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IGCSE Edexcel Economics > Government and the Economy > Flashcards

Government and the Economy Flashcards

1
Q

What are Macroeconomic Objectives?

A
  • Economic Growth
  • Reducing unemployment
  • Protect the Environment
  • Balance of Payments
  • Redistribution of Income
  • Controlling Inflation
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2
Q

What is economic growth?

A

increase in the level output by a nation.

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3
Q

What is national income?

A

value of income, output or expenditure over a period of time.

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4
Q

What is the measure for economic growth?

A

Gross domestic product (GDP)

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5
Q

What is GDP?

A

Gross domestic product is the market value of all final goods and services produced in a period (usually yearly).

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6
Q

What are the limitations of using GDP as a measure of growth?

A
  • Does not account for inflation
  • Population Growth: GDP difficult to calculate
  • Statistical errors
  • The value of home produced goods.
  • The hidden economy
  • Increase in GDP may not increase living standards.
  • Does not take into account external costs
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7
Q

What is the”Boom” and what is it’s impact on economic growth, employment and inflation?

A

The peak of the economic cycle is called the boom.
* GDP is growing fast because the economy is performing well.
* Existing firms are expanding and new firms are entering the market. Demands rise and jobs will be created.
* Inflation also happens as prices rise.

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8
Q

What is “downturn”and what is it’s impact on economic growth, employment and inflation?

A

period in the economy cycle where GPD grows but more slowly.
* The economy is still growing but at a slower rate.
* Demand for goods and services will fall, unemployment will start to rise.
* Profits will fall and firms will stop expanding, prices will rise more slowly.

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9
Q

What is Reccession and what is it’s impact on economic growth, employment and inflation?

A

Period of temporary economic decline during which trade and industrial activity are reduced. It is identified by a fall in GDP in 2 successive quarters.

  • GDP falls and economic decline occurs.
  • Demand for goods and services decreases, leads to unemployment.
  • The prices of some things may fall.
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10
Q

What is Recovery and its impact on economic growth, employment and inflation?

A

When GDP starts to rise again.
* Recovery or upswing in the economy.
* Unemployment begins to fall
* Prices start to rise again.

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11
Q

What is different impacts of economic growth on?

A
  • Employment
  • Standard of Living
  • Poverty
  • Productive Potentital
  • Inflation
  • The Environment
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12
Q

What is the impact of economic growth on Employment?

A

Economic growth is the result of businesses generating more output. As businesses grow, they need more workers. Consequently economic growth raises employment levels.

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13
Q

What is the impact of economic growth on Standards of Living?

A

Increases in GDP mean that on average people have more income. With more disposable income, people can buy better quality food, improved housing and more leisure goods.

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14
Q

What is the impact of economic growth on poverty?

A

Rapid economic growth may help to reduce poverty as the expansion of businesses creates jobs. Some of these jobs may be taken up by the poor.
A growing economy means that the government is able to collect more tax revenue.

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15
Q

What is the impact of economic growth on productive potential?

A

Economic growth can raise the productive potentital of a country. This means a country can produce more goods and services. This can be shown using a PPC.

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16
Q

What is the impact of economic growth on Inflation?

A

If economic growth is too fast, demand rises too fast, causing prices and imports to rise. This can cause demand pull inflation, which is bad for the economy.

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17
Q

What is the impact of economic growth on the environment?

A

As economies grow, more cars are purchased and more flights are taken. Economic growth also uses up non-renewable resources such as oil, gas, gold and iron ore.

Economic growth means that future generations will have fewer resources. This is referred to as unsustainable growth.

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18
Q

Inflation

What is inflation?

A

It is the sustained rise in the general price level of goods and services in an economy over a period of time.

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19
Q

What is deflation?

A

A sustained fall in the general price levels of goods and services in an economy over a period of time.

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20
Q

What is Aggregate Demand?

A

It is the total demand in the economy including consumption, investment, government expenditure and exports minus imports.

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21
Q

What is consumer price index (CPI)?

A

It is the measure of the general price level. Excludes housing costs.

Governments usually measure and monitor the rate of inflation. It is measured using CPI.

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22
Q

What is retail price index (RPI)?

A

It is the measure of the general price level which includes house prices and council tax.

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23
Q

What are the 2 types of inflation?

A
  • Demand Pull-Inflation
  • Cost-Push Inflation
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24
Q

What is Demand-Pull Inflation?

