THEME 2 STEEDS (part 1) Flashcards
what is GDP
gross domestic product (measure value of output)
what are the main measures of the economy
1-unemployment
2-exchange rate
3-debt
4-inflation
5-interest rates
6-balance of payments
circular flow on income
3 measures of economic activity
1- income method (add all income of firms)
2- expenditure method (finding how much people have spent)
3- output method (goods and services that have been sold)
7 government main economic objectives
1- control inflation
2- reduce unemployment
3- economic growth
4- balance of payments
5- debt
6- reduce inequality
7- sustainability
what is aggregate demand
total spending on goods and services within an economy
aggregate demand equation
AD = C + I + G + (X-M)
what percentage does each component of AD equation account for
1- consumers 65%
2- investment 15%
3- government spending 25%
4- difference between imports and exports -5%
how does wealth influence consumption
increase in wealth value leads to increase of consumption - the wealth effect
what is the accelerator theory
- as output increases, investment will increase but investment will increase at an accelerating rate faster than the output. investment is linked to the growth of the economy
3 types of government spending
1- capital spending (new public infrastructure)
2- current expenditure (providing public services)
3- transfer payments (benefits system)
what is the multiplier
initial increase in AD leads to a much bigger increase in total output
falls in AD
-fall in net exports
-cut in government spending
-higher interest rates
-decline in household wealth and confidence
increase in AD
-depreciation of exchange rate
-cuts in direct and indirect taxes
-increase in house prices
-expansion of supply of credit and lower interest rates
what are shocks to aggregate demand
unexpected events that cause changes in the level of demand, output and employment
terms of trade
the ratio of an index of a country’s export prices to an index of its import prices
short run time period
4-6 months
long run time period
after 4-6 months/one year
fiscal policy
a governments policy regarding taxation and government spending
progressive tax
marginal rate of tax rises as income rises. causes a rise in the average rate of tax
proportional tax
marginal rate of tax is constant leading to a constant average rate of tax
regressive tax
rate of tax paid falls as income rises
problems with fiscal policy
-recognition lags
-imperfect information
-response lags
-magnitude
discretionary fiscal changes
deliberate changes in tax and government spending
automatic fiscal changes
changes in tax revenues and government spending arising automatically as economy goes through the trade cycle
what is money
-medium of exchange
-unit of account
-standard of deferred payment
-store of value
factors considered by bank of englanf when setting interest rates
1- GDP growth and spare capacity
2-bank lending and consumer credit figures
3-equity markets and house prices
4-consumer and business confidence
5-growth of wages
6-unemployment figures
7-trends in global foreign exchange markets
8-international data
transmission mechanism of monetary policy
changing of interest rates gives the opportunity to influence AD
quantitative easing
the introduction of new money into the money supply by a central bank.
what is the liquidity trap
a situation when expansionary monetary policy does not increase the interest rate and income hence it doesn’t stimulate economic growth. usually during recession when confidence is low
