selling natural resources Improving factor productivity Driving innovation and enterprise.

Answer 86

Higher productivity Gains from innovation Rising real incomes for households.

Answer 87

A rise in a country's productive capacity cases the PPF to shift outwards. This allows both increases supply of consumer and capital goods.

Answer 88

Low interest rates set by a nation's central bank. Government spending and taxation rates Commodity prices such as oil gas and food Exchange rates Economic cycles in other countries Confidence of businesses and households

Answer 89

Capital investment Improved productivity Growing labour supply Research and development Innovation Enterprise.

Answer 90

An output gap is the difference between the actual level of GDP and its estimated potential level. It is usually expressed as a percentage of the level of potential output.

Answer 91

Where actual GDP is above potential GDP a sign pf possible excess aggregate demand.

Answer 92

Where the economy has a large margin of spare capacity of factor resources.

Answer 93

No, real output can expand without the risk of an acceleration in the rate of inflation.

Answer 94

Some capacity constraints can be supply bottlenecks in industries supply components and raw materials.

Answer 95

Inelastic.

Answer 96

``` Boom Slowdown Recession Recovery Depression ```

Answer 97

A period when the rate of growth of real GDP is fast and higher than the long term trend.

Answer 98

A weakening of the rate of growth, real GDP is still rising but increasing at a slower rate.

Answer 99

A period of at least six months when an economy suffers a fall in aggregate output, employment, investment and confidence.

Answer 100

A phase after a recession, during which real GDP starts to increase and unemployment begins to fall.

Answer 101

A prolonged downturn in the economy and and where a nation's GDP falls by at least 10 per cent.

Answer 102

Demand side shocks | Supply side shocks

Answer 103

Economic downturn in a major trading partner Unexpected tax increases or cuts to welfare benefits Financial crisis causing bank lending/credit to fall Bigger than expected rise in unemployment rates.

Answer 104

Steep rise in oil and gas prices or other commodities Political turmoil or strikes Natural disasters causing sharp fall in production Unexpected breakthroughs in production technology.

Answer 105

External events or shocks Tightening of macro policy Fall in asset prices or supply of credit Drop in businesses and consumer confidence

Answer 106

A recession in a major trading partner e.g. the EU or USA A sharp rise in global commodity prices e.g. rising oil and gas prices

Answer 107

Higher interest rates leading to more expensive loans A rise in taxation or a cut in government spending

Answer 108

Steep decline in the level of share or house prices A collapse in the supply of credit

Answer 109

Lower business confidence cuts investment and may also lead to job losses Declining consumer confidence leads to less spending and more saving.

Answer 110

Business profits and capital investment Unemployment and falling real incomes Government finances Inflation

Answer 111

Falling demand can cause more businesses to fail and profits to fall. Planned investment declines, hitting those industries that make capital goods.

Answer 112

A steep decline in aggregate demand causes a fall in demand for labour. This causes a contraction in employment and a rise in cyclical unemployment.

Answer 113

Recession causes a decline in tax revenues and more welfare spending. The result is usually an increase in the budget deficit and a rising national debt.

Answer 114

Many businesses offer price discounts to help off-load their excess (unsold) stock. A deep recession risks causing a period of sustained deflation.

Answer 115

Rising structural long term unemployment and regional decline Low rates of investment can reduce the size of the capital stock Persistent budget (fiscal) deficits and a rising national debt leads to austerity (and cuts in the public services)

Answer 116

Falling real wages hits average living standards and reduces demand. Widening inequality of income and wealth leading to rising poverty. Social costs such as loss of social cohesion and threats to democracy.

Answer 117

Higher living standards Real GNI per capita helps to lift many people out of extreme poverty and improve development outcomes Employment effects Sustained growth creates jobs and contributes to lower unemployment which in turn helps to reduce inequality poverty and social problems. Fiscal dividend Higher economic growth raises tax revenues and allows the government to spend more on public and merit goods or help cut fiscal deficit. Accelerator effect Rising growth stimulates new investment e.g. in low carbon technologies and it provides profits that fund research and innovation.

Answer 118

Risks of higher inflation and higher interest rates Environment effects Inequalities of income and wealth

Answer 119

Economic growth can lead to demand pull and cost push inflation. Central bank may decide to raise interest rates to control inflation Rising consumer spending might lead to an increasing trade deficit.

Answer 120

Negative externalities such as pollution and waste are produced potentially with growth. Risk of unsustainable extraction of finite resources- causing a long-run depletion of natural resources.

Answer 121

Rapid growth can lead to a higher level of inequality and social divisions, the distribution of gains from growth are often unequal. Many of the gains from growth may go to only a few people; growth might be at the expense of hours worked and increased stress.

Answer 122

The official measure of unemployment in the UK is based on the quarterly Labour Force Survey. This asks 40,000 households to self classify as either employed, unemployed or economically inactive.

Answer 123

Without a job, want a job have actively sought work in the last four weeks and are able to start work within the next two weeks. OR Out of work but have found a job and are waiting to start it in the next two weeks.

Answer 124

Cyclical unemployment or otherwise known as demand deficient unemployment is caused by weak aggregate demand, reducing demand for labour.

Answer 125

During recessions as that is usually when aggregate demand is lowest and as a result cyclical unemployment is highest.

Answer 126

Frictional unemployment is caused by workers seeking a better job; or who are in-between jobs. It also affects those people who are new entrants to the labour market such as school and college leavers.

Answer 127

Structural unemployment is unemployment that is caused by lack of suitable skills for the jobs available; as a result of long-term changes in the pattern of demand for the products of particular industries. Often people remain unemployed because of disincentive effects including the unemployment trap.

Answer 128

This is a situation in which there is little financial incentive for someone who is unemployed to start working because the loss of welfare benefits and a need to pay income tax and other direct taxes might result in them being worse off.

Answer 129

Seasonal workers without jobs due to the time of year where there are seasonal changes in employment. E.g. Fruit pickers in summer, retail jobs pre-Christmas

Answer 130

Season demand refers to the fluctuations in demand and sales related to the season of the year. For most products there will be seasonal peaks and troughs in production or sales. E.g. Ice creams are more demanded in the summer when it is hot, rather than in the winter when its cold

Answer 131

Economic inactivity is that section of the working age population which is not in employment and is not actively seeking employment. These persons are therefore not part of the working population.

Answer 132

``` Full-time student Looking after family or home Long-term sick Retired from the labour force Discouraged workers who have given up job search ```

Answer 133

Long term unemployment accounts for people who have been out of work for at least one year.

Answer 134

The longer people are without a job, then the harder it is for them to find their way back into employment. One reason is that people's skills tend to worsen due to economic inactivity. Motivation also suffers. Employers tend to favour people who have consistent record of being in a job rather than having gaps in their CV.

Answer 135

Increase in the active labour supply which might cause lower unit labour costs for a host country.

