yr 12 Flashcards
what are the government’s six macro-objectives?
-encouraging price stability
(low inflation target: 2% +/- 1%)
-ensuring the working population is productive
(full employment/minimise unemployment)
-maintaining a favourable balance of payments
(x - m -> value of exports compared to imports)
-promoting steady economic growth
(2.25% per annum)
-redistributing income & wealth more equitablity
-reducing the government budget deficit and the national debt
what are the main causes of demand pull inflation?
-a depreciation of the exchange rate
-a reduction in direct or indirect taxation
-rapid growth of the money supply as a consequence of increased bank and building society borrowing
-rising consumer confidence and an increase in the rate of growth of house prices
-faster rates of economic growth in other countries
what are the main causes of cost push inflation?
-external shocks (commodity price fluctuations)
-a depreciation in the exchange rate
-acceleration in wages
(leads to an inward shift in SRAS curve)
(firms raise prices to protect their profit margins)
evaluate how a appreciation in the exchange rate leads to an increase in AD? (SPICED)
-depends of the size of the exchange rate appreciation
-depends on the price elasticity of demand for imports (maybe no UK substitute goods)
-added advantage - more jobs created
what are the four stages of the economic cycle?
downturn
peak/boom
recession
recovery
what are the three injections into the circular flow of income?
-government spending
-bank loans for investment
-exports
what are the three withdrawals from the circular flow of income?
-taxation
-savings
-imports
what are the signs of an economic downturn?
-rising unemployment
-falling aggregate demand
(interest rates may be changed)
-reduced output
(maybe not all sectors)
-falling tax revenues
(changes in tax rates)
-increased government spending on benefits
-order books of firms get emptier (construction)
-stock market falls
-reduced consumer confidence and spending
what is debt?
the accumulation of all the deficits
what is the government budget?
a document that presents the governments anticipated revenues and proposed spending for a fiscal year
how does the government raise cash to cope with a budget deficit?
-borrow money (issue bonds)
-use previous surplus
-sell government assets
-print money (last resort)
what does ceteris paribus mean?
all other things remain equal
what is hot money?
funds of money available to be lent to government and business
what is quantitative easing?
when the central bank buys back bonds early in order to stimulate aggregate demand
what is unemployment?
anyone between 18 and 67 who is able, available, and actively seeking employment
what are the different types of unemployment?
-frictional
-cyclical (or demand deficiency)
-structural
-hidden
-real wage
-seasonal
what is frictional unemployment?
unemployment related to the process of changing jobs, which may involve a period out of work
what is cyclical (demand deficient) unemployment?
the category of unemployment whose number varies according to the economic cycle
what is structural unemployment?
a mis-match between the skills of those unemployed and the skills that the new jobs required
when does structural unemployment happen?
when there is a change in the structure of the economy eg. industry decline (eg shipbuilding)
structural unemployment is worsened by….?
geographical and occupational immobility of labour
what is geographical immobility?
vacancies in another location - housing costs, family ties
what is occupational immobility?
when you do not have the correct skills
what is hidden unemployment?
-known to exist but is not included in the official government figures.
-can also refer to a persons skills being unemployed rather than the person
what is says law?
supply creates its own demand
what is seasonal unemployment?
people who work in certain industries (eg tourism, beach resorts) may be out of work in winter months
what is real wage unemployment?
when a rise in real wages above a market clearing level causes a contraction in labour demand and lower employment
why does high unemployment matter?
economic costs:
-loss output = waste of resources
-lower GDP growth = reduced SoL
-loss of skill
fiscal costs:
-less tax revenue
-higher welfare benefits
-rise in government borrowing
what policies have been put in place to deal with unemployment?
-targeted macro stimulus policies to boost growth
-expansion of apprentice schemes
-improving geographical mobility of labour
-measures to stimulate business start ups
-regional development policies
what are index numbers?
a system that measures changes in “a set of variables” that move in different directions by different amounts
(the index gives us an idea of the average movement)
what does excess demand mean?
too much money chasing too few goods
demand pull inflation occurs when…?
there is excess aggregate demand, (a positive output gap)
describe demand pull inflation
businesses respond to high demand by raising prices to increase profit margins
what stage of the economic cycle is demand pull inflation associated with?
boom
(when SRAS becomes inelastic)
what is the economic definition of inflation?
a fall in the value of money from one year to the next
what is the non economic definition of inflation?
a general increase in the average price level from one year to the next
what is the wealth effect?
for every owner of a house / asset, people have access to additional borrowing which shifts AD right
how does a depreciation in the exchange rate lead to an increase in AD? (WPIDEC)
-imports are dearer
-british people switch to UK goods
-AD increases
how does an appreciation in the exchange rate lead to an decrease in AD? (SPICED)
-imports cheaper
-british people buy more imports
-raw materials are cheaper (can invest/expand)
how does an increase in the rate of growth of house prices lead to an increase in AD?