A

Inflation caused by too much demand in the economy relative to supply.

Demand-pull inflation occurs when aggregate demand in an economy exceeds aggregate supply.

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25
Q

What is Cost-Push Inflation?

A

Inflation caused by rising businesses costs.

When cost of production rises, this rise in costs is then passed onto consumers in the form of higher prices.

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26
Q

What are the causes of demand-pull inflation?

A
  • Rising consumer spending encouraged by tax cuts or low interest rates.
  • Sharp increases in government spending.
  • Rising demand for resources by firms.
  • Booming demand for exports.
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27
Q

What are the causes of cost-push inflation?

A
  • Increase in prices of raw materials.
  • Higher wages
  • Indirect Taxes
  • Fall in productivity
  • Supply shocks (natural disasters, political instability)
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28
Q

What are interest rates?

A

It is the price paid for borrowing money, expressed as a percentage of the amount borrowed per year. It is also the reward for saving.

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29
Q

What are the different impacts of inflation?

A
  • Impact on Prices
  • Impact on Wages
  • Impact on Exports
  • Imapct on Unemployment
  • Impact on Menu Costs
  • Impact on Shoe Leather Costs
  • Impacts Uncertainty
  • Impact on Business and Consumer Confidence
  • Impact on Investement
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30
Q

Explain the impact of inflation on Prices:

A
  • One of the main problems of inflation is that prices are rising.
  • Inflation reduces the purchasing power of money.
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31
Q

Explain the impact of inflation on Wages:

A
  • When inflation occurs, workers need to raise their wages to compensate for the loss in purchasing power.
  • Firms may raise their prices for goods if wages for workers rise.
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32
Q

Explain the impact of inflation on exports:

A

Higher prices for goods and services will lead to a fall in demand for the goods and services. This will lead to a fall in exports.

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33
Q

Explain the impact of inflation on unemployment:

A

High levels of inflation could indicate rising aggregate demand. This will reduce unemployment as firms will look to employ more workers to meet the excess demand.

High levels of inflation could indicate rising cost push inflation. This will increase unemployment as firms may reduce number of workers to reduce wage costs.

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34
Q

What are menu costs?

A

costs to firms of having to make repeated price changes.

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35
Q

Explain the impact of inflation on menu costs:

A

Menu costs will change as firms constantly have to re-price goods and services. This costs time and money.

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36
Q

What are shoe leather costs?

A

costs to firms and consumers of searching for new suppliers when inflation is high.

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37
Q

Explain the impact of inflation on Shoe Leather Costs:

A

Shoe Leather Costs increase. As consumers shop around to try and find cheaper prices. Moving around is a cost as it takes time.

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38
Q

Explain the impact of inflation on uncertainty for consumers and businesses:

A

Uncertainty over future prices can cause a fall in both consumer and business confidence.

Firms may be unaware of future prices and predicting ahead becomes very difficult. Uncertainty can affect a firm and consumer’s decisions on long-term contracts.

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39
Q

Explain the impact of inflation on business and consumer confidence:

A

Consumers may start to save more money and borrow less money. This will reduce demand which is not good for employment.

Businesses may postpone growth plans or reduce spending on product development. They will take less risks. This will cause a fall in economic growth rates.

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40
Q

Explain the impact of inflation on investement:

A

Inflation often results in a decline in business investement.
It becomes difficult to budget for the future.

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41
Q

What is unemployment?

A

Individuals that are without work and are actively seeking work but are unable to find work.

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42
Q

What is the rate of unemployment and how is it measured?

A

the number of people unemployed as a % of the labour force.

Unemployed/Labour Force x 100= rate of unemployment

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43
Q

What is the measurement of unemployment using ILO measure?

A

One method to measure unemployment is to carry out a survey. The survey used in th EU is called the Labour Force Survey and is carried out every month.

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44
Q

What are the types of Unemployment?

A
  • Cyclical
  • Structural
  • Seasonal
  • Voluntary
  • Frictional
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45
Q

Explain cyclical unemployment:

A

This is caused by fluctutations in the economic cycle. During economic downturn, demand for goods and services falls, leading to businesses laying off workers.

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46
Q

Explain structural unemployment:

A

This occurs when there is a mismatch between the skills of the workforce and the demands of the economy. It can be caused by technological advancements, changes in consumer preferences, or the decline of certain industries.

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47
Q

Explain seasonal unemployment:

A

This occurs when workers are unemployed at different times of the year.
This tends to happen in seasonal industries such as leisure, tourism and farming.