Answer 136

Inward migration increases pressure on government spending but can also lead to rising tax revenues.

Answer 137

Increase in population size Rising demand for public services If housing stock is fixed, can lead to higher prices and rising rents

Answer 138

Human capital helps to generate ideas and products. Many migrants start businesses possible exporters. Knowledge spillovers.

Answer 139

Slower long run trend rate of economic growth Risks of period of price deflation Rising income inequality Erosion of people's skills Fiscal budget costs to the government Externalities from social problems

Answer 140

Not in employment education or training

Answer 141

Skill Gaps Reluctant employers Falling retirement rates Competition for jobs

Answer 142

Employers may not be willing to employ young people who lack basic functional literarcy

Answer 143

They may prefer older more experienced workers with a track record and are more reluctant to employ youth.

Answer 144

Declining pension incomes means less jobs for younger people to go for.

Answer 145

Increasing competition from more highly skilled migrant workers can cause youth unemployment.

Answer 146

Expand mentoring programmers- more alternatives to university post 18 Most certified apprenticeship schemes Better career education in schools Lower national insurance for employers who take on younger workers Increasing funding for education in STEM and coding Improvements in basic skills including numeracy and literacy Increased bursaries for university tuition Macroeconomic policies that help avoid recessions A lower minimum wage for younger workers

Answer 147

Macro Stimulus Policies Cutting the cost of employing extra workers Competitiveness policies Reducing the occupational mobility of labour Improving Geographical mobility of labour Stimulate stronger work incentives

Answer 148

Low interest rates Improving credit supply to businesses Depreciation in the exchange rate to help exporters Infrastructure investment projects

Answer 149

Reductions in the rate of national insurance contributions Financial support for apprenticeships/paid internships Extra funding for regional policy/Specific economic zones

Answer 150

Reductions in corporation tax to increase investment Tax incentives for research / innovation spending Enterprise policies to encourage new business start ups.

Answer 151

Better funding for and more effective work training Teaching new skills e.g. coding for gaming An expansion of apprenticeships / intern programmes

Answer 152

Rise in house building will help to keep property prices lower and encourage more affordable housing rents Active regional policy to improve transport infrastructure.

Answer 153

Higher national living wage Increased tax free allowance Welfare reforms to reduce the risk of the poverty trap

Answer 154

Increased employment increases real GDP, helps to lift living standards and demand More people in work creates extra tax revenues for the government either to lower the budget deficit or to increase spending Social costs of high unemployment are severe progress in cutting it has important economic and social benefits.

Answer 155

Extra spending from expanding labour market might worsen the current account. Risk of an acceleration in demand pull and cosh push inflationary pressures if unemployment falls rapidly. Fewer spare labour will mean a rise in unfilled vacancies; labour shortages might put off some inward investment.

Answer 156

Inflation is a sustained increase in the cost of living or the general price level leading to a fall in the purchasing power of money.

Answer 157

The rate of inflation is measured by the annual percentage change in consumer prices.

Answer 158

Not necessarily, only when there is deflation will the general price level fall, i.e. the rate of inflation becomes negative.

Answer 159

When the rate of inflation becomes negative

Answer 160

The falling rate of inflation.

Answer 161

The consumer price index.

Answer 162

A base year is selected and a family expenditure survey is carried out- the survey covers many thousands of UK households. The survey tracks what people are buying. A representative basket of over 600 goods and services is used and weights are attached to each item based on these items importance in people's expenditure. Weights are then multiplied by price changes the weighed price changes are then totalled to calculate the inflation rate.

Answer 163

Demand pull inflation Cost push inflation Regulated prices

Answer 164

If aggregate demand (AD) rises faster than productive capacity (LRAS), then firms will respond by putting up prices, creating inflation.

Answer 165

Lower interest rates. A cut in interest rates causes a rise in consumer spending and higher investment. This boost to demand causes a rise in AD and inflationary pressures. The rise in house prices. Rising house prices create a positive wealth effect and boost consumer spending. This leads to a rise in economic growth. Rising real wages. For example, unions bargaining for higher wage rates. Devaluation. Devaluation in the exchange rate increases domestic demand (exports cheaper, imports more expensive). Devaluation will also cause cost-push inflation (imports more expensive)

Answer 166

Cost-push inflation occurs when we experience rising prices due to higher costs of production and higher costs of raw materials. This is usually done to protect their profit margins.

Answer 167

Cost-push inflation can lead to lower economic growth and often causes a fall in living standards, though it often proves to be temporary.

Answer 168

Higher Price of Commodities. A rise in the price of oil would lead to higher petrol prices and higher transport costs. All firms would see some rise in costs. As the most important commodity, higher oil prices often lead to cost-push inflation (e.g. 1970s, 2008, 2010-11) Imported Inflation. A devaluation will increase the domestic price of imports. Therefore, after a devaluation, we often get an increase in inflation due to rising cost of imports. Higher Wages. Wages are one of the main costs facing firms. Rising wages will push up prices as firms have to pay higher costs (higher wages may also cause rising demand) Higher Taxes. Higher VAT and Excise duties will increase the prices of goods. This price increase will be a temporary increase. Profit-push inflation. If firms gain increased monopoly power, they are in a position to push up prices to make more profit Higher Food Prices. In western economies, food is a smaller % of overall spending, but in developing countries, it plays a bigger role. (food inflation)

Answer 169

Changes in regulated prices e.g. affecting water and energy bills Changes in indirect taxes such as VAT and subsidies Changes in environmental taxes such as carbon tax

Answer 170

The sum of the price index multiplied by their weightings. Then divide the total by the sum of the weights.. Take this number from the previous year.

Answer 171

The CPI basket is not fully representative of all consumers it will be inaccurate for non typical households. E.g. 14% of CPI index covers motoring costs inapplicable for non car owners. Errors/Inaccuracies in data e.g. sampling errors Many purchases are made in the informal economy these are probably not always picked up in the official inflation data. The CPI is slow to respond to new products , the CPI basket is changed each year but only slowly.

Answer 172

A large surge in property prices Higher wage/ labour costs Boom in credit/money supply Rise in business taxes e.g vat

Answer 173

Increase in world oil/gas prices Inflation in global commodity prices Depreciation of the exchange rate Higher inflation in other countries.

Answer 174

Inflationary pressures within the domestic economy come for example from rising wage costs and increases in the cost of component parts for raw materials.

Answer 175

These are inflationary pressures from outside of a particular country, for example arising from an increase in the global price/cost of energy and other inputs.

Answer 176

Demand pull inflation occurs when total demand for goods and services exceeds aggregate supply.

Answer 177

A combination of slow growth and rising inflation.

