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Macro-economics - Mr Cummisky > Economics > Flashcards

Economics Flashcards

1
Q

What are the 3 methods of measuring National Income

A

Income Method
Expenditure Method
Output Method

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2
Q

What are the 4 measures of the income method

A

Wages
Rent
Interest
Profits/ Dividends

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3
Q

What are the 4 measures of the expenditure method

A

Consumption (consumer spending)
Investment Spending
Government Spending
Net Exports

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4
Q

What are the 4 measures of the output method

A

Primary
Secondary
Teriary
Quarternary

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5
Q

What are the 4 Factors of Production

A

land
labour
capital
enterprise

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6
Q

what is land as a factor of production

A

any natural resource e.g wheat, sugar, gold

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7
Q

what is the reward of land as a factor of production

A

rent

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8
Q

what is labour as a factor of production

A

any human input e.g teacher, firefighters

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9
Q

what is the reward of labour as a factor of production

A

wages

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10
Q

what is capital as a factor of production

A

any human made element of the production process e.g tools, machine, vans

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11
Q

what is the reward of capital as a factor of production

A

interest

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12
Q

what is enterprise as a factor of production

A

an entrepreneur - organise the other factors, take risks

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13
Q

what is the reward of enterprise as a factor of production

A

profit

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14
Q

The demand for labour is derived from …

A

the demand for the goods & services that labour produces

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15
Q

Define GDP

A

the value of total output in one year

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16
Q

Define GDP per capita

A

GDP divided by population

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17
Q

Define National Economic Growth

A

Economic growth percentage increase in GDP from one year to the next

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18
Q

Define Real Economic Growth

A

nominal economic growth minus inflation

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19
Q

What 5 factors is economic stability dependent on

A
  • Spending
  • Output
  • GDP
  • Employment
  • Income
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20
Q

What is the target for the trend rate of growth

A

2.25% per annum

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21
Q

why do economist work towards an achievable and manageable rate of growth trend

A

to ensure economic stability

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22
Q

VAT = … %

A

20%

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23
Q

real economic growth= _______ minus ________

A

real economic growth = economic growth - inflation

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24
Q

what is the macro economic consumption function

A

AD=C + I + G + ( X - M )

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25
Q

AD=C + I + G + ( X - M )
what does AD mean

A

aggregate demand

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26
Q

AD=C + I + G + ( X - M )
what does C mean

A

consumer spending

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27
Q

AD=C + I + G + ( X - M )
what does I mean

A

business spending

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28
Q

AD=C + I + G + ( X - M )
what does G mean

A

government spending

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29
Q

AD=C + I + G + ( X - M )
what does x mean

A

exports

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30
Q

what does m mean

A

imports

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31
Q

AD=C + I + G + ( X - M )
what does ( X - M ) mean

A

balance of payments or the net exports

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32
Q
  1. In the circular flow of income
    Households provide ____________ to firms
A

factors of production such as labour, land, capital & enterprise

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33
Q
  1. In the circular flow of income
    firms in return provide ________ to the households
A

wages, rent, interest & profit

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34
Q
  1. In the circular flow of income
    Households then provide ________ to firms
A

consumer expenditure

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35
Q
  1. In the circular flow of income
    firms in return provide ____________ to the households
A

goods & services

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36
Q

____________ enters through households in the circular flow of income

A

bank loans from investments

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37
Q

__________ leaves through firms in the circular flow of income

A

savings

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38
Q

_______ ________ & _________ enter the circular flow of income

A

Government spending , bank loans for investment & exports

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39
Q

_________, ________ & _________ leave the circular flow of income

A

taxation, savings & imports

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40
Q

Symbol for Injections

A

J

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41
Q

Symbol for Withdrawals

A

W

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42
Q

Symbol for Exports

A

X

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43
Q

Symbol for Imports

A

M

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44
Q

Symbol for Banks loans for investment

A

I

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45
Q

Symbol for Savings

A

S

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46
Q

Symbol for Government spending

A

G

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47
Q

Symbol for Taxation

A

T

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48
Q

What are the 4 phases in the economic cycle

A

Downturn
Peak/Boom
Recession
Recovery

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49
Q

Government Economic Objectives
encouraging______stability (low inflation)

A

price

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50
Q

Government Economic Objectives
ensuring the working population is ________so….

