A-Level Economics A: THEME 4 GENERAL KNOWLEDGE Flashcards

Question

4.1.1 Globalisation What are the costs to the environment?

Answer 1

One problem of globalisation is that it has increased the use of non-renewable resources. It has also contributed to increased pollution and global warming. Firms can also outsource production to where environmental standards are less strict. However, arguably the problem is not so much globalisation as a failure to set satisfactory environmental standards.

Answer 2

Globalisation enables workers to move more freely. Therefore, some countries find it difficult to hold onto their best-skilled workers, who are attracted by higher wages elsewhere.

Answer 3

- Multinational companies like Amazon and Google, can set up offices in countries like Bermuda and Luxembourg with very low rates of corporation tax and then funnel their profits through these subsidiaries. This means they pay very little tax in the countries where they do most of their business. This means governments have to increase taxes on VAT and income tax. It is also seen as unfair competition for domestic firms that don’t use the same tax avoidance measures. - The greater mobility of capital means that countries have sought to encourage inward investment by offering the lowest corporation tax. (e.g. Ireland offers a very low tax rate). This has encouraged lower corporation tax, which leads to higher forms of other taxes.

Answer 4

- Specialisation means countries often stop making products they need, to focus on producing the products they are better at. - As a result, trade must happen with other countries, and an efficient exchange system is needed.

Answer 5

- The theory of comparative advantage states that countries find specialisation mutually advantageous if the opportunity costs of production are different. If they are the same, there will be no gain from trade. - Absolute advantage exists when a country can produce a good more cheaply in absolute terms than another country. - Comparative advantage exists when a country is able to produce a good more cheaply relative to other goods produced.

Answer 6

- Comparative advantage assumes there are no transport costs , and these could lower or prevent any comparative advantage. - It also assumes costs are constants and that there are no economies of scales. Economies of scale help to increase the gains from specialisation. - In the model, goods are assumed to be homogenous, which is unlikely to hold in real life. The fact products aren’t homogenous makes it difficult to conclude that a country has a comparative advantage as their products can’t be perfectly compared. - It also assumes that factors of production are perfectly mobile , there are no tariffs or other trade barriers and there is perfect knowledge.

Answer 7

- Comparative advantage - Economies of scale - Greater choice - Greater competition

Answer 8

Comparative advantage shows how world output can be increased if countries specialise in what they are best at producing, this will increase global economic growth.

Answer 9

Trading and specialising allows countries to benefit from economies of scale , which reduces costs and therefore decrease prices globally.

Answer 10

Trade enables consumers to have greater choice about the types of goods they buy, and so there is greater consumer welfare.

Answer 11

Trade also means there is greater competition, which provides an incentive to innovate. This creates new goods and services and new production methods, increasing consumer welfare and lowering costs respectively.

Answer 12

- Over-dependence - Structural unemployment - Environmental deterioration - Loss of sovereignty

Answer 13

Trade can lead to over-dependence, where some countries become dependent on particular exports whilst others become dependent on particular imports. This can cause problems if there are large price falls in the exports of if imports are cut for political reasons.

Answer 14

It can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and competitive. The less mobile the workforce, the higher the chance that changes in demand due to trade will reduce output and employment over long periods of time.

Answer 15

The environment will suffer due to the problems of transport as well as the increased demand for resources e.g. deforestation.

Answer 16

Countries may suffer from a loss of sovereignty due to signing international treaties and joining trading blocs, for example in the EU. They may see a loss of culture as trade brings foreign ideas and products to the country.

Answer 17

- Infant industries - Job protection - Protection from potential dumping - Protection from unfair competition - Terms of trade - Danger of over specialisation

Answer 18

An infant industry is one that is just being established within a country. They need to be able to build up a reputation and customer base and will have to cover a lot of sunk costs, meaning their AC will be higher. Therefore, the industry would be unable to compete in the international market and so the government protect them until they are able to compete on an equal level.

