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Economics > Theme 2 > Flashcards

Theme 2 Flashcards

1
Q

The supply of a currency is determined by _________ and __________.

A

Tourism abroad and imports

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2
Q

The demand for a currency is determined by _______ and ________.

A

Domestic tourism and exports.

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3
Q

Define exchange rate

A

An exchange rate tells us the price of one currency in terms of another.

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4
Q

Define imports

A

goods or services produced in foreign countries which are purchased by domestic consumers.

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5
Q

What are supply-side policies

A

Government policies which aim to increase aggregate supply.

Attempts to increase productivity and increase efficiency in the economy.

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6
Q

What are Demand-side Policies

A

Government policies which aim to increase aggregate demand.

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7
Q

What are the two types of demand side policies?

A
  • fiscal policy
  • monetary policy
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8
Q

Who manages fiscal policy

A

The government

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9
Q

Who manages monetary policy

A

the Bank of England

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10
Q

What is contractionary fiscal policy?

A

Contractionary fiscal policy is when the government increases taxes and decreases government spending in order to decrease AD

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11
Q

What is expansionary fiscal policy?

A

Expansionary fiscal policy is when the government decreases taxes and increases government spending in order to increase AD

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12
Q

What is fiscal policy

A

Fiscal policy involves the government changing tax rates and levels of government spending in order to influence aggregate demand in the economy.

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13
Q

What is Aggregate Demand

A

Aggregate demand (AD) is the total demand for goods and services produced within an economy over a period of time.

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14
Q

What is the formula for Aggregate Demand

A

C + I + G + (X-M)

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15
Q

What is Aggregate Supply

A

Aggregate supply is the ​volume of goods and services produced within the economy at a given price level.

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16
Q

What are animal spirits

A

The level of confidence of business owners

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17
Q

What is balance of payments

A

A record of all financial dealings over a period of time between economic agents of one country and another

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18
Q

What is meant by budget deficit

A

when the government spends more money that it receives

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19
Q

What is meant by budget surplus

A

when the government receives more money than it spends

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20
Q

What is the circular flow

A

A model of the economy which shows the flow of goods and services, the factors of production and the money around the economy

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21
Q

What is claimant count

A

a measure of unemployment; the number of people receiving benefits for being unemployed

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22
Q

What is the Consumer Price Index (CPI)

A

an official measure used to calculate the rate of inflation using weighted baskets of goods

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23
Q

What is cost push inflation

A

Inflation caused by a decrease in AS

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24
Q

What is the current account

A

measures the inflow and outflow of goods, services, investment incomes and transfer payments into and out of of a country

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25
Q

What is current account deficit

A

when more money leaves the country than enters, so the current account is negative

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26
Q

What is current account surplus

A

when more money enters the country than leaves, so the current account is positive

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27
Q

What is deflation

A

a sustained decrease in the general price level

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28
Q

What is demand pull inflation

A

Inflation caused by an increase in AD

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29
Q

What is disinflation

A

when the price level continues to increase but by a smaller percentage

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30
Q

What is economic growth

A

An increase in the productive potential of an economy

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31
Q

What is indirect tax

A

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

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32
Q

What is inflation

A

a sustained increase in the general price level

33
Q

What is an injection

A

When money enters the circular flow of income through government spending, investment and exports

34
Q

What is MPC

A

Marginal propensity to consume (MPC) measures how much more individuals will spend for every additional pound of income they receive

35
Q

What is MPM

A

The marginal propensity to import (MPM) is the proportion of any additional income spent on imports

36
Q

What is MPS

A

Marginal propensity to save (MPS) is the proportion of any additional income that is saved

37
Q

What is MPT

A

Marginal Propensity to tax (MPT) is the proportion of any additional income that is taxed

38
Q

what is meant by the multiplier effect

A

The multiplier effect occurs when an initial injection into the circular flow causes an even larger increase in real national income.

39
Q

What is the formula for the multiplier

A

1/ 1 - (MPC) = 1/ MPW = 1/ MPS+ MPM+ MPT

40
Q

What is quantitative easing

A

when the central bank buys assets in exchange for money in an attempt to increase the money supply

41
Q

What does the Short run Phillips curve show

A

shows the relationship between unemployment and inflation: higher levels of unemployment lead to lower levels of inflation

42
Q

What is meant by a withdrawal

A

When money leaves the circular flow of income through savings, imports and taxation

43
Q

Define exports

A

Exports are goods and services that are produced domestically, but then sold to customers residing in other countries.

44
Q

What is meant by the benefits trap?

A

When benefits get too high and unemployed workers are actually better off staying unemployed and claiming benefits than working.

45
Q

Define interest rates

A

The reward for saving or cost of borrowing

46
Q

Define government budget deficit

A

When government spending exceeds the value of tax revenues

47
Q

Define GDP

A

Gross Domestic Product is the total value of goods and services produced in an economy

48
Q

Define GNI

A

GDP plus net income from abroad

49
Q

Define unemployment

A

Someone is considered to be unemployed if they are not working but actively seeking work

50
Q

Define structural unemployment

A

when there is a mismatch between jobs and skills in the economy

51
Q

What is meant by a recession?