A

productive so full employment/minimising unemployment

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51
Q

Government Economic Objectives
Maintaining a favourable balance of ….

A

payments on the current account (international trade)

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52
Q

Government Economic Objectives
Promoting steady_______ _______

A

economic growth

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53
Q

Government Economic Objectives
redistributing income and wealth more _______

A

equitably

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54
Q

Government Economic Objectives
reducing the ________ ______ and the national _____

A

government budget
debt

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55
Q

How would the government act to reduce government debt if the budget is in a deficit

A
  • borrow money - most common way by issuing bonds
  • print money
  • use previous surplus
  • assets
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56
Q

debt is…

A

the accumulation of all the deficits

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57
Q

the government budget can be in a ______ or a ______

A

deficit
surplus

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58
Q

What are the signs of an economic downturn
1. & 2. Rising…..&……

A

rising unemployment
rising government spending on benefits

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59
Q

What are the signs of an economic downturn
3. & 4. & 5. Falls…..&……&……

A

stock market falls
falling tax revenues
falling aggregate demand

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60
Q

What are the signs of an economic downturn
5. & 6. Reduced……&……

A

reduced output
reduced consumer confidence & spending

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61
Q

What are interest rates

A

cost of borrowing & the reward of saving

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62
Q

what is hot money

A

funds of money (e.g pension funds) available to be lent to governments & businesses

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63
Q

How could a business raise money through borrowing hot money

A

a business debenture

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64
Q

How could a government raise money through borrowing hot money

A

a government gilt

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65
Q

what is an exchange rate

A

the value of one currency in terms of another

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66
Q

Factors which affect consumer spending

A
  • interest rates
  • income tax rates
  • stage of the economic cycle
  • consumer confidence
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67
Q

Factors which affect government spending

A
  • level of government revenue
  • interest rates
  • Government Gilts
  • Government priorities (e.g pensions & infrastructure)
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68
Q

Factors which affect business spending

A
  • interest rates
  • business confidence
  • stage of the economic cycle
  • the level of spare capacity in the economy
  • level of profits
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69
Q

Factors which affect exports

A
  • stage of the economic cycle overseas
  • tariffs overseas
  • exchange rates
  • international competitiveness
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70
Q

Factors which affect imports

A
  • stage of the economic cycle here
  • tariffs here
  • exchange rates
  • international competitiveness
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71
Q

Describe a process in which income tax can be reduced, resulting in a fall in unemployment

A
  1. Income tax is reduced
  2. Workers have more disposable income
  3. They spend this extra disposable income
  4. Businesses see an increase in demand for goods & services
  5. More workers are needed to produce these extra goods & services
  6. Results in a fall in unemployment
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72
Q

If the pound is stronger then imports are

A

Cheaper

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73
Q

Mnemonic to understand imports and exports when the pound is stronger

A

S - stronger
P - pound
I - imports
C - cheaper
E - exports
D - dearer (more expensive)

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74
Q

If the pound is weaker then exports will be

A

Cheaper

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75
Q

Mnemonic to understand imports and exports when the pound is weaker

A

W - weaker
P - pound
I - imports
D - dearer (more expensive)
E - exports
C - cheaper

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76
Q

What is aggregate demand

A

The total level of planned real expenditure on UK produced goods & services

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77
Q

Why is the Short Run Aggregate Supply curve upward sloping

A
  • Higher prices for goods & services makes output more profitable
  • & enable businesses to expand their production
  • by hiring fewer productive workers & other resources
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78
Q

What is Quantitative Easing

A

Central Bank buy back bonds early in order to stimulate aggregate demand

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79
Q

Define productivity

A

The rate of output

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80
Q

What are the 3 shifts in Short Run Aggregate Supply

A
  • Input costs
  • Business taxes, subsidies and imported costs
  • Supply shocks
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81
Q

Explain the shift in Short Run Aggregate Supply
Input costs

A
  • Wage costs per unit of output
  • Labour productivity (higher efficiency lowers unit costs)
  • Raw material prices
  • Interest rates, business rents, fuel, energy costs
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82
Q

Explain the shift in Short Run Aggregate Supply
Business taxes

A
  • VAT - environmental charges / employment taxes
  • Business rates - costs of meeting business regulations
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83
Q

Explain the shift in Short Run Aggregate Supply
Subsidies

A
  • Scale and size of government subsidies to certain industries
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84
Q

