Exam Flashcards
(48 cards)
Explain the meaning of GDP and explain what is measures. Why is this useful to economists? What extra information is provided by ‘GDP per capita and why is this important?
GDP is the monetary value of all finished goods and services made within a country during a specific period.
GDP is a global measure for gauging the prosperity of nations and is used by economists to analyze the prosperity of a country based on it’s economics growth.
GDP per capita ls the break down of a country’s economic output per person and is calculated by the GDP divided by the nations population. Small rich countries have the highest GDP per capia
Define the term credit crunch.
And explain how the credit crunch resulting from the 2007 financial crisis led to a decline in investment and consumption spending in the uk economy.
A credit crunch is the decline in lending activity due to a sudden shortage of funds.
The lack of funds meant the UK Market declined less people had. Money invest so the whole market felt the hit less to invest means less to save and spend.
Describe krugman’s basic baby Sitting analogy laying it out the ananologys with the real world economy
Krugman suggests that We simplify an economy to snow the effects of economic struggles. By doing this he suggest that we look at it as a babysitting Scheme within a naighbor hood (this being the whole economy in the example) he suggests that before an economic problem people would use these baby sitting vouchers like money they would spend them as needed. When strain within the economy begins to appear People can start to save these vouchers and not use them this lead to fewer vouchers being available the. people saving them are like the banks in real life they where afraid of going bankrupt so saved the tokens and only used them on people who could really be trusted. This left fewer available in the market and left people without any vouchers at all,
Give reasons why recessions are a serious social and political problem?
Social: unemployment, this is directly linked to a risen crime, poverty, and a decline in peoples mental and physical health.
Political: pressure on political structure as a result of perceived economic failure
What is quantitative easing.?
It is where the central bank purchases longer term securities from the open market in order to increase the money supply and encourage lending and investment
What is the concept of paradox thrift?
It’s an economic theory that poses that personal savings are a net drag on the economy during a recession
What is a bubble in relation to asset prices?
And how are bubbles maintained above the intrincict Value of the asset?
Asset bubbles exist when Market prices of an asset rises at a rapid rate without the underlying fundamentals such as demand.
In an asset price bubble, new money entering the market keeps prices going up well beyond the fundamental value of the underlying assets implied by simple supply and demand.
Briefly discuss the causes of bubbles?
Often bubbles are caused by investment within innovative technology or interest rates that are historically low. These then gain momentum and this is how bubble forms.
Using un example explain the concept of moral hazard?
A moral hazard Is when one party engages in a risky manor or fails to act in good faith because they know the other party bears the economic consequences of there behaviour. An example is huge corporateations in America where on the verge of collapse after years of accounting blunders andthese company’s employed thousands of workers and contributed billions into the economy. While the companies blamed the poor state of the economy for these finachal troubles.it was there own fault. Ultimately the us government deemed these business to big to fail and bailed them out costing taxpayers hundreds of bullions of dollars.
Explain how a drop of consumption and investment May result in a drop of GDP.?
When people stop investing and spending the GDP of a country is likely to decline due to the decline in money movement. If people are not investing in goods money is not being spent in the economy so the GDP is unable to grow wich means in most cases it declines.
What is a liquidity trap?
A liquidity trap is a contradictory economic situation in wich interest rates are very low and saving rates very high rendering the monetary policy ineffective.
Explain problems posed by deflation in the economy?
Under some conditions it can cause a contraction in the market and in some cases can lead to a temporary financial crisis and a period of liquidation of speculative investment known as dept deflation.
Define the term exchange rate when referring to currencies?
An exchange rate is the rate that one currency can be sold for another depending on how much the exchange rate is will change now much you get in return
Explain what would happen to a countries imports and exports if the exchange rate decreases?
A lower exchange rate tends to make imports and exports more expensive
describe what happens in a bank Run? And what’s the outcome if not intervened?
A bank run is when a large number of people withdraw there deposits simulatiosly due to concerns with the bank
If not intervened in extreme cases the banks funds are not enough to cover this
Explain what causes bank runs and how are they contagious?
Bank runs are caused by fears of the banks solvency and large numbers of people withdrawing money at the same time, bank runs are contagious as people fear the money is no longer safe in the banks so they see others doing it so out of fear they follow
How can a government control a bank Run?
The movement put into place some reserves to help stop bank runs these include:
- Banks may choose to shut down to try and slow down the effects
- Banks can borrow from others to stop bankruptcy if they don’t have enough in bank reserves
- Insured deposits by the government
Define current account surplus?
Current account surplus is a positive current account balance usually indicating the nation is a lender to the rest of the world.
Define capital account surplus?
Capital account surplus is when the foreign purchases of domestic purchases out weighs the domestic purchases of foreign goods.
Briefly explain “krugman’s” feedback loop of financial contagion?
The financial loop is:
Loss of confidence
Plunging currency, rising interest rates & slumping economy
Financial problems for banks, companies, & households
And this loops.
What are financial assets?
Financial assets are things like stocks and shares these mean they are nothing more than an agreement on paper rather than something physical. Like property wich is a physical asset rather than fmanchal!
Explain briefly what collatarlised dept obligations?
Collater1ised dept collection Is the use of physical assets as a back up if payments can’t be made the bank would take these physical assets when the franchal run out!
What is credit rating agency?
They are institutions that give credit ratings for companies that issue financial assets as well as the assets themselves
In what ways does auction related security behave like a bank?
The way they work means people/ investors decide they need money this is lent to them over a long period of time like a bank would rather than a short term loan
