Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economics > Theme 2: The UK economy - Performance and Policies > Flashcards

Theme 2: The UK economy - Performance and Policies Flashcards

1
Q

What is economic growth ?

A

Rate of change of output, increase of long term productive potential

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

How is economic growth measured ?

A

% change in real GDP per annum, can be shown through PPF shift

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is GDP ?

A

A standard measure of output, total value of goods produced in a country within a year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What can GDP indicate ?

A

Living standards

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is GDP per capita ?

A

Total GDP/population of the country

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is the difference between real and nominal GDP ?

A

Real considers inflation, nominal does not

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What does real refer to ?

A

Volume (size)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does nominal refer to ?

A

Value (monetary cost), volume * current price level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are 2 other measures of national income ?

A

GNI and GNP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is GNI ?

A

Gross national product, value of goods + services produced by a country over a period of time + net overseas investments from payments and dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is GNP ?

A

Value of all goods/services produced by a citizen of a country, domestically/overseas

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How can economic growth over time be compared ?

A
  • changing national income levels
  • real per capita figures used
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How can growth between countries be compared ?

A
  • using GDP
  • real figures used
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is PPP ?

A

Exchange rate comparing how much a typical basket of goods costs in one country compared to another

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Why might PPP be used ?

A

Takes into account living costs so living standards can he compared

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are problems of using GDP to compare living standards ?

A
  • inaccuracy of data (hidden/black market, home-produced services e.g. sustenance farmers)
  • inequality
  • quality of goods/services
  • comparing different currencies (cost of living not considered)
  • spending (varies between countries and can impact GDP, e.g. defence)
  • may other factors not consideredW
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What are the 7 measures of national happiness ?

A
  • real GDP per capita
  • health
  • life expectancy
  • having someone to count on
  • perceived freedom to make life choices
  • freedom from corruption
  • generosity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What did the UK national well-being report find ?

A

Health, relationship status, and employment status most affect personal wellbeing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is the relation between real incomes and subjective happiness ?

A

At lower levels, strongly related but less so at higher levels - Easterlin Paradox

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is inflation ?

A

General increase of prices in the economy which erodes purchasing power

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What is deflation ?

A

Fall of prices, indicated a slowdown in the growth of output in the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What is disinflation ?

A

Reduction in the rate of inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the formula for calculating index prices ?

A

new figure/base figure * 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

How is inflation calculated using the CPI ?

A

Price index calculated based on average household spending patterns, considers how much is spent on each good so it is weighted, price increases are measured to calculate inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What are the limitations of CPI in measuring inflation ?

A
  • not totally representative
  • doesn’t indicate housing costs, inflation may be higher
  • difficult to make comparisons with historical data
  • doesn’t consider price increases due to increased quality
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

How does RPI differ to CPI ?

A
  • RPI considers housing costs
  • also considers consumers switching to cheaper alternatives due to price rises
  • excludes the top 4% of earners and low income pensioners as they are not average
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What are 3 causes of inflation ?

A
  • demand pull
  • cost push
  • growth of money supply
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is demand pull inflation ?

A

Increased AD, demand for goods+services increases and so does the price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What is cost push inflation ?

A

Increased production costs, firms increase prices to maintain profit margins

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

How can the growth of money supply result in inflation ?

A

Increase in money supply can result in a change in the amount of goods/services supplied so the price increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What are the effects of inflation on consumers ?

A
  • less to spend, lower living standards
  • can pay off debt at a lower rate
  • customers who save will lose out
  • psychological effects, spending falls
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What are the effects of inflation on firms ?

A
  • less competitive
  • postponed purchased due to disinflation, fall in demand, profit, business confidence, investment
  • cannot plan for the future
  • changing prices can be expensive, e.g. menus
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What are the effects of inflation on workers ?

A
  • lower living standards from lower real incomes
  • deflation can lead to job losses
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

What are the two measures of unemployment ?

A
  • claimant count
  • International Labour Organisation and the UK Labour Force Survey
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

What is the claimant count ?

A

Number of people receiving benefits for being unemployed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What does the term employed mean ?