Answer 178

Workers in Trade unions with strong wage bargaining power Debtors if real interest rates on their loans are negative Producers if their prices rise faster than unit costs

Answer 179

Retired living on fixed incomes Lenders if real interest rates on loans are negative Savers if real returns on their deposits are negative. Workers in low paid jobs with low union protection.

Answer 180

Inequality- Inflation has a regressive effect on lower income families Falling real incomes- if wage rises lag behind price increases Negative real interest rates- If interest on savings is lower than inflation Cost of borrowing-High inflation may also lead to rising interest rates. Risks of wage inflation- Rising wage costs and lower profits Business competitiveness- High inflation can reduce competitiveness which will then lower demand for a country's exports. Business uncertainty- High and volatile inflation is bad for confidence because businesses cannot be sure of what their costs and prices will be. This uncertainty can lead to a fall in capital investment.

Answer 181

A persistent fall in the general price level of goods and services shown by a negative rate of inflation. The real purchasing power of money increases during time of price deflation.

Answer 182

Deep fall in AD causing a recession Large negative output gap, i.e. high level of spare capacity.

Answer 183

Improved productivity Technological advances Significant fall in wage rates Strong exchange rate causing important prices to drop.

Answer 184

Holding back on Spending- Consumers may expect prices to fall further in the future and postpone demand, this lowers total ad. Debts increase as the real value of debts rise with deflation Real cost of borrowing increases Lower profit margins Lower confidence and saving Falling asset prices such as price deflation in the housing market hits personal sector wealth and confidence Deflation can make exporters more competitive eventually- but this often comes at a cost of higher rate of unemployment in the short term.

Answer 185

``` Economic Growth vs Inflation Unemployment vs inflation Economic growth vs Current account balance of payments Budget deficit vs Economic Growth Economic growth vs Environment ```

Answer 186

The trade off between Inflation and unemployment, when there is low unemployment inflation is high and when there is high unemployment inflation is low.

Answer 187

When an economy suffers high inflation and also is in a slowdown in economic growth.

Answer 188

If there is rapid economic growth, it is more likely that inflationary pressures will increase. Inflation is particularly likely to occur when growth is above the long run trend rate, and AD increases faster than AS. When the economy is growing very quickly, firms have difficulty employing sufficient skilled labour; this can lead to wage inflation and higher wages cause higher prices. Also, if demand grows faster than supply, firms will respond to shortages by putting up prices.

Answer 189

When economic growth is led by consumer spending, it tends to cause a deficit in the current account. This is because as consumer spending rises, there will be a rise in import spending. This is especially true in the UK, where traditionally we have a high marginal propensity to import (MPM). Also, high economic growth may increase inflation and make exports less competitive.

Answer 190

Policies to improve labour productivity and control unit wage costs. They are incentives to promote research, development and innovation.

Answer 191

A depreciation of the currency in theory makes exports more price competitive and imports are more expensive. This makes the trade balance between exports and imports better. But the effects are dependent on the elasticity/supply.

Answer 192

Waste from production and consumption Pollution and increasing climate change risks. Depletion of natural capital Loss of biodiversity

Answer 193

Potentially proceeds of growth can be invested in clean energy. Increased awareness of need for sustainability Decline in heavy energy intensive industries.

Answer 194

A medium for exchange A store of value A unit of account A standard of deferred payment

Answer 195

Notes and coins plus reserves held by commercial banks at the central bank.

Answer 196

Notes and coins plus all retail bank deposits including real time deposits held by the non bank private sector.

Answer 197

Note and coins, deposits, certificates of deposit, securities with a maturity of less than five years.

Answer 198

The money supply measures the total amount of money in the economy at a particular time. It includes actual notes and coins and also any deposits which can be quickly converted into cash.

Answer 199

M0 = This is the level of notes and coins in circulation + banks operational balances at the Bank of England.

Answer 200

Broad money supply is defined as a measure of notes and coins in circulation (M0) + bank accounts. It is a broader definition because it includes bank accounts and not just notes and coins in circulation.

Answer 201

Any exchange that facilitates trading of financial instruments such as stocks, bonds, foreign exchange, or primary commodities such as oil.

Answer 202

Market for short term loan finance for businesses and households. This includes inter-bank lending i.e. the commercial banks providing liquidity for each other e.g. Barclays lending to Santander.

Answer 203

Market where securities such as shares and bonds are issued by companies to raise medium to long term financing.

Answer 204

Market where currencies such as dollars, Yuan, yen and sterling is traded.

Answer 205

To facilitate saving by businesses and households To lend to businesses and individuals To allocate funds to productive uses To facilitate the final exchange of goods and services To provide forward markets in currencies and commodities To provide a market for equities and bonds

Answer 206

Debt financing is borrowing money from an outside source with the promise of paying back the loan, plus interest at a later date.

Answer 207

``` Bank loans Bank overdrafts Credit cards Mortgages Peer to Peer lending Corporate bonds ```

Answer 208

Money you borrow that is secured against an asset you own, usually your home.

Answer 209

Money supported only be a borrower's creditworthiness, rather than by any type of collateral.

Answer 210

Equity financing means raising capital by selling shares to investors

Answer 211

Angel investors Venture capital Stock market listing Crowd funding

Answer 212

Individuals who inject capital for startups

Answer 213

Firms specializing in building high risk equity portfolios

Answer 214

When you offer shares to public and institutional investors

Answer 215

Raising capital from a large number of individuals.

Answer 216

A fixed-rate bond is a bond that pays the same amount of interest for its entire term

Answer 217

Government bonds are an example of fixed interest securities. A a government bond pays a fixed annual interest this is known as the coupon.

Answer 218

The yield is effectively the interest rate on a bond.

Answer 219

The market price of a bond has an inverse relationship with the yield on a bond. This means when the bond prices fall, then the yield on the bond increases.

Answer 220

200/5000=4%

Answer 221

200/4300=4.65%

Answer 222

Commercial banks Investment banks Internet banks Shadow banks

Answer 223

Bank capital is the value of the bank's assets minus its liabilities or debts

Answer 224

Money and liquid assets such as securities that can be sold quickly held by banks to meet withdrawals by customers.

Answer 225

The services provided by banks that only exist on the internet/web

Answer 226

Non-deposit taking financial intermediaries including investment banks and hedge funds.

Answer 227

Commercial banks provide retail banking services to households and business customers. They accept deposits and extend loans, they are licensed deposit takers providing savings accounts. They are licensed to lend money and thereby create money in the form of bank loans overdrafts and mortgages.

Answer 228

Reserves and Deposits

Answer 229

Retail funding is the main funding source for all UK commercial banks. It is the money in a bank comes from customer deposits, that the bank uses for i.e. loans.

Answer 230

Banks typically pay a higher interest on retail deposits that are saved with a bank for a longer period of time. This gives them a more secure regular source of funds to use for lending. The saver gets high interest for sacrificing some of their liquidity.

