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Economics > Theme 2 > Flashcards

Theme 2 Flashcards

1
Q

What does the circular flow of income represent?

A

Economics growth

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2
Q

Government objectives

A

Debt, sustainability, economic growth(gdp), inequality, unemployment, balance of payments, inflation

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3
Q

Aggregate demand formula

A

Consumption +Investment +Government spending (X-M)

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4
Q

Aggregate demand definition

A

Total amount of planned spending of goods and services

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5
Q

Key factors influencing consumer spending

A

Real disposable income, level and changes In Employment and job security, availability cost of consumer credit and interest rates, costs of servicing a mortgage, wealth effect, expectations of future prices, confidence, composition of households, level of personal debt

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6
Q

Capital investment

A

Spending on capital goods such as plans and equipment and new buildings to produce more consumer goods in the future

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7
Q

Factors that influence investment

A

Rate of interest, inflation, price of what you are buying, uncertainty, economic growth, acceleration theory, retained profit that the business has, productivity of labour, government policy, risk of investment, uncertainty of confidence and business tax

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8
Q

Acceleration theory

A

Postulation whereby investment expenditure increases when either demand or income increases.

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9
Q

Gross spending

A

Total amount that the economy spends on new capital

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10
Q

Net investment formula

A

Gross investment - capital depreciation

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11
Q

Multiplier effect

A

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

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12
Q

Examples of Net trade evaluation

A

Food and fuel
Import and exports (balance of payments)

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13
Q

Trade balance

A

The difference between the value of exports and imports

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14
Q

What are the Balance of payments accounts

A

3 accounts- currents, capital, finance

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15
Q

Positive trade surplus

A

A trade surplus adds to net exports, which in turn increases AD

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16
Q

Negative trade deficit

A

Subtracts from net exports, leading to reduction in AD.

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17
Q

Output gap

A

The difference between the actual level of GDP and its estimated potential level.

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18
Q

Potential output

A

The level of production an economy can achieve when all resources are fully employed without causing inflationary pressures

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19
Q

Why could there be a fall in AD

A

Fall in net exports
Cut in gov spending
Higher interest rates
Decline in household
Wealth and confidence

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20
Q

Why could there be an increase in AD

A

Depreciation of the exchange rate
Cuts in direct and indirect taxes
Increase in house price
Expansionary of supply of credit + lower interest rates

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21
Q

What graph is aggregate supply

A

Short run

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22
Q

Aggregate supply

A

Total output of the good and services that firms in an economy are willing and able to to supply at a given price level.

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23
Q

Long run aggregate supply

A

This represents a maximum output when all factors of production are fully and efficiently employed.

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24
Q

Shifts in the shirt run aggregate supply curve

A

Unit wage costs perhaps arising from a higher minimum wage
Labour productivity
Raw materials
Taxes
Imported materials
Supply shocks

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25
Q

Factors influencing long run aggregate supply

A

Changes in labour=increasing in supply
Increase in stock of capital inputs including infrastructure
Changes in natural resources
Changes in the efficiency of allocation
Improvements in quality of inputs/productivity
State of technology
Improvement in institutions

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26
Q

Fiscal policy

A

A governments policy regarding taxation and public spending

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27
Q

Which way does Loose fiscal policy shift the curve

A

To the right

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28
Q

Which way does tight fiscal policy shift the curve

A

Left

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29
Q

Magnitude

A

Size of the increase in income tax or lack of government spending

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30
Q

Eval impacts of an expansionary fiscal policy

A
  • leads to higher market interest rates e.g bond yields rise as deficit increases
  • an acceleration in the rate of price inflation
  • marginal propensity to spend and save of households
  • marginal propensity to import
  • rise in business confidence
  • crowding-out.
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31
Q

Crowding out

A

If the government runs a big budget deficit, it will have to sell debt. This may require higher interest rates (they buy bonds). Or raising taxes to pay back the debt.

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32
Q

Interest rates defined

A

Reward for saving and the cost of borrowing

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33
Q

3 tools of monetary policy

A
  1. Quantitive easing or tightening
  2. Rate of interest
  3. Credit availability
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34
Q

What is an injection

A

An investment of money into something - circular flow

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35
Q

What is red tape

A

This means too many regulations form filling and quality checks

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36
Q

Factors considered by the Bank of England when setting interest rates

A
  • GDP growth and spare capacity
  • bank leading and consumer credit figures
  • equity markets and house prices
  • consumer confidence and business
  • growth of wages, average earnings and unit labour costs
  • unemployment
  • trends in global foreign exchange markets
  • international data
37
Q

Tight monetary policy does what?

A

Raise interest rates and limit borrowing

38
Q

What are transmission mechanisms

A

Several ways in which change in interest rates influences AD, output, and prices.

39
Q

What are some effects of interest rates?

A
  1. Change in market interest rates
  2. Impact on demand
  3. Effects on output, jobs & investment
  4. Real GDP and price inflation
40
Q

What happens when the interest rates increase or decrease

A

Interest rates increase the pound gets stronger
When interest rates decrease the pound gets weaker - loose policy

41
Q

Facts about Quantitive easing

A
  • monetary policy tool
  • when the economy is lacking energy, the bank buys assets like government bonds from commercial banks and other financial institutions. The banks get cash in return for selling bonds
  • this will increase the amount of money in the financial system and will in theory encourage banks to lend more and consumers and businesses to spend more.
42
Q

Loos expansionary fiscal policy

A

Increase aggregate demand directly through an increase in government spending

43
Q

Evaluative point for Quantitive easing

A
  • time lags and impact of QE on the real economy
  • Bank of England now a major holder of the UK government debt
  • Liquidity trap
  • Lots was investerwd from higher income so it didn’t go round the circular flor of income.
44
Q

Reasons why monetary policy may not work?