A

> 1 hour of paid work a week, temporarily away from work (holiday), > 15 hours unpaid for a family business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

What does the term unemployed mean ?

A

Without work, able to work, actively seeking work (within the last 4 weeks), and able to start within the next 2 weeks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

What does the term inactive mean ?

A

Working age but not seeking employment, or seeking employment but not able to start in the next 2 weeks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

What is the Labour Force Survey ?

A

Survey given to a sample of people to determine whether they are employed/unemployed/inactive, may not be accurate due to it being a sample

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

What are 3 comparisons between the CC and LFS ?

A
  • not included in LFS but CC, working in a hidden economy or fraudulently claiming benefits
  • may not be eligible for benefits but unemployed
  • both may underestimate the real figure as the hidden unemployed are not considered
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

What does the term economically active mean ?

A

Employed/unemployed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

What does the term workless mean ?

A

Unemployed and inactive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

What does the term employment rate mean ?

A

% of working age who are employed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

What does the term unemployment rate mean ?

A

% of economically active who are unemployed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

What does the term activity/participation rate mean ?

A

% of working age who are economically active

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

What does the term inactivity rate mean ?

A

% of working age who are inactive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

What is underemployment ?

A
  • part time/zero hour contracts who prefer to be full time
  • self employed who would rather be employed
  • not working at a job which matches their skill level
  • increases during recession
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

What is the significance of changes in activity ?

A
  • fall in productive potential
  • lower GDP
  • lower tax
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

What are the types of unemployment ?

A
  • frictional (between jobs)
  • structural (regional/sectoral/technological, supply higher than demand)
  • seasonal (e.g. tourism)
  • cyclical (lack of general demand)
  • real wage inflexibility (real wages above market clearing level, excess supply)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

How do skills influence employment/unemployment ?

A
  • more skills required than previously
  • causes structural unemployment
  • migrant workers may fill skill shortages if they have the skills
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

How does migration influence employment/unemployment ?

A
  • increases jobs, more people coming to work
  • can lead to lower wages, affects lower skilled work the most
  • supply of labour increases
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

What is the impact of unemployment on workers ?

A
  • loss of income + living standards
  • stigma (mental health implications)
  • skills lost
  • lower job security for those who are employed
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

What is the impact of unemployment on firms ?

A
  • fall in profit
  • smaller pool of skilled people to employ
  • can offer lower wages
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

What is the impact of unemployment on consumers ?

A
  • less choice, also lower quality
  • less available to spend
  • firms may lower prices and put on sales to stimulate demand
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

What is the impact of unemployment on government ?

A
  • fall in tax revenues + higher spending
  • budget deficit
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

What is the impact of unemployment on society ?

A
  • social deprivation
  • further loss of jobs
  • loss of potential national output
  • social costs of the unemployed, violence and crime
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

What is the balance of payments (BoP) ?

A

Record of all financial dealings over a period of time between economic agents of one country and all other countries; where money flows

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

What are the 2 components of the BoP ?

A
  • current account
  • capital and financial account
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

What is the current account ?

A
  • trade in goods (visibles)
  • trade in services (invisibles)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

What is the balance of trade in goods services ?

A

Balance of trade + balance of invisibles

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

What are income and current transfers ?

A

Wages, profit, interest, or dividends which can be repatriated back into the country

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

What is the current balance ?

A

Balance of trade + balance of invisibles + net income and current transfers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

What are government’s 4 main macroeconomic objectives ?

A
  • low unemployment
  • economic growth at a similar rate to other countries
  • balance of payment equilibrium
  • low and stable inflation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

What type of growth is desirable ?

A

Export led, however this can lead to inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
65
Q

What can high economic growth result in (BoP) ?

A

Current account deficit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
66
Q

What is aggregate demand (AD) ?

A

Total level of spending in the economy at any given price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
67
Q

What are the components of AD ?

A

AD = C + I + G + (X-M)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
68
Q

What is consumption ?

A

Consumer spending

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
69
Q

What is investment ?