Answer 19

Governments may be concerned that allowing imports will mean domestic producers will lose out to international firms, and so there will be job losses within the country. Not only would this have negative economic consequences, it would be politically unpopular.

Answer 20

Dumping is when a country or company with surplus goods sells these goods off to other areas of the world at very low prices, harming domestic producers in those countries. The government may need to intervene to protect domestic producers who are unable to compete with firms that are willing to make a loss.

Answer 21

Domestic producers may be unable to compete with a firm that has very low labour costs or very low health and safety costs due to regulation or with a firm that is heavily subsidised by the government. Some will argue the government should intervene to protect domestic producers from this.

Answer 22

if a country buys a large amount of imports for a certain good, this will increase demand for that good and hence increase the price. This will worsen the terms of trade and so therefore they can buy less imports with the amount of exports. Restrictions will reduce supply of the good and lead to a fall in the price received by the importer, so improve the terms of trade.

Answer 23

Some people believe that no country should become totally reliant on another for important products or materials and so it is important to introduce protectionism on these goods to prevent firms and consumers becoming reliant on them.

Answer 24

- Tariffs - Quotas - Subsidies to domestic products

Answer 25

These are limits placed on the level of imports allowed into a country , meaning people are forced to buy domestic goods if they want that good and the quota is already used. There will be a welfare loss and shift of consumer subsidy to producer subsidy but instead of tax revenue, there will be extra revenue for the exporting, foreign firms.

Answer 26

These are payments to domestic producers which lower their costs and help them to be more competitive by enabling cheaper prices. Sometimes subsidies are purely given to goods that are exported whilst other times they are given to firms that have a large proportion of their sales as exports. Subsidies can also be given to domestic firms that compete with imports, usually in the form of indirect subsidies like tax breaks or cheap loans.

Answer 27

These are payments to domestic producers which lower their costs and help them to be more competitive by enabling cheaper prices. Sometimes subsidies are purely given to goods that are exported whilst other times they are given to firms that have a large proportion of their sales as exports. Subsidies can also be given to domestic firms that compete with imports, usually in the form of indirect subsidies like tax breaks or cheap loans.

Answer 28

- Higher prices for consumers as they are unable to buy imports at the cheaper price, the higher prices is because competition for domestic producers is reduced so they have less incentive to be efficient and keep prices low/competitive. - They suffer from less choice.

Answer 29

- Less competition so can sell more goods at a higher price than before. - May suffer from higher costs if there are controls on the imports they need for production. - Foreign producers will lose out as they are limited in where they can sell their goods.

Answer 30

- In the short run, governments benefit as they can gain tariff revenues and they are politically popular. - In the long run, protectionist policies can lead to an inefficient economy dues to less competition which stifles growth.

Answer 31

- As the tariff diagram shows, the imposition of import controls results in deadweight welfare loss. - It also causes trade wars since the introduction of restrictions often leads to retaliation by other countries. - Example: US-China trade war, where each country continued to impose more tariffs on the other's goods. This causes a reduction in trade and a reduction in growth.

Answer 32

There has been a rise of economic nationalism in a number of countries, leading to policies which emphasise the domestic control of the economy, labour and capital formation, one of these is restrictions to free trade. The financial crisis and recession led to distrust of globalisation and pressure to put self-interest above anything else. Countries have found it difficult to lower protectionism since they always expect reciprocity, for example the UK would not lower barriers on US goods if they US were not willing to do the same.

Answer 33

Inequality in accumulated wealth. The bigger issue and more extreme than another kind.

Answer 34

Income inequality is how unevenly income is distributed throughout a population.

Answer 35

The Lorenz curve represents the income equality of the economy. Therefore the further the Lorenz curve lies below the line of perfect equality the more inequality.

Answer 36

The Gini coefficient is one of the most frequently used measures of economic inequality. The coefficient can take any values between 0 to 1 (or 0% to 100%). A coefficient of zero indicates a perfectly equal distribution of income or wealth within a population.

