Peter Cramp Stuff I Like - Any Topic Flashcards
Explain a depreciation of sterling as a source of inflation
Hint: think about the dollar and oil
Oil is priced in dollars and if sterling depreciates against the dollar, the Sterling price of oil imports increases, leading to cost push inflation
What is a fiscal dividend?
Higher economic growth will raise tax revenues and reduce government spending on unemployment and poverty related welfare benefits.
What is the tax free allowance?
12,570 pounds
Why might the government not have used expansionary policy when the UK was at risk of recession in 2022-23?
In 2022-2023, the UK economy was threatened by recession but unemployment was at record low rates. Firms were struggling to get hold of the workers they needed. In this context, action to stimulate the economy risked raising the derived demand for labour and causing wage claims to accelerate, which could have a wage-price spiral which would have embedded inflation in the economy.
When was the last time the UK experienced large inflation?
Lawson boom 1989 inflation reached 10%
Why could inflation reduce consumer and business confidence?
High and unstable inflation could reduce both business and consumer confidence. Firms may find it difficult to predict future costs and revenue from an investment project so the may be less likely to invest. Consumers may increase the proportion of their income they save.
Define macroeconomic stability
Macroeconomic stability can be defined as the absence of volatility in key performance indicators (inflation, economic growth, employment and the current account of the balance of payments)
Chain of analysis for lower interest rates - epic chain
Low interest rates mean that there is little reward for saving. It also means that the cost of borrowing for consumers and firms is low. The fall in borrowing costs encourages consumer credit to finance spending and firm credit for investment. Also, those with variable rate mortgages experience a rise in their discretionary income if mortgage rates fall as they have to pay less for the mortgage installments. As such, low interest rates are likely to cause consumer spending and investment to increase. Both C and I are components of AD (AD = C+ I + G + (X - M) ), therefore aggregate demand increases. The negative output gap closes as spare capacity diminishes and previously unemployed resources are brought into use. Labour is in derived demand from goods and services, therefore unemployment will fall and average incomes will rise. If people have a greater income they can buy more goods and services that increase their material standards of living. A multiplier effect explained….
Define multiplier effect
A multiplier effect may occur which is when an initial injections into the circular flow is followed by a proportionately greater increase in real national output.
Go on chains of analysis that don’t match with extract material so that…
You can evaluate and say “however the relevance of this point is weaker by the data in extract abc” 😁
Inflation creates uncertainty and discourages investment. Firms are more willing to make investment plans in a climate of economic stability. What is a main reason for this?
Inflation makes real rates of return on investment difficult to predict.
Describe how low interest rates can cause an asset price bubble
Low interest rates encourage borrowing in the form of mortgages to finance house prices. As a result, there is an increase in demand for housing. As house prices begin to rise, demand for housing tends to increase further. This is because there is an incentive to get onto the housing ladder or climb higher on it before any further price increases and because of speculative activity, houses may be purchased as an investment with the aim of later selling the property at a higher price. House prices are thus driven to unrealistically high levels, but the process may be reversed at a later date, with a small fall in house prices leading to a big sell-off and a market crash.
Tariffs definition
Tariffs, a protectionist policy, are a tax on selected imports
Explain what happens (chain of analysis) to supply and why when an import tariff is removed. Use eg cars
Because imports are now more competitive than domestically produced cars, UK consumers may switch from domestically produced cars to imported ones, leading to a contraction in domestic supply.
Analyse why dumping is bad
Dumping occurs when large amounts of surplus output is sold at below the cost of production, such as with china and steel. This UNDERCUTS domestic producers on price, serving to take away their MARKET SHARE. If prolonged, this could DRIVE DOMESTIC PRODUCERS OUT OF BUSINESS (predatory pricing), resulting in structural unemployment in affected industries. Once competition is reduced, foreign producers have price making power to restrict output and raise prices to make supernormal profit. This is bad for consumers as consumer surplus is reduced.
