W2 Flashcards
Money loses its value when it becomes
too plentiful
A policy characterized by lower interest rates, a decrease in the reserve requirements, and lower taxes
Expansionary policy
How is inflation controlled?
By increasing taxes and selling bonds – decreasing the money supply
A policy characterized by higher taxes, higher interest rate, and an increase in the reserve requirements
Contractionary policy
Money supply and aggregate demand have a ___________ relationship
direct
Government securities for the short-term
Treasury bills
Government securities for the long-term
Bonds
If prices in general are falling, this is called
Deflation
Inflation increases the _________________, not all prices
Weighted average of prices
Who handles fiscal policy?
The government
Who handles monetary policy?
Central bank
The reserve ratio and the money supply have an ________________ relationship
inverse
The money multiplier and money supply have a ____________ relationship
Direct
The money multiplier and reserve ratio have an __________ relationship
inverse
An increase in the reserve requirements decreases the ______________ and consequently, decreases the ____________________
money multiplier; money supply
Reserve ratio of 1/8
12.5%
Merchant banks lend to
businesses
The problem with the barter system
The double coincidence of wants
motive coming from expectations of falls or rises in interest rate
speculative
The motive to save
precautionary
recorded/taken account of in money terms
unit of account
Tight fiscal policy
high tax rate
Loose fiscal policy
low tax rate
What does it mean for stable prices to occur?
Inflation is controlled
When a business originated in country A makes profits on country B, on whose GDP do they contribute to?
Country B
What is GDP?
the market value of all final goods and services produced within the geographical boundary of a country in a year
Economic growth is measured through
GDP (gross domestic product)
MIS is a more detailed version of the data collected from
TPS
Data collected from TPS goes to
managers/managerial level
Frequent users of ESS
strategic level
Frequent users of MIS
middle managers/managerial level
Frequent users of TPS
Operational level
If the price of the good itself changes, then only _____________ occurs
Movement
If the price of complementary goods, substitute goods, etc. change, what happens on the curve?
A shift occurs
Selling bonds _________ the money supply; buying bonds __________ the money supply.
decreases; increases
If reserve ratio is 10%, then the money multiplier is
10
Money multiplier formula
1/Reserve ratio
When the government buys or sells bonds
Open market operations
The MPC is made up of _ experts.
9
The UK govt’s inflation target is _%.
2
Equilibrium in the money market is brought about by changes in the ____________________.
interest rate
Monetary stability means stable ________ and _________ in the currency
prices; confidence
When government buys or sells bonds
Open market operations
A central bank can control money supply by requesting that banks keep ________________ and lend less out
higher reserves
The three effects of INCREASE in MONEY SUPPLY
Higher aggregate demand, prices and output, lower interest rate
In response to demand increasing, how should prices respond?
It should go higher.
When the interest rate is high, demand for money will be ______.
low
Equilibrium in the money market is brought about by changes in the _____________.
interest rate
The money supply is ___________________.
price inelastic
The money supply at any moment is taken as a
given.
Money multiplier formula
1/Reserve ratio
Alternate name for THE DEMAND FOR MONEY
Liquidity preference schedule
What exactly do our motives affect?
Demand for money
You expect prices or interest rates will change, so you withdraw/borrow money. What motive is this?
Speculative motive
You want to save for the future. What motive is this?
Precautionary motive
What motive is it called when you want to buy something in the present?
The transaction motive
The 3 types of motives
Precautionary, speculative, and transaction
Money, like any other market, is made up of ________ and _________.
supply, demand
When interest rates are lower: the currency will _______________, it could cause _____________ pressure, should boost ________________, make investment more _________________, and of course, relatively lower _____________ costs
depreciate; inflationary; economic growth; desirable; borrowing
Low interest rates lead to _____________ mortgage payments.
cheap
Low interest rates lead to lower cost of _________; _________ for savers, and real ___________ of savings.
borrowing; return; value
Higher interest rates puts ____________ pressure on inflation
Downward
Interest rates and inflation have a/an ____________ relationship
inverse
When people spend less, ________ goes down, and _________ goes down
Aggregate demand, price
Higher interests are more ____________ for banks.
profitable
Higher rates lead to increased return to __________________, which leads to __________________, which ultimately leads to ________________________________________. It could also cause a fall in ____________ and __________ inflation.
saving; reduced consumption; lower economic growth. house prices; lower
Higher interest rates lead to increased _____________, which then leads to ______________ and ___________________.
cost of borrowing, reduced investments, and lower economic growth
How do changes in interest rates affect us personally?