A

Spending by businesses on capital goods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
70
Q

What is government spending ?

A

Total amount spend by government on providing goods/services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
71
Q

What are net exports ?

A

Exports-imports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
72
Q

What does the AD curve show ?

A

The relationship between price level and GDP

73
Q

What 4 factors influences a fall in GDP due to higher prices ?

A
  • income effect (fall in consumer spending)
  • substitution effect (less British goods bought, more imports)
  • real balance effect (spending reduced, savings worth less)
  • interest rate effect (higher prices, higher interest rates, lower interest so fall in AD and GDP)
74
Q

What causes a movement along the AD curve ?

A

Change in prices

75
Q

What causes a shift in the AD curve ?

A

Change in any other variable

76
Q

What is disposable income ?

A

Money consumers have left to spend after taxes have been deducted and government benefits have been added

77
Q

What is MPC ?

A

Marginal propensity to consume, how much an increase in income will affect consumption (lower in higher incomes)

78
Q

What is APC ?

A

Average propensity to consume, average amount of income spent on consumption

79
Q

What is the formula for MPC ?

A

change in consumption/change in income

80
Q

What is the formula for APC ?

A

total consumption/total income

81
Q

What effect does consumption have on savings ?

A

Increased consumption, decreases savings

82
Q

What is MPS ?

A

Marginal propensity to save, how much of an increase in income is saved

83
Q

What is APS ?

A

Average propensity to save, average amount saved of income

84
Q

What is the formula for MPS ?

A

change in savings/change in income

85
Q

What is the formula for APS ?

A

total savings/total income

86
Q

What are influences on consumer spending ?

A
  • interest rates (higher interest rates, lower spending, value of shares fall)
  • consumer confidence (confidence, spending rises)
  • wealth effect (change in consumption following a change in value of assets)
  • distribution of income (depends on MPC)
  • tastes and attitudes (materialistic)
87
Q

What is investment ?

A

Addition of capital stock into the economy

88
Q

What is gross investment ?

A

The total amount of investment carried out

89
Q

What is net investment ?

A

Gross investment - rate of depreciation

90
Q

What are some influences on investment ?

A
  • rate of economic growth (more growth more investment)
  • business expectations and confidence (Animal Spirits, Keynes, feeling of managers and owners of firms on where this investment would be profitable)
  • demand for exports (increased demand increases investment)
  • interest rates
  • access to credit (harder during recessions, higher risk)
  • retained profit (higher profits, higher investment)
  • technological change (improve production, increased profitability)
  • costs (costs rise, low investment)
91
Q

What is wealth ?

A

Measure of all assets a person owns

92
Q

What are some influences on government spending ?

A
  • trade cycle (increases during a recession, falls during a boom)
  • fiscal policy (spending can vary annually, depends on priorities laid out in fiscal policy)
  • age distribution of the population (e.g. pensioners and education)
93
Q

What is fiscal policy ?

A

Decisions about government spending and taxes, depends on the priorities of the government

94
Q

What is net trade ?

A

Total exports - total imports

95
Q

Where does money flow when a good is exported ?

A

Into the UK

96
Q

Where does money flow when a good is imported ?

A

Out of the UK

97
Q

What are some influences on the net trade balance ?

A
  • real income (higher imports due to higher income as demand increases)
  • exchange rates (depreciation leads to more exports)
  • state of world economy (trade relationship with the UK)
  • degree of protectionism (high protectionism on UK exports, lower exports etc)
  • non price factors (quality/design, marketing)
  • prices (affected by inflation)
98
Q

What is aggregate supply (AS) ?

A

The value of goods and services produced within the economy at a given price level

99
Q

Why is the AS curve upwards sloping ?

A

Firms are willing to supply more but only at a higher price due to the marginal cost of labour per good produced

100
Q

Why is SRAS elastic ?

A

Firms can increase production without a significant increase in costs

101
Q

What leads to a movement along the SRAS curve ?

A

Change in price level

102
Q

What shifts the SRAS curve ?

A

Change in the cost of production

103
Q

What 3 factors influence SRAS ?