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48
Q

Explain voluntary unemployment:

A

This is a situation where workers chosoe not to work at the current equilibrium wage.
Workers may elect not to participate in the labour market.
Several reasons for this may include:
* excessively generous welfare benefits
* high rates of income tax
* workers seeking better employment conditions

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49
Q

Explain Frictional Unemployment:

A

Unemployment that occurs as workers move between jobs, mainly through career moves or geographical changes. Typically short term.

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50
Q

What are the different impacts of unemployment on?

A
  • output
  • use of scarce resources
  • poverty
  • government spending on benefits
  • tax revenue
  • consumer confidence
  • business confidence
  • society
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51
Q

Explain the impact of unemployment on output:

A

Lost output. If there is unemployment, this represents a significant wastage of economic resources.

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52
Q

Explain the impact of unemployment on use of scarce resources:

A

There will be a fall in the use of scarce resources as there is less requirement due to the fall in demand in the economy.

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53
Q

Explain the impact of unemployment on poverty:

A

Increased poverty due to lower living standards as the unemployed will have lower incomes.

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54
Q

Explain the impact of unemployment on government spending on benefits:

A

Increased government spending unemployment benefits. This extra expenditure will incur an opportunity cost. The moeny could be better spent on education or healthcare for example.

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55
Q

Explain the impact of unemployment on tax revenue:

A

Lost tax revenue through lower income tax receipts. There is also likely to be lower consumption of goods and services so VAT receipts will also fall.

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56
Q

Explain the impact of unemployment on consumer confidence:

A

Consumer confidence will fall as people lose their jobs and are less likely to play a part in the economy.

Those who remain employed may fear for their job security and also spend less money on goods and services which can fuel more unemployment.

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57
Q

Explain the impact of unemployment on Business confidence:

A

Unemployment means demand for goods and services, especially non-essential goods and services will fall. This will decrease business confidence.

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58
Q

Explain the impact of unemployment on society:

A

Reduced morale and productivity of remaining workforce who may be concerned over future potentital job losses (job security).

Uemployment can also enhance the likelihood of illnesses such as depression. Individuals may turn to a life of crime to meet their material needs.

59
Q

What is balance of payments?

A

A record of all transactions relating to international trade.

60
Q

What is the current account of the balance of payments?

A

It is the part of the balance of payments where all exports and imports are recorded.

61
Q

What is current acount deficit?

A

when value of imports exceeds the value of exports.

62
Q

What is current account surplus?

A

When value of exports exceeds value of imports.

63
Q

What is current balance?

A

Difference between total exports and total imports (visible and invisible).

64
Q

What is visible trade?

A

It is to do with the buying and selling of physical goods.

65
Q

What is invisible trade?

A

Involes the exchange of services.

66
Q

What is the relationship between the current account and exchange rate?

A
  • If a country’s exchange rate gets stronger, exports become more expensive and imports become cheaper. This will have a negative impact on the current account.
67
Q

What are the different reasons for deficits and surpluses?

A
  • Quality of Domestic Goods- More exports helps to improve a current balance.
  • Quality of Foreign Goods- Imports can rise which will have a negative impact on the current account balance.
  • Price of Domestic Goods- If domestic goods are expensive, exports will fall and negatively impact current balance.
  • Price of Foreign Goods-If foreign goods are cheaper, imports may rise and this will have a negative impact on the current balance.
  • Exchange Rates Between Countries-Lower exchange rate= higher demand for exports= positive effect on current account.
68
Q

What are the impacts of a current account deficit?

A
  • Leakages from the economy-persistent current account deficit means country is becoming increasingly dependant on imports. Money is leaving the country. Output and employment are under threat.
  • Inflation-Rising import prices will result in higher domestic inflation levels. Greater the reliance on imports= greater the threat of inflation when import prices rise.
  • Low Demand for Exports-Quality or price of exports may be too high. Country may suffer progressive economic decline and rise in unemployment.
  • Funding the Deficit-If a country has high continuing current account deficit, it will need foreign currency to pay for the rising quantity of imports being purchased. It may need to borrow money if its foreign reserves are running low. Borrowing can impact long term economy.
69
Q

What are some examples of business activity that damages the environment?

A
  • Mining
  • Electricity/Power Generation
  • Chemical Processing
  • Agriculture
  • Construction
70
Q

What are the ways businesses damage the environment?