It changes the
- amount we repay on loans
- amount when we borrow money
- the cost of firms’ borrowing for investments
What is interest rate(s) also known as?
The price of money/the cost of money or borrowing money
Your interest rate depends on 4 factors. What are those factors?
How much you’re borrowing, your track record, how long you want it, and for security
Banks and financial institutions make profit by
Lending and investing money
When you deposit money, 80% is invested into the ___________, and 20% is kept as ___________.
market; reserves
Commerical banks operate ____________________. Merchant banks, building societies, finance houses, and etc. operate _________________.
internationally; locally
Who sets interest rates?
Central Bank/Bank of England
Who is the lender of last resort?
Central Bank/Bank of England
Who is the one that can promote and maintain monetary and financial stability?
Central Bank/Bank of England
Who is the only authority that can control the issue of notes and coins?
Central Bank/The Bank of England
What kind of reserves does the Central Bank/Bank of England hold?
Foreign and gold exchange reserves
What finances does the Central Bank/Bank of England manage?
Government finances
Who are the two parties that Central Bank/The Bank of England gives loans to?
Commercial banks and the government
The UK’s central bank and plays a critical role in determining how much money there is in the economy
The Bank of England
Three things that money is
A medium of exchange, a unit of account, and a store of value
Money is a store of
Value
The unit of account (in which prices are quoted and accounts are kept)
Money
What is barter?
Exchanging goods for other goods, with no medium of exchange.
What is money?
Accepted means of payment for goods and debts, a medium of exchange.
Monetary policy
Involves Central Bank influencing the economy through controlling the money supply and interest rates
Fiscal policy
Involves the government influencing the economy through government spending and changing tax rates
What is the main goal of fiscal policy in relation to the government?
To help a government meet its macro-economic objectives.
What are the 4 macro-economic objectives?
Economic growth, stable prices, low levels of unemployment, and favorable balance of trade
What is fiscal drag?
A situation where people are pushed into higher tax brackets due to increased tax rates.
What are contractionary fiscal policies?
Policies that decrease aggregate demand by reducing government spending and increasing taxes.
What are reflationary fiscal policies?
Policies that increase aggregate demand by increasing government spending and reducing taxes.
What are automatic fiscal stabilizers?
Taxes and government expenditures that adjust automatically with changes in national income.
What are discretionary policies?
Policies enacted in response to changes in the economy.
What are automatic stabilizers?
Mechanisms that exist prior to economic booms and busts
What is a balanced budget?
A situation where there is a balance between surplus and deficit, similar to market equilibrium.
What is the national debt?
The total amount of money that the government owes
What is the public net sector borrowing?
The difference between government expenditure and income over a year.
What happens when government spending exceeds its revenues?
The government has a deficit.
What are the main sources of government revenue?
Taxes, borrowing from the Central Bank, and selling securities
Can tax revenue increase indefinitely?
No, tax revenue only increases up to a certain point.
What does the Laffer Curve suggest about tax cuts?
A tax cut can have an incentive effect and increase tax revenues by boosting motivation and spending.
How can increasing tax rates have a disincentive effect?
Higher taxes can reduce the people’s incentive to work or work for more hours.
What characteristics must effective taxation systems have?
They must be:
Understandable, cost-effective for administration, difficult to avoid, non-distortionary, and fair.
What is a proportional tax?
A tax where the % of income paid stays constant regardless of income level.
What is a regressive tax?
A tax system where the average rate of tax decreases as income increases.
What is a progressive tax?
A tax system where the average rate of tax increases as income increases.
What are customs or duties?
Taxes paid on imports into the country.
What are excise taxes?
Taxes paid on particular goods and services like alcohol or drugs.
How is VAT different from other taxes?
You only pay for the goods and services you use through VAT.
What are national insurance taxes?
Payments made by individuals and their employers to finance pensions and social security
What is inheritance tax?
Tax paid when you inherit income and assets
What is capital gains tax?
Tax paid when you sell assets that have increased in value
What is corporation tax?
Tax paid on firms’ profits
What is income tax?
Tax paid on employees’ income
What does fiscal policy primarily influence?
Aggregate demand and supply
What is the role of monetary policy in achieving government objectives?
The Central Bank controls the money supply and interest rates
What does fiscal policy involve?
Decisions regarding taxation and government spending
How does fiscal policy influence the economy?
By changing government spending and taxation rates
The 2 main types of policy instruments and who uses them to achieve economic objectives
Fiscal policy, by the government; Monetary policy, by Central Bank
Lower interest rate leads to
a fall in the exchange rate
The interest rate in the UK is set by the
Monetary Policy Committee or Central Bank