Answer 231

Loans to UK households and businesses Other assets (Liquid assets)

Answer 232

Retail funding (Saving deposits in household current accounts) Wholesale funding Capital (Equity)

Answer 233

Banks create credit by extending loans to businesses and households. They do not always need to attract deposits from savers to do this. When a bank makes a loan it credits their bank account with a bank deposit of the size of the loan/mortgage At that moment new money is created.

Answer 234

When they issue credit they gain a new asset that is new loans and gain a liability that new deposits.

Answer 235

They charge a higher interest rate on loans that the rate paid to savers. They include fees when arranging loans. Many banks also provide currency and share dealing services and charge a brokerage fee for doing so.

Answer 236

If depositors panic and withdraw their money, this will create a liquidity crisis for the bank and as a result the bank will fail. If there is a credit crunch, this means that a bank may be unable to borrow money from other banks on even an overnight basis. If there is high losses from bad debts/loan defaults.

Answer 237

Market forces influence the scale of profitable lending opportunities. Regulatory policies e.g. capital reserve requirements Behavior of consumers and businesses e.g. decisions about how much of their debt to repay. Monetary policy dictates the interest rates which influences the demand for loans from households and businesses.

Answer 238

Banks to attract short term deposits, then often lend for longer periods of time e.g. 20 year mortgage. As a result a bank may not be able to repay all deposits if savers decide to withdraw their funds in one go.

Answer 239

Banks will try to attract long term deposits and also hold some liquid assets e.g. cash as capital reserves.

Answer 240

This is the risk to the commercial bank of lending to borrowers who turn out to be unable to repay some or all of their loans.

Answer 241

Commercial banks can control credit risk by researching into the credit-worthiness of borrowers and by banks.

Answer 242

An investment bank provides specialized services for companies and large investors: - Underwriting and advising on securities issues and other forms of capital raising - Advice on mergers, acquisitions and corporate restructuring - Trading on capital markets - Corporate research and private equity investment. An investment bank trades and invests on its own account.

Answer 243

JPMorgan Chase UBS Morgan Stnaley Barclays investment bank

Answer 244

Monetary policy function Setting the base rate Quantitative easing Exchange rate intervention Policies designed to maintain financial stability of banks Lender of last resort Managing liquidity in the commercial banking system Overseeing payment systems used by banks Debt management to the government Handling the issue (sale) and repayment of issues of government debt

Answer 245

The Monetary Policy Committee does a thorough assessment of the UK economy 8 times a year. They look at a range of demand and supply side indicators, the interest rate decision is taken after this. Key issue is the strength of inflationary pressures and the inflation forecast for the UK over the next two years.

Answer 246

This is monetary stimulus and involves changes in monetary policy designed to increase aggregate demand including lower policy interest rates and measures to increase the supply of credit.

Answer 247

Contractionary monetary policy is designed to lower the level/growth of aggregate demand to help control inflationary pressures. This can involve a rise in interest rates, tighter control on bank lending and perhaps attempts to cause an exchange rate appreciation which would lower import prices.

Answer 248

Higher interest rates have the effect of slowing down the rate of growth of demand including consumption: There is an increased incentive for people to save Mortgage interest rates are likely to rise causing a fall in the effective disposable income of mortgage payers Interest rates on credit cards and other loans will increase making borrowing more expensive Higher interest rates might dampen consumer optimism.

Answer 249

Quantitative easing is the introduction of new money into the national supply by a central bank. In the UK, the Bank of England creates new money to buy assets from financial institutions. It aims to increase the supply of money available for banks to lend, it is an alternative strategy to that of cutting interest rates.

Answer 250

Central bank creates new money electronically by adding money to their balance sheet. This money is used to buy financial assets, mainly used to purchase government bonds. More demand leads to higher prices for assets e.g. bond prices. A rise in the price of bonds then leads to a lower yield on government bonds. The effect of quantitative easing can cause a fall in long term interest rates e.g. mortgages and corporate bonds. Lower interest rates and increased cash the banking system should then stimulate AD through a rise in consumption and investment.

Answer 251

Financial Policy Committee Prudential Regulation Authority Financial Conduct Authority Competition and Markets Authority.

Answer 252

Protect against the consequences of market failure Protect the interest of consumers Encourage confidence in the economy and government.

Answer 253

Limit monopoly power of commercial banks Protect borrowers from excessively high interest rates on loans. Improve access to affordable finance services key for growth and development and prevention of poverty in main countries Balance the interests of uninformed consumers with sophisticated sellers of financial services.

Answer 254

Promote capital investment and sustainable long run growth Allow the central bank to perform its other roles such as lender of last resort Prevent/mitigate systemic risk that might damage the economy.

Answer 255

This is a situation where there is imperfect knowledge. In particular, it occurs where one party has different information to another. A good example is when selling a car, the owner is likely to have full knowledge about its service history and likelihood to break-down. The potential buyer, by contrast, will be in the dark and he may not be able to trust the car salesman.

Answer 256

Systemic risk is the possibility that an event at the micro level of an individual bank / insurance company for example could then trigger instability or collapse an entire industry or economy.

Answer 257

A ratio of liquid assets held by a bank on their balance sheet to their overall assets.

Answer 258

Commercial banks need to hold enough liquidity to cover expected demands from their depositors.

Answer 259

Keep enough liquid assets such as cash and bonds to get through a 30-day market crisis.

Answer 260

The minimum liquid reserves that a bank must maintain in the event of a sudden increase in withdrawals.

Answer 261

Cash and balances with central bank and government bonds / divided by a bank's total assets.

Answer 262

The funds it has in the reserve against the riskier assets it holds that could be vulnerable in the event of a crisis.

Answer 263

To check whether the bank have enough of a capital buffer to cope with difficult economic/financial conditions.

Answer 264

Moral hazard exists when an individual or organisation takes more risks because they know they are covered by insurance, or that the government will protect them from an damage incurred as a result of those risks.

Answer 265

Individuals with large insurance policies to cover specific risks are more likely to claim against such policies. Government bail-outs of commercial and investment banks encourages them to engage in ever-more riskier behaviour. Sub prime mortgage lenders prior to 2007 were able to repackage loans into bundles bought by other institutions.

Answer 266

Micro prudential aims to ensure that individual financial institutions remain solvent and that depositors are protected

Answer 267

Macro prudential aims to ensure that an entire financial system has the capacity to absorb bad economic news. It seeks to make the system more resilient.

Answer 268

in 2015 it was 43%

Answer 269

Salaries of NHS employees Drugs used in health care Road maintenance budget Army Logistics supplies

Answer 270

Construction of new motorways and bridges New equipment in the NHS Flood defense schemes Extra defence equipment

Answer 271

Lower AD-Government spending is a key component of AD Lower government spending would lead to lower growth Should reduce the government deficit Cuts to government spending would reduce capital spending and as a result made may affect long term productivity

Answer 272

It is a key component of Ad Can have a regional economic impact Important in providing public and merit goods Can help to achieve greater equity in society.