A
  • changes in the costs of raw materials and energy
  • changes in exchange rates (depreciation, increased price of imports, production becomes more expensive)
  • changes in tax rates (increases the cost of production)
104
Q

When do supply side shocks occur ?

A

When there are significant changes in the factors influencing the cost of production

105
Q

What is the difference between increasing supply in the long run and short run ?

A

Limit to how much supply can be increased in the long run; limited machines/people available

106
Q

What are the 2 different shapes of LRAS ?

A
  • classical
  • Keynesian
107
Q

What are some features of the classical LRAS curve ?

A
  • AS is determined by the level of all factors of production and the quality of technology
  • independent of the price level
  • assumes the economy is constantly at full capacity
  • based on the view that economies can correct themselves quickly
108
Q

What are some features of the Keynesian LRAS curve ?

A
  • wages cannot fall below a certain level (e.g. due to unions, minimum wages, and workers willing to work)
  • elasticity varies as employment increases, becomes more elastic as wages increase
109
Q

What are some factors influencing LRAS ?

A
  • technological advances (speeds up production)
  • changes in relative productivity (more productive, more produced)
  • changes education and skills (more skilled more efficient)
  • changes in government regulation (e.g. increasing workforce size, encouraged R&D through subsidies/tax breaks)
  • demographic changes and migration (immigration higher than emigration, larger workforce)
  • competition policy
110
Q

What 2 things does the circular flow of income show ?

A
  • households own all wealth and factors of production
  • money and goods + services flow in opposite directions
111
Q

What is income ?

A

The flow of money/earnings

112
Q

What are injections into the circular flow of income ?

A

Monetary additions into the economy

113
Q

What are 3 injections into the circular flow of income ?

A
  • government spending
  • investment
  • exports
114
Q

What are withdrawals/leakages from the circular flow of income ?

A

Money is removed from the economy

115
Q

What are 3 withdrawals/leakages from the circular flow of income ?

A
  • taxes
  • savings
  • imports
116
Q

When does the economy grow (circular flow of income) ?

A

When the sum of leakages < injections

117
Q

When does the economy shrink (circular flow of income) ?

A

When the sum of leakages > injections

118
Q

When is the economy in equilibrium (circular flow of income) ?

A

When the sum of leakages = injections, national income will remain the same

119
Q

Where is the equilibrium of national output ?

A

Where AD and AS intersect

120
Q

How is national output increased in classical LRAS ?

A

Only way is to shift the classical LRAS curve outwards

121
Q

What does the effect of a shift of AD depend on using Keynesian LRAS ?

A

Strongly depends on the elasticity of the curve

122
Q

Can a factor affect both AD and AS ?

A

Yes, one which affects AD can strongly influence AS

123
Q

What is the multiplier process ?

A

Idea that an increase in AD due to an increased injection can lead to a further increase in national income

124
Q

What is the multiplier ratio ?

A

The final change in income to the initial change in injection

125
Q

What does an injection represent ?

A

An increase in spending which will increase spending for someone else which will then lead to further consumption spending

126
Q

What determines the size of the multiplier ?

A

How much of an increase in income people will spend; MPC

127
Q

How is the multiplier able to work ?

A

Using the concept of the circular flow of income

128
Q

How would a negative multiplier effect occur ?

A

Due to a withdrawal from the economy leading to a further fall in income

129
Q

What effects can the multiplier have on the economy ?

A
  • grows can occur quicker
  • time lag between income and its full effects
  • but impossible for the government to know the exact effect of their spending
130
Q

What effect does the multiplier have on marginal propensities ?

A
  • MPC, increase in consumption following an increase in income
  • MPS, increase in savings following an increase in income
  • MPT, increase in taxation following an increase in income
  • MPM, increase in imports following an increase in income
  • MPW, increase in following an increase in income
131
Q

What is the formula for MPW ?

A

MPS + MPT + MPM

132
Q

What is the formula for the multiplier ?

A

1/MPW or 1/1-MPC

133
Q

What is the significance of the multiplier for shifts in AD ?