Answer 37

Income is a flow of earnings, whilst wealth is a stock of assets. Income inequality refers to the extent to which income is distributed in an uneven manner.

Answer 38

- Wages - Wealth levels - Chance - Age

Answer 39

Some workers simply earn more than others. This can be because of higher educational achievements, because they work longer hours or because their skills are more in demand. Those who aren’t at work will have a lower income than others e.g. pensioners or those on benefits. Moreover, the higher the level of income, the more someone can save and thus the more wealth they can build up. Those on high incomes will be able to build up a stock of assets whilst those on lower incomes may have to spend most of their money on everyday items like food.

Answer 40

Someone who already has a high level of wealth, whether through inheritance or saving, is able to build up larger wealth than those on lower levels of wealth. For example, they may undertake more risky investments which will give a higher rate of return. They could buy property in London which they hope will rise in price and make a huge return. Those with lower levels of wealth are unable to do so. Inheritance often allows high levels of wealth. Moreover, high levels of wealth mean people can earn rent and interest on their assets and so, therefore, see increased income.

Answer 41

Those who bought houses in the right area or bought the right assets will see a huge increase in the price of their assets and hence an increase in their wealth. They may have been lucky to inherit wealth. Those who chose the right sort of job will have seen their income rise higher than in other areas.

Answer 42

Working adults at the peak of their career will earn a higher income than those who have just started. Those who are older will have had a chance to build up more assets, although some of this stock may have been used up to pay for retirement.

Answer 43

- Relative poverty | - Absolute poverty

Answer 44

This is when income is a certain percentage less than the average income. For example, in the UK relative poverty is defined as income 50% less than average income. Therefore a rise in economic growth and average incomes will cause a change in what constitutes relative poverty.

Answer 45

This is an income below a certain level necessary to maintain a minimum standard of living. (e.g. enough money to buy the basic necessities of food, shelter and heat.

Answer 46

- The incentive effect - Entrepreneurship - Trickle-down effect - Fairness

Answer 47

- Inequality arising from monopoly power - Inequality arising from Monopsony power - Diminishing marginal utility of income - Social Problems - Unemployment - Inherited Wealth

Answer 48

If someone works harder and as a consequence receives a higher wage then this is not market failure. The promise of a higher wage is essential to encourage extra effort. By rewarding hard work, there will be a boost to productivity leading to higher national output – so everyone can benefit.

Answer 49

Inequality is necessary to encourage entrepreneurs to take risks and set up new businesses. Without the prospect of substantial rewards, there would be little incentive to take risks and invest in new business opportunities.

Answer 50

If some people gain extra income, then this can ‘trickle down' to other people, e.g. if an entrepreneur sets up a business he may become a millionaire, but also will create jobs and provide income for other workers. There may be a gap between the highest and lowest earners. But, the lowest earners are still better off than without the entrepreneur.

Answer 51

Arguably, inequality is a type of market failure. Market failure occurs when there is an inefficient allocation of resources in a free market. It can occur due to.

Answer 52

- Geographical immobility - Structural unemployment - Occupational immobility - Education levels - Monopolies - Government policy

Answer 53

- Geographical immobility - When it is difficult to move from one geographical area to another. - Occupational immobility - When it is difficult to move from one type of work to another.

Answer 54

- Education increases a person's human capital and thus their productivity. - In 2016, FTSE 100 CEO's average remuneration was £4.5m, this would take the average worker, 160 years to earn (avg salary = £28,000). In 2016 45% of FTSE 100 CEOs were privately educated, compared to 7% of society. - 24% went to Oxbridge, of which 63% were privately educated. (53% attended a Russell Group university).

Answer 55

- Increased demand for highly skilled workers in finance and technology (high income). - Globalisation and offshoring have reduced the bargaining power of low/semi-skilled labour (low income). - However, technology also helps pull people out of poverty and reduces the price of consumption goods. Globalisation also create more open markets hence increasing demand.