A
  • the unwillingness of commercial banks to lend
  • low consumer confidence
  • huge levels of private sector debt
  • cost of borrowing is high
45
Q

Liquidity trap

A

This is something that acts against economic situation that can occur when consumers and investors save cash rather than spend or investing it even when interest rates are low, preventing efforts by economic policymakers to stimulate economic growth

46
Q

Phillips curve

A

The implication of the curve was that any attempt by governments to reduce unemployment was likely to lead to increased inflation.

47
Q

Stagflation

A

Unemployment and inflation rising together

48
Q

What will happen if in a Recession
+ causes

A

It will get worse as people hold back
- Unemployment rates and lack of confidence

49
Q

What is deflation?

A

Where the rate of inflation becomes negative

50
Q

Demand side causes of deflation

A
  • Fall in AD - recession
  • larger negative output gap
51
Q

Supply side causes of deflation

A
  • improved productivity
  • high technology
  • significant fall in wage rates
  • high exchange rates causes import prices to fall
52
Q

What is Direct tax

A

Tax on income learnings or tax or business profits

53
Q

What is under employment

A

A firm has too many workers

54
Q

Corporation tax

A

Tax on a business profit
Supply side

55
Q

Reasons why deflation can be damaging

A
  • holding back on spending
  • debt increase
  • the real cost of borrowing increases
  • lower profit margins
  • confidence and savings
  • income distribution
  • competition
56
Q

What is Quantitive tightening

A
  • It involves selling government bonds to banks or central banks letting bonds mature and then removing them from their balance sheet.
  • banks have less money to lend
  • interest rates increase along with bonds falling
  • less borrowing, less lending
57
Q

Financial crisis 2008
The causes of recession

A
  • US housing and mortgage bust over lending
  • low deals to low income earners who can’t afford it
  • impacting all banks around the world
  • borrowers couldn’t pay back
  • lead to loss of confidence
58
Q

What is GDP (gross domestic product)

A

The value of all goods and services produced within a country over a year. Therefore the real GDP is a measure of a countries output.

59
Q

Trend growth

A

The estimated rate of growth of a nation’s productive potential

60
Q

What are the types of unemployment

A

Frictional
Seasonal
Structural
Cyclical

61
Q

Frictional unemployment

A

Out of work due to personal short term unemployment - made redundant

62
Q

Structural unemployment

A

Your skills are no longer relevant

63
Q

Cyclical unemployment

A

Economic reasons

64
Q

Seasonal unemployment

A

Parts of the year when there is no work in your job

65
Q

Demand deficient causes of unemployment

A

High interest rates
Global recession
Negative multiplier effect
Financial crisis

66
Q

What does claimant count include

A

People who are eligible to claim the jobs seekers allowance e.g.
- out of work
- available for work
- actively seeking employment
- aged 18-66
- excluded various people

67
Q

Benefits of using claimant count

A

Up to date
Cheap
Easy to understand/ compose/ compare

68
Q

Problems of using claiming count

A

Misses out on people
Some people refuse to claim benefits
Not used in Europe

69
Q

Labour force survey

A

an inquiry directed to households, designed to obtain information on the labour market and related issues through a series of personal interviews.

70
Q

What does the LFS survey involve

A
  • 80,000 people across society
  • aged 17-70
  • includes unemployment
  • used in Europe, good for comparisons
71
Q

Benefits of LFS survey

A

Used in Europe
Wider criteria
Measures ‘students’ and ‘retirees’

72
Q

Problems with LFS survey

A

Can be out of date
People may lie
Expensive to make

73
Q

Current account

A

How much we import or export and if we’re in surplus or deficit

74
Q

What does the Balance of payments do

A

Measure all international economic transactions between the UK and trading partners

75
Q

Remittences

A

Someone who works here from another country and sends most of the money earnt back to their home country

76
Q

Interventionist supply side policies

A

Spending on healthcare
Building business parks
Increased education and training
Improving transport and infrastructure
Invest in council housing

77
Q

Market supply side policies

A

Reducing the power of trade unions
Privatisation of state industry
Lower tariff barriers
Removing unnecessary red tape
Reduce corporation tax
Reducing state welfare benefits , providing better information about jobs, deregulation

78
Q

Collective bargaining

A

Negotiation of wages and other conditions of employment by an organised body of employees

79
Q

Industrial action

A

Action taken by employees of a company as a protest, especially striking or working to rule

80
Q

Holding a ballot

A

Asking people to vote and it’s open to all members in the union

81
Q

Deregulation

A

The opening up of a state monopoly. This market is now open to competition

82
Q

Deregulation of labour markets

A

Where the government reduces the amount of employees rights. This makes it easier for firms to hire and fire workers, as well as flexible workforce.

83
Q

3 ways to reduce inequality

A

A progressive tax system
A benefits system
Greater investment in education

84
Q

Trickle down economics

A

Reduces tax rates for the rich
Money that the rich spend on goods and services with trickle down to poor households

85
Q

Problems of trickle down economics

A

Rich may save
NHS gets less money
Less in the circular flow
Rich may buy more from luxury goods so it won’t ’trickle down’
Invest overseas

86
Q

Human development index

A

A broader measure of society that looks at income, health and education

87
Q

What are the three indicators in human development index

A

Health
Education
GDP per capita

88
Q

Positives of using HDI

A

Helps form government policies
Looks at wide elements in society

89
Q

Negatives of using HDI

A

Does not measure inequality within the country
We cannot trust the reliability of the figures

Economics (4 decks)

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