A
  • must be spare capacity for extra output
  • more elastic the curve, bigger effect on output, smaller effects on prices
  • effect depends on elasticity and whether it is short run/long run
134
Q

What must occur for economic growth to occur ?

A

Increase in quantity/quality of one of the factors of production, or used more efficiently

135
Q

What does an increase in LRAS lead to ?

A

An increase in the productive potential of the economy

136
Q

What factors influence economic growth ?

A
  • land (new resources)
  • labour (workforce size/quality)
  • capital (sustained investment can improve technology)
  • enterprise (new jobs created and goods + services)
  • technological processes (average cost of production falls and new products are available)
  • efficiency (more goods can be produced)
137
Q

What is actual growth ?

A

% change in GDP

138
Q

What is potential growth ?

A

Change in productive potential of the economy over time

139
Q

How can export led growth occur due to international trade ?

A
  • can encourage firms to invest and increase labour demand
  • encourages efficiency
140
Q

What does the long trend rate of growth mean ?

A

The average sustainable rate of economic growth over a period of itme

141
Q

What is an output gap ?

A

The difference between the actual level of GDP and the estimated long-term value of GDP

142
Q

What is a positive output gap ?

A

When GDP is higher than estimated

143
Q

What is a negative output gap ?

A

When GDP is lower than estimated, usually signifies spare capacity in the economy

144
Q

Why are output gaps hard to measure ?

A
  • exact position of LRAS is unknown
  • initial estimates of real GDP are often inaccurate
145
Q

What is the trade cycle ?

A

Periodic but irregular up and down movements in economic activity

146
Q

What are the 4 phases in a trade cycle ?

A
  • boom
  • downturn
  • recession
  • recovery
147
Q

What are characteristics of an economic boom ?

A
  • high national income (e.g. GDP)
  • positive output gap (producing above PPF)
  • inflationary pressure
148
Q

What are characteristics of a recession ?

A
  • high unemployment (low consumption and imports)
  • low inflationary pressure
  • defined as where GDP falls in at least two successive quarters
149
Q

What are the impacts of economic growth on consumers ?

A
  • positive wealth effect
  • improved productive efficiency, can lead to lower prices and higher quality goods
  • productivity increases happiness
  • increased inequality, economic growth may not affect all consumers
  • inflation, negative effects
150
Q

What are the impacts of economic growth on firms ?

A
  • increased investment and business confidence
  • increased productive efficient, lower production costs
  • higher profits
  • opportunity for new firms to establish themselves
  • firms selling inferior goods lose out
  • some firms may their markets disappear (e.g. Blockbuster)
151
Q

What are the impacts of economic growth on the government ?

A
  • higher tax revenues, higher government spending, can improve living standards
  • can reduce budget deficit
  • more expected of the government
152
Q

What are the impacts of economic growth on current and future living standards ?

A
  • lower poverty levels
  • more goods and services to enjoy
  • housing standards + quality of food increases, so does health
  • highest benefits in developing countries
  • can invest in greener technology
  • increased inequality
153
Q

What are 7 possible government macroeconomic objectives ?

A
  • economic growth
  • low unemployment
  • low and stable inflation
  • balance of payment equilibrium on the current account
  • balance government budget
  • protection of the environment
  • greater income equality
154
Q

What is expansionary policy ?

A

Aimed at increasing AD to help bring about growth

155
Q

What is deflationary policy ?

A

Decrease AD to control inflation

156
Q

What is monetary policy ?

A

Central banks/regulatory authority, attempts to control AD levels by altering base level interest rates or the amount of money in the economy

157
Q

What is fiscal policy ?

A

Use of borrowing, government spending to manipulate the level of AD and improve macroeconomic performance

158
Q

How can monetary policy reduce AD by increasing interest rates ?

A
  • increase cost of borrowing, lowers investment and consumption whilst increasing saving
  • fall in asset prices, negative wealth effect
  • confidence in the economy falls, investment and consumption falls
  • pound appreciates (higher return on storing money in British banks, decreases net trade)
159
Q

What are problems with using interest rates to influence AD ?