A
  • Visual pollution
  • Noise pollution
  • Air Pollution
    *Burning of Fossil Fuels
    *Emissions from other factories
    *Agricultural activties
  • Water Pollution
71
Q

What is government intervention to protect the environment?

A
  • Taxation
  • Subsidy
  • Regulation
  • Fines
  • Pollution permits
  • Government provision of parks
72
Q

How does taxation help to protect the environment?

A

Tax can help to raise the prices of energy sources that use fossil fuels. These will then be more expensive than clean energy.

As a result CO2 emissions will be reduced, new jobs will be created in the production of clean energy and tax revenue will be boosted.

73
Q

How do subsidies help to protect the environment?

A

The government can offer grants, tax allowances and other subsidies to firms if it reduces activities that damage the environment.

For example a firm might recieve a subsidy for buildinga plastics recycling plant.

74
Q

How does regulation help to protect the environment?

A

By banning certain projects or infrastructure that can cause damage to the environment.

Many governments employ specialist agencies to help monitor and take action against business breaking environmental laws.

75
Q

How do Fines help to protect the environment?

A

This is because fines reduce a business’s profits. Fines therefore act as a deterrant to companies from damaging the environment.

76
Q

How do Pollution Permits help to protect the environment?

A

A total cap is set on the amount of pollution allowed to be emitted. This establishes a level of desired environmental protection.

Furthermore pollution permits act as an incentive for businesses to reduce their emissions to avoid buying permits at a price.

77
Q

How does park provision help protect the environment?

A

Business development and other commerical ventures are completely illegal. This prevents CO2 emissions and pollution in the area.

There may also be carbon absorption in the area thanks to trees and plants which can have a positive impact on biodiversity and the environment.

78
Q

What is income inequality?

A

Income inequality refers to the unequal distribution of income or wealth within a society. It measures the extent to which income is concentrated among a small portion of the population compared to the rest.

79
Q

What is Absolute poverty?

A

Absolute poverty refers to a deprivation of basic necessities needed for survival and a healthy life. These necessities typically include food, water, shelter, clothing, and healthcare.

80
Q

What is relative poverty?

A

Relative poverty refers to the condition of having fewer resources than others in the same society. It focuses on the comparison of an individual’s or household’s income or resources to the average or median income level within the society.

81
Q

What are the reasons to reduce poverty and inequality?

A
  • Meet basic needs
  • raise standards of living
  • ethical reasons
82
Q

What is the government intervention to reduce inequality and poverty?

A
  • progressive taxation
  • redistribution through government benefits
  • investment in education and healthcare
83
Q

What is progressive taxation?

A

where the proportion of income paid in tax rises as the income of the taxpayer rises.

84
Q

What is regressive taxation?

A

tax system that places the burden of tax more heavily on the poor.

85
Q

What is fiscal policy?

A

Government policy to influence the economy through its level of spending and taxation.

86
Q

What is the main source of government revenue?

A

Main source of government revenue is taxation.

87
Q

What are the 3 types of taxes and what key examples are there for each?

A

Direct Taxes, Indirect Taxes and Environmental.
* Direct Taxes:
Income Tax, Corporation Tax, Capital Gains Tax

  • Indirect Taxes:
    Sales Tax(VAT), Duties, Council Tax, Custom duties
  • Environmental Tax:
    Landfill tax, Climate Change tax
88
Q

What is government expenditure?

A

Refers to the total amount of money the government spends on various goods and services to fullfil its objectives.

89
Q

What are the main areas of focus for government expenditure?

A
  • Social Protection:
    State benefits, pensions, child benefits, jobseekers allowance.
  • Health Care:
    Salaries of nurses, doctors and admin stuff; drugs and medicines.
  • Education:
    Teacher salaries, equipment for schools and student grants
  • Defence:
    Maintenance of armed forces
  • Public safety:
    Police foce, fire services, prison service, justice system
90
Q

What is national debt?

A

total amount of money owed by a country

91
Q

What is a fiscal deficit?

A

It is the amount by which government spending exceeds government revenue.

92
Q

What is fiscal surplus?

A

It is the amount by which government revenue exeeds government spending.

93
Q

What is the impact of a fiscal deficit?

A

When a government plans to overspend, it will have to borrow money to fund the deficit. Consequently if deficit builds up over a period of time, the national debt gets bigger and bigger.

This means the government has to spend more of its revenue on paying off the debt.

94
Q

What is the impact of a fiscal surplus?