Explain the shift in Short Run Aggregate Supply
Imported costs

A
  • Cost of imported components
  • which is affected by the exchange rate
  • & fluctuations in world commodity prices
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85
Q

Explain the shift in Short Run Aggregate Supply
Supply shocks

A
  • A hurricane, a tsunami or the effects of drought, flooding or political crisis which can have an effect on a country’s national output
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86
Q

What are the external factors affecting Aggregate Supply

A
  • World oil and gas prices
  • Energy prices
  • Metal prices
  • Foodstuff prices
  • Import tariffs
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87
Q

Explain the external factor affecting Aggregate Supply
World oil and gas prices

A

The UK is a net importer of oil - an input used in many different industries

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88
Q

Explain the external factor affecting Aggregate Supply
Energy prices / costs

A

The UK is a net importer of energy source such as coal

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89
Q

Explain the external factor affecting Aggregate Supply
Other mineral / metal prices

A
  • e.g the price of rubber, iron ore, rare earths
  • (used in many electronic products)
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90
Q

Explain the external factor affecting Aggregate Supply
Foodstuff Prices

A

E.g. International prices for fresh foods, coffee, wheat, cocoa, sugar

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91
Q

Explain the external factor affecting Aggregate Supply
Import tariffs / quotas

A

The UK is a member of the European Union which sets a common import tariff on different goods and services coming into the EU Single Market

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92
Q

Define Unemployment

A

Anyone who is able, available & actively seeking employment, between 18-67

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93
Q

What are the 2 measures of unemployment

A
  • claimant count
  • labour force survey (includes training schemes)
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94
Q

What are the 5 types of unemployment

A

Frictional
Cyclical
Structural
Hidden
Seasonal

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95
Q

Define frictional unemployment

A

Unemployment related to the process of changing jobs, which may invoke a period out of work

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96
Q

Define Cyclical unemployment

A

The category of unemployed whose number varies according to the business or economic cycle

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97
Q

What is another name for Cyclical Unemployment

A

Demand Deficient Unemployment

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98
Q

Define structural unemployment

A
  • When there is a mis-match between the skills of those unemployed & the skills that new jobs require
  • Happens when there is a change in the structure of the economy or industry declines
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99
Q

What are the 2 causes of structural unemployment

A

Geographical Immobility
Occupational/ Industrial Immobility

100
Q

Define geographical immobility

A

There are vacancies but they’re in another location
-e.g housing costs or family ties

101
Q

Define occupational immobility

A

You don’t have the correct skills

102
Q

Define Hidden Unemployment

A

Unemployment which is known to exist but is not included in the official government figures

103
Q

What can Hidden Unemployment also refer to

A

A person’s skills being unemployed rather than the person being unemployed

104
Q

Labour Market theory against minimum wage
As the minimum amount that firms are required to pay increases, they…

A

Can afford less workers so unemployment increases

105
Q

What is Dsay’s law

A

L’offre cieu sa propre demande
Supply created its own demand

106
Q

What is Dsay’s law based on the assumption of

A

That the extra income is spent

107
Q

Why is Dsay’s law not necessarily correct

A
  • Due to the macro economic consumption function
  • AD=C+I+G+(X-M)
  • An increase in consumer spending means there is a decrease in business spending so it levels out
108
Q

What is the second argument why minimum wage would not be effective

A

People found that they needed to work less days so firms had to employ more people on the days people didn’t need to work

109
Q

Define real wage

A

how much money an individual or entity makes after adjusting for inflation

110
Q

Define seasonal unemployment

A
  • People who work in certain industries,
  • for example, tourism in beach resorts,
  • may be out of work, in winter months &
  • less economically prosperous times of the year
111
Q

Why does high unemployment matter
3 Economic costs

A
  • Lost output (waste of resources)
  • Lower GDP growth (reduced standard of living)
  • Loss of skills (skills become obsolete)
112
Q

Why does high unemployment matter
Fiscal Costs

A
  • less tax: income tax, VAT, corporation tax
  • higher welfare: unemployment benefit, child benefit
113
Q

What are the results of fiscal costs

A

An increase in borrowing —> interest payments—> opportunity costs

114
Q

What are the policies to deal with unemployment

A
  • targeted macro stimulus policies to boost growth e.g cut income tax
  • expansion of apprenticeship schemes
  • improving geographical mobility of labour
  • measures to stimulate business start ups
  • active regional development policies
115
Q

The economic costs of unemployment - private costs of the involuntary unemployed
-income

A

Loss of income - but many people have major commitments (mortgage, credit agreements)

116
Q

The economic costs of unemployment - private costs of the involuntary unemployed
Fall in ….

A

Real living standards

117
Q

The economic costs of unemployment - private costs of the involuntary unemployed
The knock on effect of unemployment for age groups

A

Unemployment in your 20s has a huge effect on living standards for people in their 50s

118
Q

The economic costs of unemployment - private costs of the involuntary unemployed
Health

A
  • Increased health risks (particularly for long term unemployed)
  • Stress / reduction in quality of diet
  • Increased risk of marital break-up
  • Social exclusion
119
Q

The economic costs of unemployment - private costs of the involuntary unemployed
Skills

A
  • Loss of marketable skills (human capital)
  • The longer the duration of unemployment, the lower the chances of finding fresh employment
  • Particular problem facing the youth unemployed
120
Q

What are the negative consequences of unemployment for businesses

A
  • Fall in demand for goods and services
  • Fall in demand for businesses further down the supply
    chain
  • Consider the negative multiplier effects from the closure of a major employer in a town or city
121
Q

What are the positive consequences of unemployment for businesses

A
  • Bigger pool of surplus labour is available - but still a problem if there is plenty of structural unemployment
  • Less pressure to pay higher wages
  • Less risk of industrial / strike action - fear of job losses - leading to reduced trade union power
122
Q

Define Index Numbers

A
  • 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
123
Q

What index measures inflation

A

The consumer price index

124
Q

When does demand pull inflation occur

A

When there is excess AD

125
Q

Give an example of when there is excess AD

A

e.g when there is a positive output gap (actual GDP>potential GDP)

126
Q

How do businesses respond to high demand

A

By raising prices to increase their profit margins

127
Q

What phase is demand-pull inflation associated with

A

The boom phase of the cycle (when SRAS becomes inelastic)

128
Q

What are the main causes of demand pull inflation

A
  • Very fast growth of demand for credit/ borrowing
  • High levels of consumer spending
129
Q

Define inflation

A

A fall in the value of money from one year to the next

130
Q

What is real value

A

What the money can buy

131
Q

Name the 3 functions of price

A
  • signal
  • incentive
  • ration
132
Q

Main causes of demand pull inflation
A depreciation of…

A
  • A depreciation of the exchange rate,
  • increase the price of imports &
  • reduce the foreign price of UK exports
133
Q

Main causes of demand pull inflation
A reduction…

A
  • A reduction in direct or indirect taxation
  • consumers will have more disposable income,
  • causing demand to rise
134
Q

Main causes of demand pull inflation
Rapid…

A

Rapid growth of the money supply as a consequence of increased bank building & society borrowing

135
Q

Main causes of demand pull inflation
Rising…

A

Rising consumer confidence and an increase in the rate of growth of house prices

136
Q

Main causes of demand pull inflation
Faster…

A
  • Faster rates of economic growth in other countries
  • providing a boost to UK exports overseas
  • (an injection of AD)
137
Q

Define the wealth effect

A
  • Once mortgages are paid bank,
  • the bank are willing to provide access to additional borrowing,
  • as a method of maximising profit
138
Q

Define collateral

A

Something you give the lender as a backup if you are unable to repay your loan

139
Q

When does cost push inflation occur

A

when costs on production are increasing

140
Q

What are the 3 causes of cost push inflation

A
  • external shocks (commodity price fluctuations e.g raw materials traded on the world market)
  • a depreciation in the exchange rate
  • acceleration in wages
141
Q

Cost push inflation leads to an….

A

inwards shift in SRAS curve

142
Q

Once cost push inflation has led to an inward shift in the SRAS curve…..

A
  • firms raise prices to protect their profit margins
  • they are better able to do this when market demand is price inelastic
143
Q

Because “wages often follow prices”, a rise in inflation can lead to…

A

rising inflationary expectations

144
Q

define productivity

A
  • a measure of the efficiency
  • of the factors of production
  • in the production process
145
Q

High productivity means that we can produce…

A

goods & services at lower costs

146
Q

High productivity means that we can increase…

A

total output from our scarce resources

147
Q

An improvement in productivity helps to…

A

bring about economic growth for a country in the longer term

148
Q

How can labour productivity be measured

A

by calculating output per hour worked

149
Q

Name the 5 factors which could explain a productivity gap

A
  • relatively low rates of capital investment
  • low rates of spending on research & development
  • skills of the labour force
  • good healthcare
  • good transport/ infrastructure
150
Q

Explain a factor which could explain a productivity gap
-relatively low rates of capital investment

A
  • the failure of the economy to invest a sufficient share of national income in capital accumulation
  • to raise the stock of physical capital available per worker
  • increasing the value of an initial investment
151
Q

Explain a factor which could explain a productivity gap
-low rates of spending on research & development

A
  • the UK now denotes much less GDP to research spending than other nations
  • this eventually impacts on the pace of innovation
  • & the speed with which technological developments are incorporated into the production process
152
Q

Explain a factor which could explain a productivity gap
-skills of the labour force

A
  • there are concerns about the education skills of the UK labour force
  • inc. basic literacy & the quality of job specific training
153
Q

Name strategies to raise productivity in the British Economy
Encouraging…

A

foreign investment

154
Q

Name strategies to raise productivity in the British Economy
Incentives for…(2)

A
  • small businesses
  • increased reasearch & development spending
155
Q

Name strategies to raise productivity in the British Economy
Improvements…(2)

A
  • in a country’s infrastructure
  • in management & entrepreneurship
156
Q

Name strategies to raise productivity in the British Economy
Making…

A

markets more competitive

157
Q

Name strategies to raise productivity in the British Economy
Extra…

A

investment in education & training

158
Q

Name strategies to raise productivity in the British Economy
A rise in…

A

capital investment

159
Q

Name strategies to raise productivity in the British Economy
Less…

A

business regulation & Red Tape(bureaucracy)

160
Q

Monetary Policy
Too much ……., chasing too few …….

A

too much money, chasing too few goods

161
Q

Define monetary policy

A
  • involves changes in:
  • interest rates, the supply of money & credit & exchange rates
  • to influence the economy
162
Q

What factors can affect Monetary Policy

A
  • market interest rates
  • currency markets
  • bank lending
  • Bank of England
  • inflation targets
163
Q

define interest rates

A

the reward of saving & the cost of borrowing expressed as a percentage

164
Q

define repo rate

A

the interest rate at which the central bank of a country lends money to the banks

165
Q

what is a PLC

A

a public limited company which aims to make a profit

166
Q

What is the Policy Interest Rate

A
  • set out each month by the monetary policy committee
  • the 2% inflation target is set out by the govt
167
Q

What is expansionary monetary policy

A
  • fall in nominal & real interest rates
  • measures to expand supply of credit
  • depreciation of the exchange rate
168
Q

What is deflationary monetary policy

A
  • higher interest rates on loans & savings
  • tightening of credit supply (loans are harder to get)
  • appreciation of the exchange rate
169
Q

define savings rations

A

the percentage of our incomes that we save

170
Q

what does the LRAS curve represent

A
  • the full long run productive capacity of the economy
  • e.g when we are producing just about as much as the factors of production will allow
171
Q

net investment= ………………… - ………………

A

capital accumulation - depreciation

172
Q

Explain what the factors are affecting LRAS
-An increase in the…

A
  • An increase in the quantity and quality of capital
173
Q

Explain what the factors are affecting LRAS
-A more…

A
  • A more highly skilled workforce with better
    equipment (machiner, tools etc)
174
Q

Explain what the factors are affecting LRAS
-Innovation & improvements…

A
  • Innovation and Improvements in productive processes
  • such as technology
  • which increases productivity
175
Q

Explain what the factors are affecting LRAS
-Factor…

A
  • Factor mobility geographical/ occupational
176
Q

Explain what the factors are affecting LRAS
-Improved…

A
  • Improved attitudes of entrepreneurship
177
Q

Explain what the factors are affecting LRAS
-Encouraging….

A
  • Encouraging more people to join the labour supply
  • immigration, raise the retirement age, lower the school leaving age, lower benefits, lower income taxes
178
Q

Define fiscal policy

A
  • the use of government spending & taxation
  • to influence the pattern of economic activity,
  • & affect the level & growth of
  • aggregate demand, output & employment
179
Q

what is meant by the level of aggregate demand in terms of fiscal policy

A

how much we spend

180
Q

what is meant by patterns of economic activity in terms of fiscal policy

A
  • how we spend:
  • buying product A or B
  • & AD=C+I+G+(X-M)
181
Q

What are the 2 types of fiscal policy

A
  • Expansionary Fiscal Policy
  • Contractionary Fiscal Policy
182
Q

Expansionary Fiscal Policy is to …… AD

A

increase

183
Q

Contractionary Fiscal Policy is to ……. AD

A

decrease

184
Q

what is a duty

A

a specific tax, at a specific rate, on a specific product

185
Q

give examples of duties on products

A

alcohol duty, petrol duty

186
Q

what is council tax

A
  • a tax that local residents pay to local authorities
187
Q

Name Adam Smith’s 6 Canons of Taxation

A
  1. Equity
  2. Convenience
  3. Certain
  4. Economy
  5. Flexible
  6. Efficiency
188
Q

Explain Adam Smith’s Canons of Taxation
* Equity

A
  • tax should be fair & based on the ability to pay
189
Q

Explain Adam Smith’s Canons of Taxation
* Convenience

A
  • tax should be easy to pay
190
Q

Explain Adam Smith’s Canons of Taxation
* Certain

A
  • tax payers should be able to know exactly how much tax they should pay
191
Q

Explain Adam Smith’s Canons of Taxation
* Economy

A
  • revenue raised must be greater than the cost of implementing the tax
192
Q

Explain Adam Smith’s Canons of Taxation
* More recent - Flexible

A
  • Taxes should be changed when necessary & easy to change
193
Q

Explain Adam Smith’s Canons of Taxation
* More recent - Efficiency

A
  • Tax should achieve what is intended to achieve
  • e.g reduce the consumption of a demerit good
194
Q

Why do we have taxes
* to raise…

A

to raise money to finance public services e.g NHS

195
Q

Why do we have taxes
* to influence (planned real expenditure)

A

to influence aggregate demand

196
Q

Why do we have taxes
* to influence (sequences)

A
  • to influence spending patterns e.g away from junk food
197
Q

Why do we have taxes
* to help…

A

to help redistribute wealth & income

198
Q

Why do we have taxes
* to protect…

A

to protect jobs in his country e.g a tarriff on imports

199
Q

How is the government budget balance worked out

A
  • planned govt revenue minus planned govt spending
200
Q

What are the 2 types of taxes

A
  • Indirect or Direct
201
Q

Indirect tax is a tax on ….

A

spending

202
Q

Direct Tax is a tax on …

A

income

203
Q

Give examples of indirect taxes

A
  • VAT
  • Petrol duty
  • Tarrifs on imports
204
Q

Give examples of direct taxes

A
  • Income tax
  • Corporation tax
  • Inheritance tax
  • National Insurance
205
Q

Who collects & issues taxes

A

His Majesty’s Revenue & Customs (HMRC)

206
Q

Who decides taxes

A

The councillor of the Exchequer

207
Q

What is a progressive tax

A
  • % rate of tax rises as incomes rise (income tax)
  • the more you earn, the bigger the percentage of your income is taxed
208
Q

What is a proportional tax

A
  • % rate of tax is constant
  • e.g if income tax was 25% across all income levels
209
Q

What is meant by deficits in terms of the Govt budget

A
  • financed by hot money, such as:
  • pension funds, govt gilts
  • banks
  • investment funds
210
Q

What is a regressive tax

A
  • % rate of tax falls as incomes rise
  • e.g VAT & excise duties on cigarettes & alcohol
211
Q

What is capital spending

A
  • government spending on items from which we will benefit from in the future
  • e.g infrastructure, schools & hospitals
212
Q

What is current spending

A
  • govt spending on items wich we willl benefit in the current finanical year
  • e.g the wage of a nurse
213
Q

What can government spending be divided into

A
  • current spending
  • capital spending
214
Q

For what type of government spending is it ok to borrow money for

A
  • capital spending
215
Q

define transfer payments

A
  • government payments to individuals for which no service is given in return (e.g benefits)
216
Q

What is supply-side fiscal policy

A
  • changes in the level or structure of govt spending & taxation designed to improve the supply side of the economy
    influencing incentives to save, to supply labour, to be netrepreneurial, & to promote investment
    which are largely microeconomic in nature
217
Q