-wealth effect
(additional borrowing)
-increased AD
how does a boom overseas lead to a rise in AD?
-increase employment overseas
-increase in disposable income overseas
-increase in consumption overseas
-increase in exports overseas
-increase in exports in the UK
-rise in AD
wages often follow..?
prices
what is productivity?
a measure of efficiency of factors of production in the production process
what are the benefits of higher productivity?
-produce goods and services at lower cost per unit
-increase total output from our scarce resources
-helps bring about economic growth for a country in the long term
how can labour productivity be measured?
by calculating output per worker or output per hour worked
what factors explain the productivity gap?
-relatively low rates of capital investment
-low rates of spending on research and development
-skills of the labour force
-good health care infrastructure
-good transport infrastructure
what are some strategies to raise productivity in the british economy?
-making markets more competitive
-extra investment in education and training
-improvements in infrastructure
-encouraging foreign investment
-incentives for increased research and development spending
-improvements in management and entrepreneurship
-a rise in capital investment
-less business regulation and red tape
-incentives for small businesses
monetary policy is simply…?
too much money chasing too few goods
what is monetary policy?
it involves interest rates, exchange rates and the supply of money and credit to influence the economy
what type of areas does monetary policy involve?
-market interest rates
-bank lending
-inflation targets
-bank of england
-quantitative easing
what is the aim of expansionary monetary policy?
to increase the money supply and stimulate economic growth
what is the aim of contractionary (deflationary) monetary policy?
to reduce the rate of inflation and demand for goods and services
what does expansionary monetary policy involve?
-fall in nominal and real interest rates
-measures to expand supply of credit
-depreciation of the exchange rate
what does contractionary (deflationary) monetary policy involve?
-higher interest rates on loans and savings
-tightening of credit supply (loads are harder to get)
-appreciation of exchange rate
what does the tightening of credit supply mean for loans?
loans are harder to get
what is the savings ratio?
the percentage of our income that we save
a rise in interest rates (reward for saving) leads to…?
-loans are more expensive to repay back
-increased saving
-fall in consumer spending
-fall in aggregate demand
an increase in the cost of borrowing leads to…?
-fall in borrowing
-fall in consumer spending
-fall in aggregate demand
how do cheaper imports result in a fall in inflationary pressures?
-imports cheaper
-increase demand for imports
-fall in demand for domestic spending
-fall in aggregate demand
-fall in inflationary pressures
how do dearer exports result in a fall in inflationary pressures?
-exports dearer
-increase foreign currency price of our exports
-fall in aggregate demand
-fall in inflationary pressure
how could an increase in rate of interest in the UK lead to a rise in aggregate demand?
-increase rate of interest in UK
-increase reward for saving in UK
-inflows of hot money into the UK
-increase demand for sterling
-forex graph - increase value of £
-increase aggregate demand
what is the main aim of quantitative easing?
to support aggregate demand and avoid the risk of a recession becoming a deflationary depression
what does the Bank of England use quantitative easing for?
-to increase the supply of money in the banking system
-encourage banks to lend at cheaper interest rates
(especially to small and medium sized businesses)
when the Bank of England uses quantitative easing, do they print new money?
no, banks use money created by the central bank to buy govt bonds
what are the doubts about the effectiveness of quantitative easing?
-bank lending has struggled to recover since the end of the recession
(in the summer of 2015, quantitative easing totaled to £375 billion)
what factors cause the SRAS curve to shift?
changes in :
- cost of production
- productivity
- taxes and subsidies
what does the point Yfe represent on the LRAS curve on the classical model?
the economy operating at full capactity
what does the LRAS curve represent?
the full long run productive capacity of the economy
(when we’re producing just about as much as the factors of production will allow)
describe what is included in Q^2cell / productive efficiency?
-labour productivity increases
-investment
-infrastructure
-increase quality of labour
-competition
-new rare discoveries
what is fiscal policy?
the use of government spending and taxation to influence the pattern of economic activity
(affect the level and growth of AD, output and employment)
what is the aim of expansionary fiscal policy?
to increase AD
what is the aim of contractionary fiscal policy?
to reduce AD
what is a duty?
a specific tax at a specific rate on a specific product
give 2 examples of dutys
petrol duty
alchohol duty
what were Adam Smiths canons on taxation?
