Topic 2: Questions Flashcards
Summarise the four key macroeconomic objectives?
Price stability-involves a low and controlled rate if inflation. Zero inflation is not desirable
Low unemployment- expanding the economy for more demand for labour, land, and capital
Balance of payments equilibrium- expenditure on imports of goods and services and investment income matches the income received from export goods and services and the return on oversea investments.
Satisfactory economic growth- the output of the economy is growing in real terms over time and standards of living are getting higher.
Explain the difference between inflation, disinflation and deflation?
Inflation: a sustained increase in the general level of prices of goods and services. Where the rate of growth of the money is supply is greater than the rate of growth of real goods and services.
Disinflation: a fall in the rate of inflation, i.e., prices are still rising, but less quickly than they were
Deflation: a general fall in the price of goods and services. The inflation rate is below zero per cent- a negative inflation rate.
Explain how decisions made by the Monetary Policy Committee affect banks and consumers?
MPC decides to change the bank rate, banks and deposit takers follow and alter interest rates at which they lend and borrow by something close to the same amount.
A bank will apply a margin between the rate they borrow money and a rate it lends money out, to cover costs and generate a profit.
Adjusting rates means that margins are maintained, and the lender or deposit taker can continue to cover its costs and generate profit.
Banks base rates are variable as they adjusted to follow the rate of the Bank of England.
Describe the different effects of a budget surplus or deficit on employment?
Budget surplus- amount taken in taxation is greater than amount put back into public spending- the economy contracts. Lower unemployment
Budget deficit- public spending is greater than amount taken in taxation- economy expands e.g. unemployment can rise
Explain how an EU directive differs from a regulation in the way that it is applied?
Regulations: general application, binding in their entirety of how they are achieved and are directly applicable in all member states
Directives: are binding upon each member of state , each member has discretion as to how they go about achieving the aim of the directive and the directive objective must be achieved within a specific timescale (normally 2 years)
Explain the role of the EU and the impact of EU regulation and directives on the UK post-Brexit?
Prior to Brexit the regulatory regime for financial services was determined at EU Level. EU Laws take a form of regulations and directives.
Post-Brexit when the EU change a regulation the UK consider whether to adopt the new regulation or develop alternative approach in the case of reformed EU regulation. This can apply to legislation amendments before Brexit.
What is meant by a macroeconomic objective?
An objective that relates to the economy as a whole, rather than to a specific sector or individual company
What are the four key macroeconomic objectives that UK governments generally seek to achieve?
Price stability, low unemployment, a balance of payments equilibrium and satisfactory economic growth
What is a potential growth to reduce unemployment?
Measures taken to expand the economy (e.g., reducing interest rates and taxation) increase the demand for goods and services, which is likely to result in a rise in inflation.
All governments aim to achieve zero inflation. True or false?
False. They aim to keep prices stable, but seeking to reduce inflation to zero is likely to increase unemployment.
What is the UK government’s inflation target and how is it measured?
The UK government’s inflation target is 2 per cent with a maximum divergence either side of 1 per cent. It is measured by the consumer price index.
Disinflation means that:
Prices are rising but more slowly than previously.
In June, the Monetary Policy Committee (MPC) decides to raise the Bank rate by half a percentage point. In August, Paul and Amanda’s mortgage payments increase. Explain how these two events are likely to be linked.
Paul and Amanda must have a variable rate mortgage, so the amount they pay each month is likely to rise and fall broadly in line with changes in the Bank rate.
Which of the following economic measures taken by a government would not help to achieve a budget surplus?
Increasing public spending- to achieve a budget surplus a government must cut public spending, raise taxes or both.
A new piece of EU legislation is being introduced. It is being implemented at the same time and in exactly the same way across all member states. This indicates that the legislation is in the form of:
A regulation- member states have flexibility in the way they introduce directives.
