trial dos for unit 2 Flashcards
How does the government use the Monetary policy to reduce inflation:
Firstly, the Bank of england will increase the base rate. The retail banks will then copy this action as they have an interconnected relationship with the bank of england*. Market rates charged to consumers/businesses will also rise. *retail banks save money with and borrow money from the bank of england so pass on any changes to their customers in return.
Saving levels will increase because it is now more rewarding to do so i.e. the marginal propensity to save will rise.
Borrowing levels will fall because monthly repayments are now more expensive. This leads to less consumer spending, the marginal propensity to spend falls in the UK causing lower aggregate demand from individuals and businesses.
Lower aggregate demand leads to lower demand–pull inflation as businesses reduce their prices in order to sell their goods.
Supply side policies to control unemployment
an necessity in funding in education. Thus improving education and attainment therefore higher productivity, and a better educated workforce
Decrease in corporation tax, thus means companies have more money to reinvest and therefore increase productivity and output.
Increase in nhs budget. This will improve a more healthy and productive workforce.
Improve infrastructure such as roads, and congestion. To improve this and improve productivity and allow people to get to work easier
Subsidies to help firms lower prices and production costs more employed
Decreasing JSA whilst also increasing the minimum wage
creates an incentive to work. • In this case people would be made financially better off by finding work rather than choosing not to.• This increases the supply of workers helping to reduce unemployment.
Policies aimed at improving skills and education could help to lower both voluntary and involuntary unemployment.
If workers are more skilled and able to specialise in more than one job then it will be easier to move to new jobs which would reduce frictional and structural unemployment. Plus, it will make them more skilled and productive workers and an asset to the business they work for. This increases the supply of and demand for workers.
Decreasing JSA whilst also increasing the minimum wage creates an incentive to work. In this case people would be made financially better off by finding work rather than choosing not to. This increases the supply of workers helping to reduce unemployment.
How does the government use the Fiscal policy to reduce inflation:
Reduce government spending or increasing income tax dampens consumer spending
In addition, if the government borrows less then this helps to reduce the growth in the money supply. Running a budget surplus according to monetarists will reduce inflation
Both dampen aggregate demand and hence are accentuated by the multiplier effect
(if there is inflation caused by too much demand the government should cut demand)
What is national income
National income measures the total value of all goods and services produced within the economy over a year. It’s a measure of a country’s economic performance.
Three ways of expressing this are GDP,GNP,NNP.
Real terms - an increase in real national income means that there has been an increase in the quantity of goods and services produced
How does the Government use supply-side policies to achieve economic growth
Investment - spending on capital goods such as new machinery, buildings and technology, capital accumulation increases the productive potential of the economy in the long term
Higher investment should allow british businesses to lower the production costs per unit, increase their supply capacity and become more competitive in overseas markets, investment trends to be strong when real interest rates are low, and consumer demand and confidence is high.
Increasing the quantity or quality of resources will lead to economic growth. Investment in human capital including the quantity and quality of education and training made available to the workforce is an essential ingredient of long term growth.
How does the Government use Fiscal Policy (spending/taxation) to Reduce Unemployment?
The government could reduce the basic rate of income tax from 20% to 18%, This would give workers a greater disposable income, This would then lead to more consumer spending (an increase in the MPC). More spending generates more demand. To produce more output, firms have to hire more workers; labour is a derived demand.
The Government could increase capital spending, current spending (public sector wages) or transfer payments (pensions/benefits), An increase in capital spending would create an injection into the circular form of income. This increases flows between firms and households as firms hire factors of production who then receive an income. This income will be spent. More spending generates more demand. To produce more output, firms have to hire more workers; labour is derived demand
the effects of changes in national income on employment and output
If aggregate demand is more than national income:
Then producers will increase production and hire more resources; this in turn will increase incomes and this will continue until equilibrium is reached
If injections are greater than withdrawals national income, output and employment will rise. It may be the case that firms can increase production because the economy might be at full employment. If this happens then aggregate demand is reduced through increased prices (inflation)
If aggregate demand is less than national income:
Then producers will notice that some of their output remains unsold
Firms will learn their mistakes and produce less next time, but this means that they don’t need to employ so much land,labour,capital or enterprise
Resources will become unemployed
As a result, incomes will fall until aggregate demand= national income
If injections are lower than withdrawals national income, output and employment will fall
Three types of public sector spending
Capital spending:
This is spending on social infrastructure such as new highways; airports, schools, hospitals, defence equipment and adding to the nation’s capital stock
investment in new roads or school
/hospital buildings. Investments in infrastructure that improves future productive
Current spending
This is recurring expenditure on goods and services including salaries for teachers and healthcare workers and drugs used in the national health service
Public sectors work salaries, the health services e,t,c
Day to day running expenses of public sector
Transfer payments
These are payments to an individual or firm for which there is no economic benefit given in return e.g. pension, grants, subsidies, child benefit
They are called transfer payments because money is transferred from taxpayers to those who qualify for benefit.
a payment made or income received in which no goods or services are being paid for, such as a benefit payment or subsidy.
difference between gdp and gnp
GDP -
measures the value of all goods and services produced by uk firms within the uk
is a measure of the ups national output/value of all the goods and services produced in an economy
for example includes whiskey produced in scotland
used by many nations as the main measure of economic activity and gdp is more commonly referred to in the uk than gnp
GNP -
measures the value of goods and services produced by UK firms whether in UK or not
includes gdp and net property income from abroad
for example includes primary producing clothes in Bangladesh
used mainly by the USA as its measure of economic activity
Describe possible difficulties when using national income statistics to compare different countries
Each country may calculate in a different way making it difficult to compare. (1)
Calculation per capita is essential in order to compare. (1 development mark)
In some nations there is not the infrastructure to calculate statistics accurately. (1 development mark)
Inaccuracies/corruption in the data produced by each country. (1)
Currency variations
Economies n diseconomies of scale
Economies of scale
Technical
Increased division of labour and specialisation, increased dimensions, efficient use of capital e.g. car assembly line etc.
Managerial
Able to employ specialists as there is sufficient work
Financial
Easier to attract investors due to reduced risk, higher reputation and able to borrow money at lower rates of interest
Diseconomies of scale
management/coordination
As a firm grows it acquires more workers and departments and so it is Difficult for management to keep control of activities of organisation
Geography
Business is too spread out leading to increased costs of transportation or lack of control (e.g. HQ being too far away)
Waste
Unnecessary waste pushes cost up e.g. over-manning/stealing
Describe internal and external economies of scale.
External economies of scale
cost savings due to the increased size of the industry (1)
local colleges may provide directly relevant training (1)
globalisation
The ability to produce any good or service anywhere in the world (1).This involves using raw materials, capital and technology from anywhere in the world (DEV) (1). It involves selling the resulting output anywhere in the world (DEV) (1). Profits may be declared anywhere in the world (DEV) (1).
do comparative and absolute advantage rn
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