Answer 56

- An ageing population can increase inequality as the elderly tend to have a larger income than expenditure, therefore increasing wealth and often earning more due to more experience. - Due to rising house prices, those that bought their houses many years ago now have far greater wealth than those struggling to get on the property ladder.

Answer 57

- Ownership of financial assets yields income flows, such as interest, profit & dividends. - Pension rights may be improved through private schemes. - Inheritance of wealth allows accumulation of assets over generations, particularly in housing where it is a significant share of wealth. - Thomas Piketty says wealth grows faster than income, hence (as the rich hold more wealth) the rich become richer, found in his book 'Capital in the 21st Century.'

Answer 58

- In a capitalist society, entrepreneurs take risks and are driven by the profit motive. Profits are a reward to take risks. Therefore, inequality is essential to encourage entrepreneurs to take risks. - Inequality motivates workers, which encourages them to learn new skills and work hard. A higher wage reflects higher productivity in a capitalist society, which results in wage inequality. - Capitalism leads to monopoly power. Monopolies can exploit consumers with higher prices, and exploit their consumers with lower wages. This allows them to earn even higher profits.

Answer 59

Inheritance is passed down generations, which means wealth is often concentrated in the hands of a few families. Those who inherit lots have more wealth. They can also access the best education and therefore the best jobs, which is not accessible to those with less wealth. It results in an inequality of opportunity and income. Wealth can generate more income for the rich, which widens inequality.

Answer 60

For example, inheritance tax means rich families cannot keep their entire wealth. Moreover, state education means everyone can access education, and there is regulation for firms with monopoly power. It can be argued that this stops the economic system from being capitalist.

Answer 61

Financial markets are where buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary in nature.

Answer 62

They exist for two main reasons: to meet the demand for services , such as saving and borrowing, from individuals, businesses and the government and to allow speculation and financial gains.

Answer 63

Financial markets are extremely important to the general health of an economy. With effective markets for credit and capital, borrowing and investment will be limited and the whole macroeconomy can suffer. Financial markets often fail to form in command economies and in less developed economies, causing low levels of investment and low growth rates.

Answer 64

- Facilitate savings - Lend to businesses and individuals - Facilitate the exchange of goods and services - Forward markets - Market for equities

Answer 65

Allows people to transfer their spending power from the present to the future. It can be done through a range of assets, such as storing money in savings accounts and holding stocks and shares.

Answer 66

- It contributed £119 billion to the UK economy, 6.5% of GDP. - The sector is largest in London, (where 50% of the sector’s output is generated). - Accounts for 1.1 million financial services jobs (3.2% of all jobs). - Financial services industry ran a trade surplus of £51 billion and the sector contributed £27.3 billion in tax in the UK in 2016/17.

Answer 67

They lend to businesses and individuals which allows consumption and investment. They are sometimes referred to as a financial intermediary, the step between taking money from one person to giving to another since money from savings is used for investment.

Answer 68

They facilitate the exchange of goods and services by creating a payment system. Central banks print paper money, institutions process cheque transactions, companies offer credit card services and banks and bureau de changes buy and sell foreign currencies.

Answer 69

They provide forward markets. This is where firms are able to buy and sell in the future at a set price, for example, if a farmer wants to sell the crop they are growing at a guaranteed price in a month’s time. The forward market exists for commodities and in foreign exchange and helps to provide stability.

Answer 70

Trade in currencies and commodities. This is seen in food commodities (wheat), commodities (copper/nickel), and foreign exchange (USD and EURO).

Answer 71

They provide a market for equities, company shares. Issuing shares is an important way for companies to finance expansion but people would be unlikely to buy shares if they were unable to sell them in the future. Financial markets provide the ability for shares to be sold in the future, making the asset more appealing.

