Chapter 2 - The Economic Environment Flashcards
What is a state controlled economy?
- A state-controlled economy is one in which the state (in the form of the government) decides what is produced and how it is distributed.
- It is also known as a planned economy or a command economy.
- Large inequities can arise
- Removes alot of individual choice and becomes bureaucratic
Soviet Union was one of the most famous state controlled economies.
What is a market economy?
- In a market economy, the forces of supply and demand determine from cosnumers is how resources are allocated
- Price of good, services, labour (wage) and money (money market’s interest rate) are based on supply and demand.
- Scarse and in demand resources (incl labour skill) will have high value.
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What is a mixed economy?
- A mixed economy combines a market economy with some element of state control. (most are this to a greater or lesser extent)
- Wellfare systems are provided by the government to support unemployed, infirm and the elderly
- Governments run key areas such as schools, hospitals, public transport, police, defence.
- Civil Servants are the largest working groups.
All government expendature is raised through direct taxes from wage earners and companies, indirect tax from VAT, petrol, tabacco, and also raising money through borrowing from the capital market.
What is an Open Economy?
‘Open economy’ relates to a country’s economic relationship with outside countries
- Few trading barriers and control over foreign exchange.
- Barriers can include no trading of illegal drugs and other dangers for general public, country sanctions (Russia invading Ukrane sanctions).
- The World Trade Organisation aim to prmote a near open economy.
What is protectionism in a market?
The restriction of other countries trading freely so that the domestic market can be protected.
What are the 4 macroeconomic objectives that governments aim to acheive?
- Full Employment
- Economic Growth
- Low Inflation
- Balance of Payments Equilibrium (imports vs exports)
What are the 4 stage of an economic cycle?
- Peak - GDP highest, No output growth,
- Contraction - GDP Declines
- Trough - GDP Lowest
- Expansion - GDP Increases
In an economic cycle what must happen for it to be classed as a recession?
It must have two consecutive quarters of declining GDP (negative growth).
What is fiscal policy?
The economic enviroment
When the government spent money or collect money with the intention to influence the condition of the economy.
How does the government influence the economy through tax?
- Lower tax means more disposable income for spending creating more demand for goods and services.
- Higher tax means less disposable spending reducing demand artificially
How does the goverment influence the economy though its budget?
- If its in a deficit budget it has got too much money so may lower tax to have it at an equilibrium.
- If the budget is in surplus it will need to raise more moeny and can do so through tax.
What is PSBR in terms of fiscal policy?
‘Public Sector Borrowing Requirement’ occurs when there is budget deficit (i.e. public expenditure > public income). Borrowing is required to make up the difference
What effect does fiscal policy have on businesses?
- Ability to effectively plan ahead (stable government is ideal)
- Cost of labour, tax, national insurance
What is monetary policy?
- Regulation of the economy through control of the monetary system incl. money supply (circulation), price of currency, the level of interest rates.
How is monetery supply controlled?
- Reduce/Increase Credit Lending
- Impose requirements for banks to hold a minimum cash rerserve ratio.
The latter temporarily holds supply.
Alternatively the government with the treasury can remove currency from circultion that is collected through taxes. (not in exam)
What are some effects of high inflation?
- Consumers will be encouraged to save with higher interest rates.
- Mortages payments rise leaving less disposable income
- Higher cost of credit will defer borrowing thus less spending
- Corporate investments decline
- Loss of confidence and future prospect in the economy from corporations.
- Less investment leads to less growth.
- Higher Wages
- Higher unemployment causing low tax income for the government
- Unemployment benefits increase
What is the role of the central bank?
Responsible for setting nation’s short term interest rate, controlling money supply, acting as banker and lender of last resort to the banking system and managing national debt.
What is the central bank’s responsibilities?
- Banker to the banking system by accepting deposits from, and lending to, commercial banks.
- Banker to the government.
- Manages the national debt.
- Regulating the domestic banking system.
- Lender of last resort in crises to prevent systemic collapse of banking system.
- Setting official short term interest rate.
- Controlling the money supply.
- Issuing notes and coins.
- Holding the nation’s gold and foreign currency reserves.
- Influencing the value of nation’s currency through activities such as interventions in currency markets.
- Provide depositors’ protection scheme for bank deposits.
What is the BOE?
Bank of England is a central bank for the UK founded in 1694.
It’s two core purposes are acheiving monetary stability through price stability, and also acheiving financial stability by detecting threats to the financial system as a whole.
It also carries all other reponsibilites accossaited with central banks.
Who and what committee sets the UK interest rates? Also what is this committees goal?
The Bank of England’s “Monetary Policy Committee.”
Their goal is to ensure inflation remains within the governments set range each year.
Made up of 9 members.
What is Quantitative Easing?
When inflation is so low that it risk being negative, the central bank has to create more money (called a cash injection) so that it can increase supply, reducing the value of each unit so that it can create artificial inflation promoting growth.
This does not involve printing notes, it uses this money to buy government and corporate bonds. It can also buy other assets to boost liquidity.
It aims to reduce cost of borrowing so spending increases.
Easiest to watch a video on it.
Deflation can cause a recession or depression.
Sometimes QE can have a negative effect and spead up the effects of deflation.
When an economy is referred to as “stagnating”, what does it imply?
Inflation is near 0%.
What is quantatative tightening?
The reversing of quantatative easing by selling or stoppig reinvestment into bonds and other assets to lower inflation
