4.4 Macroeconomic policies and impact on firms and individuals Flashcards
(53 cards)
What is AD a measure of
The total expenditure in the economy
What is the wealth effect and what will it cause
Purchasing power of income changes due to a price level change
Increase in price - contraction
Decrease in price - extension
What is the trade effect
As price decreases, exports more competitive, imports less competitive as domestic goods more competitive
Decrease in price - extension in AD
What is the interest effect
As price decreases, IR can be kept lower as most central banks will try to reach inflation target
Decrease in IR - AD increases as C, I, increase, and reduces ER which boosts exports
When does AD shift
When C, I, G, or (X-M) change due to factor independent of the price level
How does IR/availability of credit affect consumer spending
- low IR, RoR on savings decreases / cost of borrowing cheaper
-low credit availability - less borrowing as banks less willing to lend, more savings
How does level of real disposable income affect consumer spending
More disposable income, increased MPC - e.g. if income tax is low
How does consumer confidence affect consumer spending
-If job prospects are strong, more likely to spend
-if U low, consumers confident will keep job, increased MPC
How do asset prices affect consumer spending
High asset prices, consumers feel wealthy, increased MPC
e.g. houses, bonds
How does household indebtedness affect consumer spending
If there’s a lot of household debt, consumers more likely to save so they can pay off debts quickly if something goes wrong, e.g. lose job
How does the range/trustworthiness of financial institutions affect consumer savings
fewer banks in developing countries, may be corrupt
How do tax incentives affect consumer savings
Gov policies that encourage saving e.g. ISA
How does age structure of pop affect consumer spending
Young/old more likely to spend
Middle age more likely to save for kids/retirement
How do IR affect investment
If IR are low, borrowing is cheaper and firms more likely to borrow and invest the money
How does business confidence affect investment
If profit and demand is expected to be high in future, firms more likely to invest so they can be more productive and meet the demand
How does corporation tax affect investment
Lower corporation tax means firms will have higher retained profits, allowing for more investment
*Retained profits are profits left after corporation tax is paid
How does spare capacity affect investment
If firms have spare capacity, they don’t need to invest as they are able to increase their productivity if needed
How does level of competition affect investment
If competition is high, firms will have an incentive to be more productive/efficient so they can get ahead of competition, so will invest more
What is current spending
E.g.
-maintenance if public services
-payment of public sector wages
What is capital spending
E.g.
Infrastructure spending
What is welfare spending
E.g.
Benefits and pensions
-largest part of gov spending in UK
What are debt interest payments
All interest payments of gov spending
Large opportunity cost
What is a budget deficit/ surplus
Deficit:
Gov spending > tax rev in a fiscal year
Surplus:
Gov spending < tax rev in a fiscal year
What is the national debt
The total stock of debt over time
Accumulation of budget deficits
