The Economic Environment Flashcards
What are the 4 types of economy?
State-controlled, market, mixed and open
What are the main characteristics of a state-controlled economy?
The government decides what is produced and how it is distributed
What are the benefits of a state-controlled economy?
Low levels of inequality and unemployment. Common good replaces profit as primary incentive.
What are the cons of a state-controlled economy?
Inequalities can arise. Excessive layers of bureaucracy and reduced individual choice.
What are the main characteristics of a market economy?
The forces of supply and demand determine how resources are allocated.
What is a result of the supply and demand interaction?
Market clearing price
What is a mixed economy?
An economy that combines a market economy with some element of state control.
In a mixed economy, what will governments typically provide?
A welfare system, defense, education, public transport, healthcare and police services.
In what ways do governments raise finance for public expenditure?
Direct taxes, indirect taxes and borrowing money in capital markets
Who is direct tax collected from by governments?
From wage-earners and companies
How is indirect tax collected by governments?
From sales tax, alcohol, cigarettes and petrol.
Why would a country impose tariffs on imports?
If the country thought that another country was taking unfair advantages of trade policies, in order to protect their domestic industry.
What is the definition of Protectionism?
When a country prevents other countries from trading freely with it in order to preserve its domestic market.
What does fiscal policy involve?
Making adjustments using government spending and taxation.
What does monetary policy involve?
Making adjustments using interest rates and money supply.
How do governments implement their monetary policies?
Using central banks.
Who are central banks guided by?
The Bank for International Settlements
Name the main responsibilities of a central bank.
Accepting deposits and lending to commercial banks, acting as a banker to the government, managing national debt, setting the short-term interest rate, controlling the money supply, issuing notes and coins, holding the nation’s gold and influencing the nation’s currency through intervention in the currency markets.
Name 3 central banks
The Federal Reserve, Bank of England, European Central Bank and the Bank of Japan.
Name the ways goods and services can be paid for
Notes, coins, card, electronic payment or on credit.
What does on credit mean?
Buying something now and paying later eg. by using an overdraft, credit card or by using a loan.
How can banks increase the total money supply the economy?
By credit creation
How is credit created?
By banks lending deposited money out at a higher rate than it pays depositors.
What would result from credit creation being uncontrolled?
Inflation
How do central banks control credit creation?
By changing interest rates.
When interest rates are high….
people will borrow less.