A

Two or more consecutive quarters of negative economic growth

52
Q

Give one advantage and disadvantage of reduced government spending on benefits.

A

Advantage: The budget deficit will improve as the government is paying out less. Lower benefits may get the unemployed out of the benefits trap by increasing the incentive to work - this will reduce unemployment.

Disadvantage: Poor households will have less to spend, so consumption will fall, which will decrease AD. Also, income inequality will worsen as the poor get poorer.

53
Q

Define corporation tax

A

a tax levied on companies’ profits.

54
Q

Define Economic Growth

A

An increase in the productive capacity of an economy

55
Q

How do you calculate index numbers from base year

A

New price / Base year price x 100

56
Q

State one advantage and one disadvantage to the government spending more on healthcare and education.

A

Advantage: increases aggregate demand and, therefore, real GDP. Specifically, spending on healthcare and education will make the workforce healthier and more productive, so the LRAS will shift right.

Disadvantage: worsen the government’s budget deficit. Furthermore, spending on schools and education could go towards unproductive bureaucracy, useless degrees or cosmetic surgeries such as nose jobs.

57
Q

What is the Short run

A

Short run refers to the time period where at least one factor of production is fixed

58
Q

What is the monetary policy

A

Monetary policy involves using interest rates and other monetary tools to influence the levels of consumer spending and aggregate demand

59
Q

What is contractionary monetary policy?

A

Aims to decrease AD by increasing interest rates

60
Q

What is expansionary monetary policy?

A

Aims to increase AD and economic growth in the economy through decreasing interest rates or increasing the money supply to boost economic activity

61
Q

Define frictional unemployment

A

This is unemployment caused by the time people take to move between jobs, e.g. graduates or people changing jobs.

62
Q

Define structural unemployment

A

This occurs due to a mismatch of skills in the labour market

63
Q

Define cyclical or demand deficient unemployment

A

Demand deficient unemployment occurs when there is insufficient demand in the economy to maintain full employment.

64
Q

Define seasonal unemployment

A

Seasonal unemployment occurs when certain seasons come to an end and labour is not required until the next season e.g. fruit pickers, summer seaside resort workers, ski instructors etc.

65
Q

Define real wage unemployment

A

Real wage unemployment occurs when wages are set above the equilibrium level causing the supply of labour to be greater than demand.

66
Q

Define positive wealth effect

A

The wealth effect is the idea that an increase in an individual’s wealth (value of all ones assets) will lead to an increase in their consumption (spending).

67
Q

Define real GDP

A

Real GDP is the total goods and services produced in an economy over a given period of time, adjusted for the effects of inflation

68
Q

What is the percentage make up of each component of AD?

A

C- 60%
I- 14%
G- 25%
(X-M)- 1%

69
Q

What are the ways of measuring unemployment

A

ILO labour force survey

In the International Labour Organisation’s Labour Force survey 80,000 households are interviewed and then surveyed on the phone every 3 months to ask whether they are unemployed. In this survey, someone is considered as unemployed if they have been out of work for 4 weeks or more and are ready to start within the next 2 weeks and actively looking for work.
With this information the unemployment rate and unemployment level can be estimated for the whole country.

The second measure of unemployment is the Claimant Count which measures how many people are claiming unemployment benefits.

70
Q

Explain the limitations of the ILO Labour Force Survey and the Claimant Count as measures of unemployment.

A

The Labour Force Survey asks 80,000 households out of 27 million in the UK. It is therefore possible that the sample used is not representative, which means that this method can lack accuracy.

The Claimant Count does not include people who are unemployed but do not claim unemployment related benefits. This includes people who are embarrassed to claim benefits or who have partner who is a high earner. This means that it underestimates the actual level of unemployment.

71
Q

Define underemployment

A

When a worker is working fewer hours than they would like to work

72
Q

What is the index formula?

A

Index = Current Number/Base Number x 100

73
Q

draw a supply and demand diagram for the labour market.

A

check on google

74
Q

Draw an exchange rate diagram.

A

check on google

75
Q

Explain why unusual spending habits can be a problem when using the Consumer Price Index measure of inflation.

A

For consumers with unusual spending habits, the consumer price index with its 650 most common goods and services will not accurately measure changes in their cost of living. This is because these consumers are buying unusual uncommon goods and services which are not in the CPI basket.

76
Q

Explain why time lags can be a problem when using the Consumer Price Index measure of inflation.

A

The goods and services in the CPI basket are only updated once a year. When new goods become popular, their price changes aren’t measured, because they’re not yet in the basket. It’s only one year later that these new goods and services are included. So, any change in price of these new goods will not be reflected in the CPI for a year. However, the change in price will impact the consumer’s cost of living immediately and so the inflation rate is less accurate.

77
Q

What is the difference between Budget deficit and National debt?

A

A budget deficit occurs when the government’s expenditures exceed its revenues over a specific period. Occurs when the government spends more than it earns.

A national debt, also known as public debt or government debt, is the total amount of money borrowed by the government to finance its activities.

78
Q

What is meant by austerity?

A

Austerity refers to a policy or set of policies that aim to reduce government spending and debt.

79
Q
A

Economics (9 decks)

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