Theme 2 AO1 Flashcards
What is Monetary policy?
Monetary policy is where a country’s central bank will change the interest rates, supply of money or exchange rates to influence an economy
what is GDP
The total value of all goods and services produced within an economy in a given period of time
What is GDP per capita
the average GDP of each person in a country
What are supply-side policies?
Policies that aim to increase the supply of goods in an economy
What is the government budget
The statement of what the government plans to do in regards to taxation and spending.
What is balance of trade?
The difference between the value of a countries total exports and total imports over a given period of time
What is the CPI?
It is a way of measuring inflation by using the prices of a basket of popular goods and services over a particular period of time
What is demand-pull inflation?
Higher demand > increased prices
What is cost-push inflation?
Higher costs for businesses > higher prices being charge to account for higher costs.
What is a budget fiscal deficit?
Government spending is greater than government revenue.
What is expansionary fiscal policy?
When the government incentives economic growth by cutting taxes and increasing expenditure.
What is contractionary fiscal policy?
When the government aims to reduce the budget deficit by increasing taxes and cutting spending.
What is the difference between a budget deficit and national debt?
The national debt refers to the total amount of money that the government has borrowed over time and still needs to pay back. A budget deficit is the borrowing of 1 year.
What is Marginal Propensity to Consume (MPC)?
It measures the persons attitude to spending. It ranges from 0-1. If it is 1 then a consumer will spend £1 for every extra £1 they receive in income.
What is one type of demand-side policy?
Changing direct taxation on households to increase/ decrease consumption.
What are the components (and %s) of AD?
Consumption (C) 65%, Business Investment (I) 15-20%, Government spending (G), Net trade (X-M)
What is the most important component of AD?
Consumption, it is the largest part of AD. If consumption falls significantly, the economy would rapidly decline.
In regards to investment, what does the term ‘animal spirits’ mean?
It emphasises the role of the ‘gut instinct’ on behaviour. If a recession is predicted, businesses may postpone investments.
What does the AD curve show?
The relationship between overall price level in the economy and economic growth through real GDP. It slopes downwards because when inflation increases, GDP declines.
What causes movement along the AD curve?
A change in price level across the economy.
What causes a shift in the AD curve?
Any of the AD components change.
What is gross investment?
The total value of all physical capital (machinery, equipment, buildings) that is produced or purchased within an economy over a specific period.
What is the net investment calculation?
Gross investment value - value of depreciation of existing capital
How does the rate of economic growth affect business investment?
When the economy is growing at a healthy rate, business will need to invest in new capital to produce more goods or services to meet the new levels of demand.
How does the demand for exports affect business investment?
Greater demand for exports will incentivise businesses to grow to fulfil foreign orders.
How does interest rates affect business investment?
Lower interest rates decrease the costs of borrowing for businesses
How does access to credit affect business investment?
Greater access to credit allows businesses to take out more loans for investment.
How do government influences affect
Government policies such as subsidies can incentivise businesses to invest more.
What is the trade cycle?
The fluctuations in economic activity that an economy experiences over a period of time.
What are the 4 phases of the trade cycle?
Expansion (rising economic activity), Peak (highest economic activity), Contraction (Economic activity declining), Trough (Lowest economic activity).
How does the trade cycle influence government expenditure?
The government will spend more in the Trough to improve the economy and less in the Peak as it is already high.
What is fiscal policy?
Government decisions about spending and taxation to influence the economy.
What is real income?
The income of individuals or nations adjusted to inflation.
How does the change in real incomes affect net trade?
If income increases, there will be more imports and net trade will decrease.
What are exchange rates?
The value of one currency for the purpose of converting it to another currency.
How does changing exchange rates affect net trade?
If a currency depreciates, X is cheaper and M is more expensive.
What is the state of the world economy?
The overall health and trends of the global economy.
How does the change in the state of the global economy affect net trade?
If the global economy is experiencing growth, there will be higher exports for countries that are exporters.
Define degree of protectionism.
Government actions that restrict international trade to protect domestic businesses.
How does the degree of protectionism affect net trade?
The higher the degree, the less imports a country will have.
What non-price factors affect net trade?
Quality and innovation, branding, trade agreements.
What is a progressive tax?
A tax that marginally rises as income rises, causing a rise in the average tax rate.
What is a proportional tax?
The marginal rate of tax is constant leading to a constant average tax rate.
What is a regressive tax?
The rate of tax paid falls as incomes rise, the average rate of tax is lower for people on higher incomes.
How does MPC affect AD.
The higher the MPC, the greater the consumption.
How does income tax affect AD?
The higher the income tax, the less consumption.
How do high levels of saving affect consumption and AD?
Higher saving means less consumption and less AD.
How can a government increase investment to increase AD?
Decrease interest rates, Increase access to credit, Decrease regulations.