-equity
-convenience
-certain
-economy
what does equity mean in Adam Smiths canons of taxation?
the tax should be fair and based on the ability to pay
what does convenience mean in Adam Smiths canons of taxation?
tax should be easy to pay
what does certain mean in Adam Smiths canons of taxation?
the tax payer should be able to know exactly how much tax they must pay
what does economy mean in Adam Smiths canons of taxation?
revenue raised must be greater than the cost of implementing the tax
what more recent canons have been added to the canons of taxation?
-flexible
-efficiency
what does flexible refer to in relation to the more recent canons of taxation?
taxes should be easy to change when necessary
what does efficiency refer to in relation to the more recent canons of taxation?
tax should achieve what its intended to achieve
(reduce consumption of demerit goods)
why do we have taxes?
-to raise money to finance public services (NHS)
-to influence AD
-to influence patterns of spending
(reduce consumption of demerit goods)
-to help redistribute income and wealth
-to protect jobs in the country
(tariff on imports)
-government revenue
what is the multiplier effect?
when injections of new demands for goods and services into the circular flow of income stimulate further rounds of spending
what does the multiplier effect lead to?
-a bigger final effect on the level of GDP
-total employment in the labour market
what are the positive effects that stem from the multiplier effect?
when an initial increase in an injection (or a decrease in a withdrawal) leads to a greater final increase in real GDP
what are the negative effects that stem from the multiplier effect?
when an initial decrease in an injection (or an increase in withdrawal) leads to a greater final decrease in real GDP
what does the laffer curve show?
the relationship between tax rates and total tax revenue
what can be observed about total revenue when tax rates are 100% ?
total tax revenue is most likely not maximised when tax rates are 100% as this disincentives workers from earning wages
what would happen if taxes would be increased beyond the efficient tax rate?
- disincentives to work - harder - less entrepreneurship
- emigration
- tax evasion / avoidance
why would emigration as a result of increased tax rates, lead to a reduction in tax revenue?
pushing highest income earners, the most productive and the best entrepreneurs out of the county
what is the accelerator process?
changes in investment can be directly linked to changes in the rate of GDP growth
when the rate of GDP growth is high, firms are…?
more likely to invest, so rate quickens
what does the steepness of the slope of the AS curve depend on?
-elasticity of supply and how easy it is for firms to respond by increasing output
-if they cant respond because they’re at capacity supply will be inelastic
stable prices and full employment…?
have a trade off
what is a budget deficit?
planned government spending exceeded planned government revenue
(a deliberate attempt to stimulate AD)
(also an example of fiscal policy)
what is the balance of payments?
the value of the exports of goods and services minus the value of the import of goods and services
what are the three sections of the balance of payments?
-the current account
-the financial account
-the capital account
why don’t we want high inflation?
-loss of international competitiveness
-people on fixed incomes lose out
-businesses find is difficult to plan
lenders lose out (and savers)
-menu costs
-shoe leather costs
what does loss of international competitiveness mean, when talking about high inflation?
rising prices in the UK makes our goods relatively less competitive
evaluate loss of international competitiveness, when talking about high inflation
-could lead to a devaluation of the currency so exports become cheaper again
-the extent to which this is a problem depends on the inflation rate overseas
what does the fact people on fixed incomes lose out mean, when talking about high inflation?
real value of an unemployed persons income will go down, so as prices rise they can afford fewer goods, so standard of living falls
what factors affect the LRAS?
-an increase in the quantity and quality of capital equipment
-a more highly skilled work force
-innovation and improvements in productive processes
-factor mobility
-improved attitudes of entrepreneurship
-encourage more people to join the labour supply
what is standard of living?
the amount of goods and services a person has access to, they can be paid for or provided by the state
(education)
what are the limitations of using GDP per capita stats?
-hidden economy is not taken into account
(some people may have a much higher income than the figures suggest)
-non monetised output (stay at home parents)
-non monetary factors (pollution)
-GDP is not distributed on a per capita basis
-type of spending (NHS, security)
-doesn’t take into account cost of living
-doesn’t take into account quality of output
-statistical methods and errors
what is HDI(Human Development Index)?
takes into account:
life expectancy
education
living standards
what are C factors affecting AD?
-consumer confidence
-interest rates
-stage of the economic cycle
-income tax rates
what are I factors affecting AD?
-interest rates
-business confidence
-stage of the economic cycle
-level of profits
-level of spare capacity in the economy
what are X factors that affect AD?
-stage of the economic cycle overseas
-international competitiveness
-tariffs overseas
-exchange rates
what are M factors affecting AD?
-stage of the economic cycle here
-international competitiveness
-tariffs here
-exchange rates
what are G factors affecting AD?
-level of revenue
-government priorities
-interest rates
how is the marginal propensity to consume calculated?
1/ 1 - MPC
