Chapter 2 Flashcards
(21 cards)
What factors determine economic activity in a country?
Economic activity is influenced by natural resources, a skilled workforce, demand-side and supply-side factors, and the type of economic system (planned, market, mixed, open).
What characterizes a state-controlled or planned economy?
In planned economies, the state decides what is produced and how it is distributed, aiming for low levels of inequality and unemployment, with a focus on common good over profit.
How are resources allocated in market economies?
In market economies, the allocation of resources is determined by the forces of supply and demand, with the market clearing price reflecting a balance between consumer willingness to pay and supplier prices.
What defines a mixed economy?
A mixed economy combines elements of market economies with some state control, raising finance through direct and indirect taxes and borrowing in capital markets.
What are the characteristics of an open economy?
Open economies have few trade barriers or controls over foreign exchange and can include market and mixed economies. They are promoted by the WTO through global trade agreements.
What methods do governments use to manage the economy?
Governments manage the economy through taxation, economic and monetary policies, and stabilization policies aimed at reducing fluctuations in economic activity.
What are the stages of the normal economic cycle?
The economic cycle includes the peak (highest GDP point), contraction (declining GDP), recession (two consecutive quarters of declining GDP), trough (lowest GDP point), and expansion (increasing GDP).
What are the main objectives of macroeconomic policy?
The main objectives include achieving full employment, economic growth, low inflation, and balance of payments equilibrium.
What is fiscal policy and its tools?
Fiscal policy involves government actions on spending and taxation to influence the economy, using tools like the government budget and taxation system to stimulate or contract demand.
How does fiscal policy impact business planning and costs?
Fiscal policy affects business planning by influencing the level of aggregate demand in the economy, and it impacts costs through factors like labor costs and indirect taxes.
What is monetary policy and its key components?
Monetary policy regulates the economy through the monetary system, operating on variables like money supply, interest rates, and credit availability. It affects spending, saving, and investment behavior.
What is the role of central banks in economic management?
Central banks implement government monetary policies, guided by the Bank for International Settlements (BIS) to achieve monetary and financial stability. They manage national debt, regulate the banking system, set interest rates, and more.
What responsibilities do central banks have?
Central banks act as bankers to the banking system and government, manage the national debt, regulate the domestic banking system, act as lenders of last resort, set official short-term interest rates, control the money supply, issue currency, hold national reserves, and influence currency value.
Why are key economic indicators important?
Economic indicators provide investors with insights into the health of the economy, aiding long-term investment decisions.
What causes inflation and deflation, and their effects?
Inflation is caused by excess demand, scarcity of resources, and increasing government spending, leading to eroded real incomes and competitiveness. Deflation, caused by falling prices, can lead to high unemployment and economic depressions.
How is inflation measured?
Inflation is commonly measured by the Consumer Price Index (CPI), which tracks changes in prices of a typical ‘shopping basket’ of goods and services.
What constitutes Gross Domestic Product (GDP) and its importance?
GDP measures economic activity based on consumer spending, government spending, investment, exports, and imports. It’s important for assessing economic growth and productivity.
What does the Balance of Payments (BoP) represent and its components?
BoP summarizes all transactions between a country and the rest of the world, including trade balance (visible and invisible), current account, and capital account.
How do budget deficits and national debt impact the economy?
Government debt and budget deficits, measured against GDP, impact economic stability. Excessive government spending causing deficits can lead to inflation and affect the country’s credit rating.
What is the impact of high unemployment levels on the economy?
High unemployment indicates low demand for goods and services, negatively impacting government finances through increased welfare payments and reduced tax revenues.
What are the implications of exchange rate fluctuations?
Exchange rate changes affect economic activity and investment decisions involving foreign assets. Different regimes (fixed, floating, target zone, crawling peg, managed float) manage these fluctuations.