Answer 72

Equity represents the total amount of money a business owner or shareholder would receive if they liquidated all their assets and paid off the company's debt (linking back to the idea of liabilities). Capital refers only to a company's financial assets that are available to spend.

Answer 73

- Money Market - Capital Market - Foreign Exchange Market

Answer 74

This is the market for short term loan finance for businesses and households. Money is borrowed and lent normally for up to 12 months. Includes inter-bank lending i.e. the commercial banks providing liquidity for each other. The money market also includes short term government borrowing e.g. 3-12 month Treasury Bills – to help fund the government’s budget (fiscal) deficit.

Answer 75

Capital markets are the markets where securities such as shares and bonds are issued to raise medium to long-term financing. Includes raising of finance by the government through the issue/sale of medium-term and long-term government bonds for example 10 year and 20-year bonds (loans).

Answer 76

A market where currencies (foreign exchange) are traded. There is no single currency market – it is made up of thousands of trading floors. Gains or losses are made from the movement of exchange rates – speculative activity in the currency market is often high.

Answer 77

A commodity market is a marketplace for buying, selling, and trading raw materials or primary products.

Answer 78

The spot market is where financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery. Delivery is the exchange of cash for a financial instrument. A futures contract, on the other hand, is based on the delivery of the underlying asset at a future date.

Answer 79

A forward market is a marketplace that sets the price of a financial instrument or asset for future delivery. Forward markets are used for trading a range of instruments, but the term is primarily used with reference to the foreign exchange market. It allows a guaranteed price to sell or buy.

Answer 80

A bond is a specific type of security that is sold by firms or governments. It is a way for the firm or government to borrow money at a certain interest rate. In return for buying the bond and investor gets a certain interest rate for the duration of the bond.

Answer 81

The volatility of bonds (especially short and medium dated bonds) is lower than that of equities (stocks). Thus bonds are generally viewed as safer investments than stocks.

Answer 82

It is often fairly easy for an institution to sell a large number of bonds without affecting the price much, which may be more difficult for equities. In effect, bonds are attractive because of the comparative certainty of a fixed interest payment twice a year and a fixed lump sum at maturity.

Answer 83

The reinvestment risk is the possibility that the investor might be forced to find a new place for his money. As a consequence, the investor might not be able to find as good a deal, especially because this usually happens when interest rates are falling.

Answer 84

The exchange rate risk is a financial risk posed by an exposure to unanticipated changes in the exchange rate between two currencies.

Answer 85

This is a situation where there is imperfect knowledge. In particular, it occurs when one party has different information from another.

Answer 86

One problem with the financial sector is that financial institutions often have more knowledge compared to their customers, both consumers and other institutions. This means they can sell them products that they do not need, are cheaper elsewhere or are riskier than the buyer realises.

Answer 87

The Global Financial Crisis was partially caused by banks selling packages of prime and subprime mortgages, but advertising them as all prime mortgages.

Answer 88

Significant externalities are created by financial markets, for instance, the cost to the taxpayer of bailing out banks in situations like the 2008 GFC, where the overall cost to the UK taxpayer was £1.162 trillion.

Answer 89

Market rigging occurs when individuals or institutions collude to fix prices or share information to maintain a position in a market.

Answer 90

In the Libor scandal of 2008, financial institutions were accused of fixing the London Interbank Lending Rate (LIBOR), one of the most important rates in the world.

Answer 91

Where individuals make decisions in their own best interests knowing there are potential risks.

Answer 92

- Individual workers take adverse risks to increase salaries. - Companies take risks knowing the central bank will lend them out.

Answer 93

The Global Financial Crisis was caused by moral hazard when employees sold mortgages to those who would not be unable to pay them back. By selling more mortgages, they would see higher salaries and bonuses but would not see the negative effects if the loan was not repaid. On top of this, financial institutions may take the excessive risk because they know the central bank is the lender of last resort and so will not allow them to fail because of the impact it would have on the economy.