What is the multiplier effect

A
  • a final impact on the national income of an injection will be greater than the size of the original injection
218
Q

How does the multiplier effect come about

A
  • It comes about because injections of new demand for goods & services into the circular flow of income,
  • stimulate further rounds of spending
  • this is because ‘one person’s spending is another person’s income’
219
Q

The multiplier effect leads to a bigger…

A

final effecr on the level of national output & also total eployment in the labour market

220
Q

What is a positive multiplier effect

A
  • when an initial increase in an injection (or a decrease in a leakage) leads to a greater final increase in real GDP
221
Q

What is a negative multiplier effect

A
  • when an initial decrese in an injection (or an increase in a leakage) leads to a greater final decrease in real GDP
222
Q
A
223
Q

How do you calculate the multiplier effect

A

(sum of propensity to save, tax & import)

224
Q

At each stage extra money flowing around the circular flows gets….

A

smaller as money leaks out (get smaller), via savings, imports & taxes

225
Q
A
226
Q

The higher the rate of leakage, lower the…

A

coefficinet of the multiplier

227
Q

When AS is highly elastic, the multiplier effect is likely to be…

A

high

228
Q

When AS is inelastic, the multiplier effect is likely to be…AS…

A

lower, as it is harder for AS to expand to meet rising AD

229
Q

High multiplier value when…

A
  • economy has plenty of spare capacity - a negatuve output gap to meet higher AD
  • marginal propensity to import 7 tax is low
  • high propensity to consume any extra income
230
Q

Low multiplier effect…

A
  • economy is close to its capacity limits e.g during a boom phase of the economic cyle
  • high propensity to import –> extra demand leaks from circular flow
  • higher inflation, higher interest rates which lessens other componenets of AD
231
Q

What does the Laffer curve show

A
  • Shows how much tax revenue the govt receives at each level of tax
232
Q

Explaining the Laffer Curve

Up until the point ‘T’, as tax rates increase, govt tax revenues…

A

increase

233
Q

What happens to tax revenues after the point ‘T’ on the Laffer Curve

A

After point ‘T’, people do not think it is as worthwhile working, & the lack of incentive to work leads to falling tax revenue

234
Q

What is the point ‘T’ on the Laffer Curve

A

the optimum tax rate where the government can maximise their revenue

235
Q

The laffer curve shows that a rise in tax rate, doesn’t…

A

necessarily lead to a rise in tax revenues

236
Q

Laffer argued that tax rates are too high, so they provide…

A

a disincentive to work

237
Q

To encourage people to work, Laffer argued, tax rates should be….

A

reduced

238
Q

What does the accellerator process show the relationship between

A

the relationship between planed capital investment & the rate of change of national income

239
Q

The Accellerator Process

  1. Industry where demand is rising…
A

quickly

240
Q

The Accellerator Process

  1. firms may respond to demand rising quickly initially by….
A

using their existing productive capacity more intensively or running down stocks of finished products

241
Q

The Accellerator Process

  1. If firms expect high demand will be sustained in the long-run, they may…
A
  • increase spending on machinery, factories & technology to increase their supply capacity
242
Q

The Accellerator Process

  1. This causes an accellerator effect - …..
A

where a given change in demand for consumer goods & services will cause a bigger percentage change in demand for capital goods

243
Q

What is the negative accellerator process

A

when the rate of growth of demand in an industry slows, then net investment business spending often falls

244
Q

Give examples of the Negative Accellerator Process

A
  • e.g declining investment in steel plants in a recession
  • or a drop in investment demand when government subsidies for renewable energy are cut
245
Q

Explain why we don’t want high inflation

Loss of international competitiveness

A
  • rising prices in the UK makes our goods relatively less competitive compared to other countries goods
  • this may lead to a fall in demand for UK goods both from overseas & from UK consumers
  • this is bad for our Balance of payments & our unemployment figures
246
Q

Explain why we don’t want high inflation - loss of international competitiveness
EVALUATION

A
  • could lead to a devaluation of the currency so exports become cheaper again
247
Q

Explain why we don’t want high inflation

People of fixed incomes lose out

A
  • the real value of an unemployed person’s income will go down
  • so as prices rise, they will be able to afford fewer goods & services so standard of living falls

Macro-economics - Mr Cummisky (1 decks)

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