A
  • balance of trade deficit
  • time lag to experience effects
  • interest rates mightn’t be able to be lowered further
  • not all interest rates are affected by the BoE’s base rate
  • can decrease LRAS
160
Q

What are steps for QE ?

A
  • government buys assets
  • value rises, positive wealth effect
  • private sector companies receive more money
  • money supply increases
  • AD stimulates
  • extra money to banks may result in lower interest rates, may result in AD being stimulated further
161
Q

What are problems with using QE ?

A
  • could cause high inflation/hyperinflation
  • may only lead to increased demand for second hand goods (e.g. houses) instead of the production of new
  • no guarantee that consumption increases through wealth effect
  • increased inequality
  • banks/economies may be too dependent on QE
162
Q

What is the role of the BoE ?

A
  • control monetary policy
  • aim to keep inflation at 2%
163
Q

How can AD be influenced through fiscal policy ?

A
  • increased income/corporation tax to reduce AD
  • can increase government spending to stimulate AD
164
Q

What is a budget deficit ?

A

government spending > government revenue

165
Q

What is a budget surplus ?

A

Government revenue > government spending

166
Q

What are problems with using fiscal policy ?

A
  • impacts LRAS (could reduce quality of education/spending on research and technology)
  • taxes impact equality and could reduce incentives
  • political issues
  • fiscal policy depends on the multiplier
167
Q

What are some evaluative points of demand side policies ?

A
  • (classical) stimulating AD won’t have an effect on output, only prices
  • (Keynesian) depends on the position of the economy/spare capacity
  • time lags between introduction and full effects
  • expansionary policies are inflationary
  • deflationary policies bring about unemployment
168
Q

What caused the Great Depression ?

A
  • loss of consumer and business confidence
  • US banks lending too much, unsustainable boom created
  • protectionism, reduced world trade and therefore AD
169
Q

What were UK policy responses to the Great Depression ?

A
  • balanced government budget, decreased AD when it should have been increased
  • high interest rates
  • left the gold standard, depreciated the pound so interest rates became lower
170
Q

What were US policy responses to the Great Depression ?

A
  • public sector investment
  • fiscal stimulus
  • work schemes for the unemployed
171
Q

What caused the Global Financial Crisis ?

A
  • mortgage lending, moral hazard
  • subprime mortgages
  • fall in confidence
172
Q

What were US and UK policy responses to the Global Financial Crisis ?

A
  • nationalise banks and building societies, guarantee savers their money
  • expansionary monetary policy, decreased unemployment and higher growth
  • US used a more expansionary fiscal policy
  • UK prioritised reducing national debt
173
Q

What are supply side policies ?

A

Aim to increase the productive potential of the economy

174
Q

What is a market based policy ?

A

Designed to remove anything which prevents the free market system working efficiently (e.g. lack of risk taking)

175
Q

What is an interventionist policy ?

A

Designs to correct market failure (e.g. under-provision of public goods, government provides education)

176
Q

What are some supply side policies ?

A
  • increase incentives (e.g. to increase size of the workforce)
  • lower taxes to encourage risk taking
  • promote competition (e.g. privatisation and deregulation)
  • reform labour market (reduce unemployment)
  • improve skills and quality of the labour force
    -improve infrastructure (e.g. tax incentives and subsidies on investment)
177
Q

What are some evaluative points of supply side policies ?

A
  • can increase output and decrease prices
  • long term policies can lead to long term growth
  • can increase exports, improving balance of payments
  • (Keynesian) policies have no impact when LRAS is elastic
  • may not be effective in increasing supply
  • budget deficit
  • could have undesirable impacts on AD (e.g. unemployment, inflation)
  • time lag
178
Q

What are some conflicts and trade offs between objectives ?

A
  • economic growth vs protection of the environment
  • economic growth vs balance of payments
  • unemployment vs inflation
179
Q

What are some conflicts and trade offs between policies ?

A
  • expansionary and deflationary fiscal and monetary policy
  • interest rates
  • supply side policies
  • fiscal deficit

Economics (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions