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Theme 2: The UK Economy-Performance and Policies Flashcards

1
Q

What are the four key macroeconomic objectives?

A

1.Economic growth
2.Low and stable inflation
3.Low unemployment
4.Sustainable balance of payments(BoP) on the current account

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2
Q

What is GDP?

A

The total value of goods and services produced in an economy over a period of time.

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3
Q

What is the difference between real and nominal GDP?

A

Nominal GDP-Not adjusted for inflation
Real GDP-Adjusted for inflation

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4
Q

What does a current account surplus mean?

A

The country exports more then it imports

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5
Q

What are the limitations of using GDP as a measure of economic performance?

A

-Doesn’t account for income inequality
-Doesn’t include non-market activity (black market)
-Doesn’t consider negative externalities (e.g pollution)

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6
Q

What is inflation?

A

The sustained increase in general price level over time

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7
Q

How is inflation measured in the uk?

A

Consumer price index (CPI)

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8
Q

What is deflation?

A

A decrease in the general price level (negative inflation)

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9
Q

What is demand-pull inflation?

A

Inflation caused by excess demand(AD) (e.g booming economy)

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10
Q

What is cost-push inflation?

A

Inflation caused by higher production costs (e.g rising wages, oil price shocks)

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11
Q

What are the effects of high inflation?

A

-Reduces purchasing power
-creates uncertainty for businesses
-worsens income inequality
-can cause wage price spirals

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12
Q

What is unemployment?

A

The number of people actively looking for work but unable to find a job

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13
Q

How is unemployment measured in the UK?

A

The labour force survey and the claimant count

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14
Q

What are the types of unemployment?

A

Cyclical-caused by economic downturns
Frictional-temporary unemployment between jobs
Structural-job losses due to industry decline
Seasonal-Jobs only needed at certain times of the year

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15
Q

What are the consequences of high unemployment?

A

-Lower income and higher poverty
-lower consumer spending->Slower economic growth
-Higher government spending on welfare benefits
-potential social unrest(crime, mental health issues)

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16
Q

What is the balance of payments?

A

A record of all economic transactions between a country and rest of the world

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17
Q

What is the current account?

A

A part of the BOP that record:
-trade in goods (visible trade)
-trade in services (invisible trade)
-primary income (e.g investment income)
-secondary income (e.g aid, EU payments)

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18
Q

What does a current account deficit mean?

A

The country imports more than it exports

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19
Q
A
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20
Q

What factors influence the balance of payments?

A

-Exchange rates
-competitiveness of domestic industries
-global economic conditions
-protectionism

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21
Q

What is aggregate demand?

A

The total demand for goods and services in an economy at a given price level

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22
Q

What is the formula for AD?

A

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

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23
Q

What factors affect consumption?

A

-Interest rates
-consumer confidence
-disposable income
-Wealth effects

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24
Q

What factors affect investment?

A

-Business confidence
-interest rates
-Government incentives

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25
What factors affect government spending?
-political priorities -economic conditions
26
What factors affect net exports (X-M)?
-Exchange rates -Global demand for exports -Trade barriers
27
What causes a shift in AD?
Change in C I G or X-M
28
What happens when AD shifts right?
Higher economic growth, lower unemployment, but potential inflation
29
What happens when AD shifts left?
Lower growth, Higher unemployment, risk of recession.
30
What is aggregate supply?
The total output of goods and services that firms in an economy are willing to produce at a given price level
31
What is the different between short -run aggregate supply and long-run aggregate supply?
SRAS-Assumes that at least one factor of production is fixed LRAS-Assumes all factors of production are variable
32
What causes a shift in SRAS?
-Changes in wage costs -changes in raw material price -changes in exchange rates -changes in taxes/subsidies
33
What are the two types of LRAS curves?
1.Classical LRAS (vertical)- The economy always returns to full employment in the long run. 2.Keynesian LRAS(curved)- The economy can be stuck at below employment due to sticky wages and demand deficiencies
34
What causes a shift in LRAS?
-Improvements in productivity -increase labour force -more capital investment -better education and training -technological advancements
35
What happens when AS shifts right?
Higher economic growth, lower inflation, and lower unemployment
36
What happens when AS shifts right?
Higher economic growth, lower inflation, and lower unemployment.
37
What is the circular flow of income?
A model showing the movement of money, goods, and services between households and firms.
38
What are the injections into the circular flow?
1. investment 2. Government spending 3. Exports
39
What are the withdrawals from the circular flow?
1. Savings 2. taxes 3. imports
40
What happens when injections > withdrawals?
The economy grows (higher GDP)
41
What happens when withdrawals > injections?
The economy contracts
42
What is the multiplier effect?
When an initial injection leads to a large final increase in GDP
43
What is the formula for the multiplier?
Multiplier= 1/(1-MPC)
44
What is the marginal propensity to consume(MPC)?
The proportion of extra income that households spend rather then save
45
What happens if the MPC is high?
The multiplier effect is stronger(more spending-> more income)
46
What happens if the MPC is low?
The multiplier effect is weaker (more saving->less spending)
47
What is economic growth?
The increase in real GDP over time
48
What is the difference between actual and potential growth?
Actual growth-increase in real GDP Potential growth-increase in productive capacity
49
What are the causes of short-run growth?
-Higher aggregate demand -increased government spending -lower interest rates
50
What does the classical LRAS curve look like?
Vertical as the economy assumed to always be at full capacity in the long run
51
What does the keynesian LRAS curve look like?
Upwards sloping, showing spare capacity at lower levels of output and vertical section at full capacity.
52
What factors affect the size of the multiplier?
High MPC=Larger multiplier High MPW=Smaller multiplier Spare capacity=bigger impact
53
What causes long-run economic growth?
-investment in capital -education and training -technological progress -labour force growth
53
What are the benefits of economic growth?
-Higher incomes and better living standards -lower unemployment -higher government revenue (more spending on healthcare, education.) -More investment opportunities
54
What are the costs of economic growth?
-Inflations (if growth is demand-led) -environmental damage -income inequality -depletion of natural resources
55
What is sustainable economic growth?
Growth that meets the needs of the present without compromising future generations
56
What are the main macroeconomic objectives?
1. Economic growth 2. Low inflation 3. Low unemployment 4. Stable balance of payments 5. Sustainable environment 6. Balanced government budget
57
What are the conflicts between objectives?
Growth vs Inflation Growth vs environment low unemployment vs wage inflation Growth vs current account
58
What are the main types of macroeconomic policies?
1. Monetary policy (interest rates, money supply) 2. Fiscal policy (government spending and taxation) 3. Supply-side policies (long-term productivity improvements)
59
Who controls monetary policy in the UK?
The Bank of England via interest rates and quantitative easing
60
How do interest rates affect the economy?
Higher rates-lower borrowing, lower AD= lower inflation Lower rates-Higher borrowing, higher AD=higher growth
61
What is quantitative easing?
The BoE creates new money to buy government bonds -> increase money supply -> encourages lending
62
What are fiscal policies?
Government decisions on taxation and spending.
63
What is the difference between expansionary and contractionary fiscal policy?
Expansionary -> Higher G, lower T -> boosts AD Contractionary -> Lower G, higher T -> reduces AD (used to control inflation)
64
What are supply-side policies?
Policies aimed at increasing productive capacity
65
Examples of supply-side policies?
-Education and training -lower business taxes -labour market reforms -infrastructure investment
66
What are the benefits of supply-side policies?
-Increases LRAS -> sustainable growth -reduces inflationary pressures -lowers unemployment
67
What are the limitations of supply side policies?
-Time lag-effects take years to show -expensive -No guarantee of success

Economics (5 decks)

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