Answer 94

Where the price of an asset rises massively and then falls.

Answer 95

They tend to occur because investors see the price of an asset is rising and so decide to purchase this asset as they believe the price will continue to rise and will profit them in the future. This leads to prices becoming excessively high and eventually enough investors decide that the price will fall, so they sell their assets and panic sets in, causing mass selling. This is known as herding behaviour.

Answer 96

Moreover, the financial market has also caused market bubbles in the housing market by lending too much in mortgages and increasing demand for houses. When this bubble bursts, for example, due to a rise in real interest rates, there is a fall in demand for houses and a negative wealth effect, reducing AD, and banks are left with loans that will not be repaid in full.

Answer 97

A proportional tax has a fixed rate for all taxpayers, regardless of income. It is also known as a flat tax. For example, all taxpayers might have to pay a 20% income tax rate.

Answer 98

A progressive tax has an increase the average rate of tax as income increases. As income increases, the proportion of income tax increases. For example, income tax is progressive.

Answer 99

A regressive tax doesn't relate to income but means those on the lowest incomes have a higher average rate of tax. The proportion of income paid as tax is higher for those on lower incomes than those on higher incomes. For example, as a percentage of income, the London Congestion Charge and Council Taxes are higher for those on lower incomes.

Answer 100

The Laffer Curve shows how much tax revenue the government receives at each level of tax. Up until point T, as tax rates increase, government tax revenue increases. After point T, people do not think it is worthwhile working and the lack of incentive to work leads to falling tax revenue.

Answer 101

- There can be income redistribution and wage equality through government intervention. For example, inheritance tax means rich families cannot keep their entire wealth. - Over the last 20-30 years, the UK has switched towards indirect taxes, which tend to be more regressive than direct taxes.

Answer 102

- Expansionary fiscal policy aims to increase AD. Governments increase spending or reduce taxes to do this. It leads to a worsening of the government budget deficit, and it may mean governments have to borrow more to finance this. - Deflationary fiscal policy aims to decrease AD. Governments cut spending or raise taxes, which reduces consumer spending. It leads to an improvement in the government budget deficit.

Answer 103

Indirect taxes could cause cost push inflation. Indirect taxes could increase the cost of goods such as cigarettes or fuel, if producers choose to pass the costs onto the consumer. Since the demand for cigarettes and fuel is relatively price inelastic, producers are likely to pass the cost of the tax onto consumers.

Answer 104

Taxes could be imposed on imports into a country. These are tariffs and they make it more expensive to import goods, which should, in theory, improve the trade balance. However, other countries may retaliate, so exports might decrease as well.

Answer 105

Governments can provide a competitive tax environment to encourage FDI so that the market is profitable, fair and has macroeconomic stability. Taxes should also be consistent and predictable, so they are business-friendly. This would encourage FDI flows. High, fickle taxes are likely to discourage FDI flows, since investors will choose to invest elsewhere.

Answer 106

- Capital expenditure is the spending on goods which create or help market other goods. - When the governments spend on capital it is usually infrastructure like transport networks which make it easier and cheaper for firms to produce goods and services.

Answer 107

- Transfer payments are payments made by the government without receiving a good or service in exchange. - Government transfer payments include the spending on benefits and aid expenditure.

Answer 108

- Current expenditure is the spending on consumables and other non-capital goods, services and labour. - Governments’ current expenditure includes payment of public sector workers.

Answer 109

When government spending fails to increase overall aggregate demand because higher government spending causes an equivalent fall in private sector spending and investment.

Answer 110

One of the most common forms of crowding out takes place when a large government, such as that of the US, increases its borrowing and sets in motion a chain of events that results in the curtailing of private sector spending. The sheer scale of this type of borrowing can lead to substantial rises in the real interest rate, which has the effect of absorbing the economy's lending capacity and of discouraging businesses from making capital investments.

Answer 111

Policies which offset fluctuations in the economy. These include transfer payments and taxes. They are triggered without government intervention.

Answer 112

- In a recession, benefits increase as more people are unemployed and so the benefits are a stabiliser as it means that the overall fall in AD is reduced, preventing too much change in the economy. - On the other hand, during a boom, tax increases as people have more jobs and higher incomes, and this tax reduces disposable income so decreases consumption and AD, meaning that demand doesn’t grow too high.

Answer 113

A policy which is implemented through one off policy changes. Discretionary fiscal policy involves deliberate changes in government expenditure and taxes with the intention of influencing AD.

Answer 114

A government has a fiscal (budget) deficit when expenditure exceeds tax receipts in a financial year.

Answer 115

The national debt is the sum of all government debts built up over many years.

Answer 116

- Money | - Percentage of GDP

Answer 117

National debt in 2018 is around £1.8 trillion, or as a percentage of GDP, the UK’s national debt is 87.7% of total GDP.

Answer 118

In 2018, the fiscal deficit is £48bn, 2.3% of GDP.

Answer 119

A cyclical deficit is the part of the deficit that occurs because government spending and tax fluctuates around the trade cycle. When the economy is in recession, tax revenues are low and spending is high creating a larger deficit.

Answer 120

This is a deficit which is due to an imbalance in the revenue and expenditure of the government, so it exists at every point in the business cycle.

Answer 121

The actual deficit is the structural deficit plus the fiscal deficit.

Answer 122

It is likely that national debt will grow over time as the government has to consistently borrow money to finance spending. For this reason, it is argued that structural deficits need to be eliminated but this is difficult since it is impossible to know what part of the deficit is structural and what part of it is cyclical, just as it is impossible to know the size of the output gap.

Answer 123

The trade cycle, unforeseen events, debt interest, privatisations, government aims, number of dependants.

Answer 124

Explained by concept of cyclical and structural deficits e.g. during a downturn there is a negative wealth affect on housing, so less taxes on property transactions (stamp duty), causing a fall in revenue and a deficit. In the UK, the fiscal deficit peaked in 2010 at 10.1% of GDP.

Answer 125

Things like natural disasters or recessions lead to huge increases in spending so increases the deficit.

Answer 126

If interest rates on government debt increase, the amount the government pays in interest repayments increases and this is likely to increase the deficit. The impact of this will depend on how significant interest repayments are in the size of the deficit. Interest rates depend on market rates and the credit ratings of the government. 7% of all UK government spending is on interest repayments of loans.

Answer 127

Provide one off payments to government to decrease the deficit in SR, depending on the value of the company sold.

Answer 128

They are important for the size of deficit, as it influences their fiscal policy e.g. austerity policy managed to reduce the fiscal deficit by 75% since 2010. Factors such as the number of dependants in a country affect both spending and tax revenues so influence the deficit.

Answer 129

If the government is continuously running a deficit, then the national debt will increase overtime. There is a consensus view that fiscal deficit over 3% will lead to growing national debt as proportion of GDP. It is only when government runs a budget surplus that the size of the national debt decreases.

Answer 130

Ageing populations tend to contribute to a high national debt since the government runs a structural deficit in order to fund their pensions and care and this leads to a high national debt.

Answer 131

High levels of borrowing may raise interest rates in the economy since an increase in the demand for money will increase the price of money, i.e. interest rates. This could cause crowding out of the economy. However, this may not always be the case as the government may borrow from overseas and during a recession, private sector investment falls which means interest rates may remain unchanged.

Answer 132

Countries spend large amount on national debt through interest repayments with high opportunity costs. The impact will depend on the level of interest rates and the size of the primary deficit compared to interest repayments. In a liquidity trap (low interest), the government often borrows at very low rates for long periods of time.

Answer 133

The actual budget deficit but without interest repayments on national debt.

Answer 134

High fiscal deficits and national debt benefit citizens today at the expense of future. However, it depends on whether it was caused by current or capital expenditure. Government show run current budget surplus to invest in future, except in recession when they can run a deficit to increase AD.