Answer 273

May increase the skills and productivity of workers Improvements in human capital will lower structural unemployment Supports innovation/competitiveness

Answer 274

Improved health outcomes will expand the active labour supply. Healthier workers are more productive Lessens the risks of relative poverty.

Answer 275

Effectiveness of extra education spending has been questioned. Money might be better spent targeting certain groups or ages.

Answer 276

Better health results can be achieved without increase in health funding. Will lower income families get the improved healthcare access.

Answer 277

Governing spending is expenditure by a government on education, health care and defense and other public services.

Answer 278

Universal child benefits / unemployment benefit Public pensions Conditional welfare transfers e.g. conditional on attending unemployment programmes Targeted welfare payments.

Answer 279

Education Health care Social housing Employment training

Answer 280

Direct effects of welfare spending such as the state pension, unemployment benefits and other benefits Government spending creates jobs both in the public and private sector e.g. multiplier effects from an increase in state infrastructure spending Government subsidies may help to keep prices lower than they might otherwise be. This helps to increase real incomes of consumers who benefit from a subsidy.

Answer 281

The bulk of tax revenues for the UK government comes from income tax, national insurance and value added tax. In 2016-17 they were forecast to contribute revenues worth 21.5% of GDP.

Answer 282

his means that they rise when the economy is doing well but fall in a slowdown or a recession.

Answer 283

Direct taxation is a type of tax which is paid for by an individual directly to the government

Answer 284

An indirect tax is charged on producers of goods and services and is paid by the consumer indirectly.

Answer 285

``` Income tax Inheritance tax National insurance contributions Capital gains tax Corporation tax ```

Answer 286

Excise duties on fuel, cigarettes and alcohol Value added tax on many different goods and services

Answer 287

The burden of a direct tax cannot be passed on.

Answer 288

Produced may be able to pass on an indirect tax depending on price elasticity of demand and supply.

Answer 289

Income tax | National insurance

Answer 290

Corporation tax

Answer 291

Changes in employers national insurance

Answer 292

A change in VAT.

Answer 293

Changes in tax rates and tax allowances have a direct and indirect effect on short-run and long run aggregate supply.

Answer 294

Changes in tax rates and tax allowances have direct and indirect effects on both the level of and growth of aggregate demand.

Answer 295

Changes in VAT affect business costs the VAT applied when buying components parts / supplies Changes in direct taxes can influence work incentives Changes in business taxes might affect the level of foreign direct investment into a country Taxes can also affect the incentive to start a business or to spend money on research and development

Answer 296

Businesses get to keep a larger percentage of their operating profits Increase in post tax profitability may lead to a rise in planned investment Investment can be both domestic and overseas business Increased capital spending is an injection into the circular flow model. Creates a positive multiplier effect on demand, output and employment.

Answer 297

Higher in short run as business pass on tax

Answer 298

Slower as real incomes and demand falls

Answer 299

Higher if aggregate demand weakens

Answer 300

Improved falling incomes may cause demand for imports to contract

Answer 301

Rising spare capacity from weaker demand

Answer 302

Decline if businesses are hit by lower profits and weaker consumer spending

Answer 303

Short run improvement from higher taxes but risk of falling revenues in medium term.

Answer 304

The effect depends on the scale of tax cut Many affects capital investment e.g. the pace of technological change and strength of market competition Some extra investment may lead to a loss of jobs through capital labour substitution effects.

Answer 305

Level of unemployment Level Consumer spending Level Business profits Automatic stabilisers

Answer 306

The size of the welfare state The level of welfare benefits Demographic factors e.g. ageing population and net inward migration Size of the tax base and tax rates.

Answer 307

Public sector borrowing is the amount the government must borrow each year to finance their spending.

Answer 308

Public sector debt is a measure of the accumulated national debt owed by the government sector.

Answer 309

Automatic stabilisers refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle. Automatic stabilisers will influence the size of government borrowing.

Answer 310

In a recession, economic growth becomes negative. However, automatic stabilisers will help to limit the fall in growth. With lower incomes, people pay less tax, and government spending on unemployment benefits will increase. This increase in benefit spending and lower tax collection helps to limit the fall in aggregate demand.

Answer 311

In a period of high economic growth, automatic stabilisers will help to reduce the growth rate. With higher growth, the government will receive more tax revenues – people earn more and so pay more income tax (note the tax rate doesn’t change, the amount received just becomes higher). With higher growth, there will also be a fall in unemployment so the government will spend less on unemployment benefits.

Answer 312

Public sector debt is owed by central and local government and also by state owned corporations.

Answer 313

The scale of government spending The level of tax revenues Cost of servicing debt + state bail outs.

Answer 314

Cuts in government spending Higher taxes Supply side policies to encourage growth

Answer 315

Output, jobs and profits in construction, transport and defence sectors fall. Effects on real income and relative poverty of households Effective demand for goods and services will fall Cuts in pension spending might lead to people delaying retirement.

Answer 316

Negative Multiplier effect of cuts in public sector spending and employment Lower fiscal deficit might help investor confidence and attract investment Risks of deflation if cutting spending creates excess capacity. Bank of England more likely to keep interest rates at very low levels.

Answer 317

Stimulates work incentives and labour productivity leading to faster growth Helps to create more jobs because businesses have less tax to pay when employing people Encourages an inflow of foreign direct investment from businesses looking for a low tax country Incentives enterprise and business start-ups a key source of long term wealth and jobs Lower direct taxes might encourage an inflow of higher skilled workers and entrepreneurs Lower tax rates might end up increasing total tax revenues.(Laffer curve)

Answer 318

Taxation is key instrument for changing the final distribution of income and wealth. It is equitable for those with the greatest resources to pay more. Tax cuts don't always lead to an increase in total tax revenues the effect on work incentives and effort can be challenged Taxes are needed to fund high quality public services such as education, transport and health which benefit millions of people in the long run. Tax competition between can lead to a race to the bottom which ultimately limits what the government can spend on essential public goods.

Answer 319

Supply Side Policies are policies aimed at increasing Aggregate Supply

Answer 320

Free-market supply-side policies involve policies to increase competitiveness and competition. For example, privatisation, deregulation, lower income tax rates, and reduced power of trade unions.

Answer 321

Interventionist supply-side policies involve government intervention to overcome market failure For example, higher government spending on transport and communication.

Answer 322

In theory, supply-side policies should increase productivity and shift long-run aggregate supply (LRAS) to the right.

Answer 323

Lower Inflation Lower unemployment Improved economic growth Improved trade balance of payments

Answer 324

Shifting AS to the right will cause a lower price level. By making the economy more efficient, supply-side policies will help reduce cost push inflation.

Answer 325

Supply-side policies can contribute to reducing structural, frictional and real wage unemployment and therefore help reduce the natural rate of unemployment.

Answer 326

Supply-side policies will increase the sustainable rate of economic growth by increasing LRAS; this enables a higher rate of economic growth without causing inflation.

Answer 327

By making firms more productive and competitive, they will be able to export more. This is important in light of the increased competition from an increasingly globalised marketplace.

Answer 328

``` Privatisastion Deregulation Income tax cuts Remove regulations Flexible labour markets Free trade agreements Reduce welfare benefits ```

Answer 329

Increasing: Public sector investment Education Vocational training Housing supply Health spending Minimum wage

Answer 330

Zero hour contracts means that workers are employed without any guarantee about the amount of work they will gain.

Answer 331

Young, part time, women or in full time education.

Answer 332

Low rate of new capital investment-many UK firms not at cutting edge Banking crisis affecting lending to businesses who want to expand Possible slowing rates of innovation - UK has low level of research and development spending Persistent and deep skills shortages in key industries Relatively low levels of market competition- inefficient monopolies Low aggregate demand and high spare capacity- under-utilizing resources

Answer 333

Improving the functioning of labour markets - Investment for all levels of education and workplace training - Encouraging inward migration of skilled workers Infrastructure Investment -Better motorways, major roads, ports, hi speed rail Support enterprise/Entrepreneurship - Improved access to business finance - Incentives for business innovation and invention Macroeconomic stability -Maintaining low inflation / price stability to help confidence.

Answer 334

Supply side policies can have long time lags depending on the type of policy. Some supply side policies might lead to greater inequality of income and wealth (Cutting higher rate income taxes) State intervention to pick winners in different industries may be ineffective (government failure) Some policies aren't sustainable if they lead to increased externalities. Supply side improvements can also occur from non-government policies such as firm's innovating, investing and productivity improvements.

Answer 335

Globalisation is a process by which economies and culture have been drawn deeper together and more inter-connected through global networks of trade, investment, capital flows and spread of technology and global media.

Answer 336

Globalisation allows businesses and countries to specialise in producing those goods and services where they have a comparative advantage. Specialisation and trade enables a net gain in economic welfare, for example through lower prices for consumers which increases their real incomes.

Answer 337

Expansion of financial capital flows between nations Increasing foreign direct investment and cross border acquisitions Global brands Deeper specialization of labour Global supply chains and new trade and investment routes Rising levels of international labour migration Increasing connectivity of people and businesses through networks.

Answer 338

Improved transport Containerisation. Improved technology Growth of multinational companies Growth global trading blocks Reduced tariff barriers encourage global trade. Firms exploiting gains from economies of scale to gain increased specialisation Growth of global media. Improved mobility of capital. Increased mobility of labour.

Answer 339

Improved transport, has made global travel easier. For example, there has been a rapid growth in air-travel, enabling greater movement of people and goods across the globe.

Answer 340

Containerisation is a system of standardised transport, that uses a common size of steel container to transport goods. These containers can easily be transferred between different modes of transport – container ships to lorries and trains. This makes the transport and trade of goods cheaper and more efficient.

Answer 341

Improved technology which makes it easier to communicate and share information around the world. E.g. internet. For example, to work on improvements on this website, I will go to a global online community, like elance.com. There, people from any country can bid for the right to provide a service. It means that I can often find people to do a job relatively cheaply because labour costs are relatively lower in the Indian sub-continent.

Answer 342

Reduced tariff barriers encourage global trade. Often this has occurred through the support of the WTO.

Answer 343

Net gains in welfare from producers and consumers reaping the benefits from deeper division of labour and economies of scale Competitive markets reduce the scale of monopoly supernormal profits and incentivize businesses to seek cost reducing innovations. Enhanced growth has led to higher per capita incomes and helped many of the poorest countries to achieve higher growth and reduce extreme poverty. Advantages from freer movement of labour between nations. Dynamic efficiency gains from sharing of ideas, skills and technologies across national borders.

Answer 344

Rising inequality Threats to global environment Globalisation can lead to greater pollution Increased macroeconomic fragility in an inter connected world economy, external shocks can have massive impacts Trade imbalances lead to protectionist tensions Higher structural unemployment Dominant global brands may squeeze out local producers.

Answer 345

The principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

Answer 346

Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another. This means a country can produce a good relatively cheaper than other countries

Answer 347

Comparative advantage was first described by David Ricardo who explained it in his 1817 book “On the Principles of Political Economy and Taxation” He used an example involving England and Portugal. Ricardo noted Portugal could produce both wine and cloth with less labour than England. However, England was relatively better at producing cloth. Therefore, it made sense for England to export cloth and import wine from Portugal.

Answer 348

Costs of trade (Exporting goods) Externalities produced Can lead to diminishing returns Dutch disease Could cause unemployment as workers in sectors that are no longer producing as its being imported in are no longer needed.

Answer 349

Transport costs e.g. carbon emissions from increased food miles Negative externalities from production and consumption Risk of risking structural unemployment as trade patterns change Inequality- benefits from globalisation are unequal Pressure on real wages in advanced and emerging countries Risks from global shocks such as the Global financial crisis.

Answer 350

A source of foreign currency to help a nations balance of payment An important way of financing imports of essential imports of capital equipment / technologies and energy supplies An injection of demand into the circular flow of income and spending + creating positive export multiplier effects. Increased employment in export industries can lead to rising per capita income Falling prices for consumers helps to increase real incomes.

Answer 351

United States and Germany.

Answer 352

As seven of the top ten export markets for Britain are with the European Union countries.

Answer 353

Import Tariffs Import quotas Subsidy Non tariff barrier Rules of origin

Answer 354

A tax or levy on imports that may ad valorem or a specific tax

Answer 355

An ad valorem tax is a tax whose amount is based on the value of a transaction or of property

Answer 356

A physical limit on the quantity of a good that can be imported into a country.

Answer 357

Payments by the government to suppliers that reduce their costs. This can allow them to be more competitive internationally.

Answer 358

Rules on the national source of a product e.g. a country might set a minimum % for locally sourced components.

Answer 359

Infant industry argument Sunset industry argument Diversify an economy too dependent on one product Raise tax revenues Improve balance of payments Preserve employment Prevention of unfair trade practices such as dumping.

Answer 360

Protect emerging industries until they have achieved economies of scale

Answer 361

Use to tariffs to slow the decline of old sectors and limit and limit structural unemployment.

Answer 362

Resource misallocation - loss of economic efficiency Dangers of retaliation and therefore risks of trade war Higher prices for domestic consumers regressive impact on poorer people Increased input costs for home producers damaging competitiveness Barriers to entry reduce market contest-ability and increased the market power.

Answer 363

The view is that import tariffs nearly always lead to a deadweight loss of economic welfare mainly though the effects of higher prices for consumers and also the distorting effects of a tariff on marketing competition, prices and the allocation of scarce resources.

Answer 364

Is a group of countries that agree to abolish tariffs and quotas between member nations to encourage free movement of goods and services and adopt a common external tariff on imports from non member countries.

Answer 365

Preferential tariff rates apply to preferential or free trade agreements that the European Union has entered into with third countries or groupings of third countries.

Answer 366

Turkey, Andorra and San Marino

Answer 367

Free Trade in Goods Mobility of Labour Free movement of Capital Free trade in services.

Answer 368

Businesses can sell their products anywhere in EU member states and consumers can buy where they want with no penalty

Answer 369

Citizens of Eu states can live study and work in any other EU country.

Answer 370

Financial capital can flow freely between member states and EU citizens can use financial services such as insurance in any EU state.

Answer 371

Services such as pensions, architecture, telecoms and advertising can be offered in any member state.

Answer 372

Net balance of trade in goods Net balance of trade in services Investment incomes Current transfers

Answer 373

Profits interest and dividends from investment in other countries Net remittance flows from migrant workers

Answer 374

Overseas aid / debt relief Military grants UK payments to the European union

Answer 375

The current account on balance of payments measures trade in goods, services, investment incomes and current transfers

Answer 376

The financial account measures capital flows / short term and long term. For example, long-term investment in building a factory or financial flows such as buying bonds or depositing money in bank accounts.

Answer 377

Current Account

Answer 378

The capital account measures transfer in assets and liabilities. For example, this may involve a Japanese firm building a factory in the UK. This is counted as a credit on the UK Capital Account

Answer 379

This is a record of all transactions for financial investment. It includes: Direct investment Portfolio investment

Answer 380

This is net investment from abroad. For example, if a UK firm built a factory in Japan it would be a debit item on UK financial account)

Answer 381

These are financial flows, such as the purchase of bonds, gilts or saving in banks. They include short-term monetary flows known as “hot money flows” to take advantage of exchange rate changes, e.g. foreign investor saving money in a UK bank to take advantage of better interest rates – will be a credit item on financial account

Answer 382

This is an external deficit. There is a net outflow of income from the economy's circular flow The current account deficit nations are debtor countries.

Answer 383

This is an external surplus, there is a net inflow of income into the economy. Current account surplus nations are creditor nations.

Answer 384

Foreigners have a greater claim on domestic assets. Large deficit could be unsustainable if financed by borrowing from abroad. It may indicate a unbalanced economy focused on short-term consumption rather than longer term investment in export sector. Large deficit could cause depreciation in exchange rate and cost push inflation For countries in fixed exchange rate it may indicate they have become uncompetitive due to higher inflation and if exports over priced reduce domestic demand.

Answer 385

Poor price and non price competitiveness Strong exchange rate affecting exports and imports Recession in one or more major trade partner countries Volatile global prices

Answer 386

A large and persistent surplus of savings over investment for households, firms and the government. An export surplus may be the result of world high prices for exports of commodities such as oil and gas.

Answer 387

These are policies designed to change the relative prices of exports and imports. E.g. an exchange rate depreciation ought to improve the price competitiveness of exports and also make imports more expensive.

Answer 388

Policies designed to lower real incomes and aggregate demand and thereby cut demand for imports. E.g. higher direct taxes and an increase in interest rates.

Answer 389

Depreciation of the exchange rate Import tariffs Low rate of inflation (Perhaps deflation)

Answer 390

Reduces relative price of exports and makes imports more expensive

Answer 391

There is a risk of cost push inflation which erodes competitiveness and causes a fall in real incomes.

Answer 392

Increases the price of imports and makes domestic output more price competitive.

Answer 393

Risk of retaliation from other countries if import tariffs are used as BoP policy

Answer 394

Keeps general price level under control and makes exports more competitive.

Answer 395

Risks from deflation as a way of achieving internal devaluation, including lower investment.

Answer 396

Increase in income taxes Cuts in real level of government spending

Answer 397

Reduces disposable incomes causing falling demand for imports.

Answer 398

Cut in living standards and risk of damage to work incentives in labour market.

Answer 399

Lowers aggregate demand, as government spending is a component of ad. Firms may also look to export their spare capacity.

Answer 400

Damage to short term economic growth, risks that austerity hits investment.

Answer 401

Imbalances refer to persistent current account surpluses for some countries contrasted with external deficits in their nations.

Answer 402

Run up external debts and are more reliant on foreign capital. May decide to switch towards a range of protectionist policies.

Answer 403

Save more than they spend thereby depressing global demand. May be deciding to keep their currency under-valued. Might be under-consuming affecting living standards and allocating many domestic scarce resources to exporting.

Answer 404

Is the rate or price at which one country's currency can be exchanged for other currencies in foreign exchange market.

Answer 405

This is weighted index of sterling's value against a basket of currencies the weights are based on the importance of trade between the UK and each country.

Answer 406

There is no such thing as "the" exchange rate so if £ depreciates against the dollar it could still be appreciating against the Euro.

Answer 407

A free floating currency A managed floating currency A fixed exchange rate system

Answer 408

Where the external value of a currency depends wholly on market forces of supply and demand.

Answer 409

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.

Answer 410

A hard currency peg either as part of a currency board system or membership of the ERM Mark II for those countries eventually intending to join the Euro

Answer 411

Currency value set by market forces No intervention by the central bank No target for the exchange rate of macroeconomic policy.

Answer 412

Hong Kong Dollar pegged to the US Dollar.

Answer 413

Government / central bank fixed currency value Pegged exchange rate becomes official rate Potential adjustable peg.

Answer 414

Brazilian Real Indian Rupee

Answer 415

Currency usually set by market forces Central bank may intervene occasionally Currency becomes a key target of monetary policy.

Answer 416

Current account surplus on the balance of payments Strong inward investment inflows + portfolio flows Relatively high monetary policy interest rates High levels of speculative currency demand.

Answer 417

Trade balances Foreign direct investment Portfolio investment Interest rate level Degree of quantitative easing.

Answer 418

Countries that have strong trade and current account surpluses tend (with all other factors the same) to see their currencies appreciate as money flows into the circular flow from exports of goods and services and also from investment income.

Answer 419

An economy that attracts high net inflows of capital investment from overseas will see an increase in currency demand and a rising exchange rate.

Answer 420

Strong inflows of portfolio investment into equities and bonds from overseas can cause an exchange rate to appreciate as investors buy a country's currency.

Answer 421

Countries with relatively high interest rates can expect to see 'hot money' flowing across the currency markets and causing an appreciation of the exchange rate.

Answer 422

An expansionary QE has the effect of increasing a country's money supply it is likely that this will cause a depreciation in the country's exchange rate.

Answer 423

Reduces the need to hold large amounts of currency reserves. Freedom to set monetary policy interest rates to meet domestic macroeconomic objectives. May help to prevent imported inflation. Partial automatic correction for a current account / trade deficit. Less risk of a currency becoming significantly over/undervalued.

Answer 424

No guarantee that floating exchange rates will be stable. Volatility in floating exchange rate might be detrimental to attracting inward foreign investment. A more competitive exchange rate does not necessarily correct a persistent current account deficit.

Answer 425

Certainty of currency value gives confidence for inward investment. Reduced costs of currency hedging for businesses. Stability helps to control inflation. Can lead to lower borrowing costs, low yields on government bonds. Less speculation if the fixed exchange rate is seen credible by the markets.

Answer 426

Reduced freedom to use interest rates for other macro objectives. Many developing countries do not have sufficient foreign currency reserves to maintain a fixed rate. Difficult for countries to use a competitive devaluation of their fixed exchange rate- creates political tensions. Devaluation of a fixed exchange rate can lead to cost push inflation. Thus has regressive effects on poorer families.

Answer 427

Rise in purchasing power of currency Becomes cheaper to import goods and services Rising demand for imports (Depends on PED for imports) Worsening of the trade balance Fall in aggregate demand in economy.

Answer 428

Inflation, a fall in a currency price leads to a rise in import prices causes a increase in cost push inflationary pressure. It also makes domestic energy and food bills higher. Increased Export demand and stronger trade balance. Increase in AD, a rise in exports and fall in imports will increase AD. Export profits are a stimulus to the labour market potentially increasing unemployment.

Answer 429

The European single currency was created in 1999 and notes and coins entered common circulation in 2002. As of January 2018 there are 19 nations in the Euro Zone. The UK is set to leave the EU in march 2019.

Answer 430

Reducing the costs of trade Improved price transparency in markets - strengthens competition Reduces currency risk for businesses Helps to attract inward investment which then lifts AD and LRAS

Answer 431

Loss of autonomy over setting domestic interest rates Loss of ability to influence the exchange rate Lower interest rates might cause a credit / asset price boom. Costs involved in switching currencies during transition.

Answer 432

A sustained rise in country's productive capacity. An increase in real value GDP / GNI per capita Increases in the productivity of factors of production.

Answer 433

Progress in expanding economic freedoms Sustained improvement in economic and social opportunities Growth in personal and national capabilities.

Answer 434

Improving and deepening people's freedoms and capabilities lies at the heart of economic development.

Answer 435

Development is about transforming the lives of people, not just transforming economies.

Answer 436

HDI is a composite statistic of life expectancy health, education/literacy and income.

Answer 437

Longevity of life- A life expectancy component is calculated using a minimum value for life expectancy of 25 years and maximum value of 85 years. Basic education- An educational component made up of two statistics mean years of schooling and expected years of schooling Minimal income- Using GNI per capita adjusted to purchasing power parity standard (PPP)

Answer 438

Infrastructure gap Primary export dependency Conflict and Corruption Human capital weakness Savings and Foreign exchange gaps Natural capital depletion Inequality of income and wealth Lack of competition in markets.

Answer 439

Conflict Over-reliance on natural resources Being landlocked with bad neighbours Bad standards of governance

Answer 440

Corruption is due to a failure of governing institutions who lack transparency both in where their tax revenues are coming from and in how state resources are spent?

Answer 441

Inhibits foreign investment into an economy Leads to allocative inefficiency e.g. diverting public resources for private gain. Contributes to persistent income and wealth inequality and reduced progress in cutting the incidence of extreme poverty Causes a loss of trust Leads to poorer human development outcomes because governments are not collecting enough tax revenues.

Answer 442

It increases supply costs for businesses this causes high prices therefore hitting real incomes Reduces the geographical mobility of labour causing higher structural unemployment Damages export competitiveness and limits intra-regional trade. Can make a country less attractive to inward foreign direct investment which might slow economic growth Makes an economy vulnerable to effects of climate change Contributes to persistent gender inequality.

Answer 443

Is the skill knowledge talent experience and ability of workers.

Answer 444

Through education and training

Answer 445

Rights to own land and to establish businesses seen as crucial for wealth creation Protection of property rights is a barrier to corruption Property rights important to tackle gender inequalities Community ownership of natural resources can help overcome threats to eco-systems Laws on patents of intellectual property are important to secure investment in research Rules encourage trade and investment between countries.

Answer 446

Aid from one country to another

Answer 447

Aid Channeled through international bodies

Answer 448

Direct financing of projects for a donor country

Answer 449

Funding of expertise of various types

Answer 450

Emerging disaster relief, food aid, refudgee relief and disaster preparedness.

Answer 451

Loan made to a country on concessionary basis

Answer 452

Projects tied to suppliers in donor country

Answer 453

Cancellation, rescheduling, refinancing of a country's external debts.

Answer 454

Helps to overcome the savings gap + overseas aid can play a key role in stabilizing post conflict environments and in disaster recovery. Project aid can fast forward investment in critical infrastructure leading to higher productivity Long term aid for health and education projects - builds human capital and stronger social institutions. Aid projects for enterprise Targeted aid might add around 0.5% to growth rate of poorest countries - this benefits donor countries too as trade grows.

Answer 455

Poor governance- aid might leave the recipient country --aid can finance corruption and locks in the power of ruling political elites. Lack of transparency- hundreds of millions is spend on aid consultants and rich nation non-governmental organisations Dependency culture- aids tends to be most effective where it is needed least - it may stunt entrepreneurial culture. Aid may lead to a distortion of market forces and a loss of economic efficiency and might also risk causing higher rates of inflation.

Answer 456

A source of foreign currency to help a nation's balance of payment An important way of financing imports of essential capital equipment and technologies and energy supplies. An injection of demand into the circular flow of income and spending + creating positive export multiplier effects Increased employment in export industries and related industries which can lead to rising per capita incomes and also stronger human development index scores. Falling prices for consumers helps to increase real incomes by opening up new markets to competition.

Answer 457

A free-market approaches favour giving a larger role to private sector enterprises with liberalization of markets, structural economic reforms to raise incentives for people and businesses and increased transparency for government high on the policy agenda

Answer 458

Fiscal discipline Reallocating state spending Tax reforms Liberalizing market interest rates Floating Exchange rates Trade liberalisation Privatization of state assets.

Answer 459

Basic health care Accessible education oil good quality Infrastructure especially in telecommunications health and transport Core public goods that the market under provides Institutions of governance Public private partnerships in supporting urbanization Active regional and industrial policies Welfare provision to provide a basic safety net and encourage saving. Progress taxation and state spending to reduce inequality.

Answer 460

The key to success to development in the next 30 years will be finding the right balance between the role of the state and the role of the market. The markets caused enormous devastation in 2008 from which many countries have not fully recovered. The developmental State has played a key role in the success of many nations including Japan and South Korea.