Answer 135

Where government revenues less than current expenditure.

Answer 136

As future generations are forced to pay bills for todays expenditure, but if deficit is for capital expenditure, future generations benefit from increased spending so extra tax bill to pay for todays borrowing can be justified. Value of debt tends to fall overtime as inflation erodes its value and because a country's GDP grows meaning the debt is easier to pay off, so limits impact on future generation.

Answer 137

If the government increases their spending and there is no similar fall in private sector spending, AD will rise and this can be inflationary. More dangerously, if a government is unable to borrow money, they will print more money and this can cause hyperinflation as in Germany in 1923 or Zimbabwe in 2008 .

Answer 138

High debt can reduce credit rating for government. Private sector companies estimates the likelihood that a government will default on his debt and give it a rating from AAA to D. Lower credit ratings mean that lending to government is riskier so higher interest are demanded from lending. However it is really not size of debt which influences level of risk involved with lending the money, it is whether the country has even defaulted on their loans before and their current economic or political climate.

Answer 139

If government has borrowed from abroad, it may have difficulties getting enough foreign currency to make repayments on its debt. This also causes problems for consumers as if there is not enough foreign currency, they will be unable to import goods.

Answer 140

Government borrowing can benefit growth if it used for capital spending since this will improve the supply side of the economy and thus reduce the deficit in the long term. On top of this, budget deficit can be used as a tool for short term demand management: Keynesians argue a deficit is acceptable to use as a stimulus in demand during recession.

Answer 141

- Austerity measures - Demand stimulus - Rely on automatic stabilisers - Default on loans

Answer 142

To decrease the national debt, the UK government has been using a policy of austerity since 2010, where they attempt to decrease spending. It would also be possible to increase taxes. Both of these are unpopular, could limit growth, and reduce living standards and income equality.

Answer 143

Creating demand stimulus by high spending, this will cause economic growth and therefore bring about higher tax revenues. This will allow for budget surpluses and eventually a reduction of national debt.

Answer 144

Another approach is to simply rely on automatic stabilisers to allow the economy to grow so national debt/fiscal deficit will reduce as a percentage of GDP. This is mainly the approach that the US took after the Global Financial Crisis and their economy recovered fairly quickly. By 2015, the fiscal deficit as a percentage of GDP was similar in the US and UK.

Answer 145

One way to reduce national debt would be for the government to default on their loans but the economic cost of this is so large that governments only default if it is the only option. Russia and Argentina have defaulted on their debts in the past.

Answer 146

When a state defaults on a debt, the state disposes of (or ignores, depending on the viewpoint) its financial obligations/debts towards certain creditors. The immediate effect for the state is a reduction in its total debt and a reduction in payments on the interest of that debt.

Answer 147

As an economy grows, import spending is stimulated relative to export revenue. Policy makers have to be aware that a ‘dash for growth’ could lead to balance of payments problems.

Answer 148

Conflict may occur if through a fiscal or monetary stimulus of aggregate demand, the economy may grow too quickly, aggregate supply may not respond quickly. This would drive up prices.

Answer 149

A government may feel it needs to reduce the budget deficit. This will require higher taxes and lower spending. However, this tightening of fiscal policy will lead to a fall in AD and lead to lower economic growth.

Answer 150

There can be a strong conflict between economic growth and environmental objectives. Higher GDP leads to higher levels of pollution and consumption of non-renewable resources.

Answer 151

There is often a trade off (at least in the short run) between unemployment and inflation. In a period of high growth – jobs are created, causing unemployment to fall. But, as unemployment falls, it can put upward pressure on wages, leading to inflation.

Answer 152

- Inability to control external shocks - Risk and uncertainty - Inaccurate information

A-Level Economics A: THEME 4 GENERAL KNOWLEDGE Flashcards

(176 cards)