A

The surplus could be used in a number of ways:
* spend on future provision of public services
* lower taxes in the economy
However most governments would use to pay off some national debt. This would reduce future interest payments and strenghthen a nation’s finances.

95
Q

What is expansionary fiscal policy?

A

fiscal measures designed to stimulate demand in the economy.

96
Q

What is contractionary fiscal policy?

A

Fiscal measures designed to reduce demand in the economy.

97
Q

What macroeconomic objectives are impacted by the fiscal policy?

A
  • Inflation
  • Economic Growth
  • Unemployment
  • Current Account Deficit
  • The environment
98
Q

What is the impact of the fiscal policy on inflation?

A

Contractionary fiscal policy can be used to reduce inflation. The government could cut its own spending or raise taxation, this will reduce disposable income, which will reduce demand, therefore relieving inflationary pressure.

99
Q

What is the impact of the fiscal policy on economic growth?

A

expansionary fiscal policy can be used to help stimulate economic growth. This is because demand from firms and households will rise as they have more disposable income.

economic growth may also occur from extra government expenditure on capital projects such as shcools, transport links and airports. Money spent on investment is the key to economic growth.

100
Q

What is the impact of fiscal policy on unemployment?

A

Expansionary fiscal policy can help reduce unemployment. Increases in gov expenditure and tax cuts can help stimulate demand for goods and services which will create jobs.

101
Q

What is the impact of fiscal policy on current account deficit?

A

Contractionary fiscal policy can be used to lower aggregate demand which will reduce the demand for imports.

102
Q

What is the impact of fiscal policy on the environment?

A

More recently, governments have used fiscal policy to tackle environmental problems. Taxes such as landfill taxes, climate change levy and the aggregates levy have been used to help reduce environmental damage.

103
Q

What is monetary policy?

A

It is the use of interest rates and the money supply to control aggregate demand in the economy.

104
Q

What is money supply?

A

Amount of money circulating in the economy.

105
Q

What are interest rates?

A

They are the cost of borrowing money and reward for saving money expressed as percentage of the inital amount loaned or deposited.

106
Q

What is the base rate?

A

Rate of interest set by the government or regional central banks for lending to other banks, which in turn influences all other rates in the economy.

107
Q

What is mortgage?

A

legal agreement where you borrow money from a financial institution in order to buy land or a house and you pay back the money over a period of years.

108
Q

What is the role of central banks in setting interest rates?

A

Central banks play an important role in the economy by:
* implementing a government’s monetary policy and regulating the banking system
* acting as a lender of last resort to commercial banks
* controlling inflation and stabilising a nartion’s currency
* setting interest rates

109
Q

What macroeconomic objectives are affected by a change in interest rates?

A
  • Inflation
  • Unemployment
  • Economic Growth
  • The Current Balance
110
Q

How is inflation affected by a change in interest rates?

A

When interest rates are higher, borrowing is likely to fall and the money supply grows less quickly. This will help to reduce aggregate demand in the economy and limit price increases.

111
Q

How is unemployment affected by a change in interest rates?

A

A government might lower interest rates to reduce unemployment. This is because borrowing would increase which would increase the spending and aggregate demand for goods and services which will result in more goods and services being produced. Firms would have to recruit more staff.

112
Q

How is economic growth affected by a change in interest rates?

A

Lowering interest rates can help stimulate economic growth. This is because ag demand increases which will result in more goods and services being produced.

113
Q

How is the current balance affected by a change in interest rates?

A

to reduce a deficit, a government might decide to tighten monetary policy. This would lower ag demand and reduce spending on imports. However if interest rates are raised the exchange rate might also increase. This would make exports more expensive, imports cheaper and worsen the current balance.

114
Q

What does the overall effect on the current balance of higher interest rates depend on?

A
  • income elasticity of imports:
    if demand for imports were income elastic, higher interest rates would reduce demand for them. This would improve the current balance.
  • the strength of the link between interest rates and exchange rates:
    if the link is strong, higher interest rates will increase exchange rate. This will make imports cheaper and exports expensive, worsening the current balance.
  • PED for imports and exports:
    If they are both price elastic and the exchange rate does rise when interest rates rise, imports will be cheaper and exports will be expensive. This would worsen the current balance.
115
Q

What is the effect of interest rates on consumers?

A
  • When interest rates rise, consumer spending increases therefore aggregate demand increases. Borrowing becomes more attractive and saving is not.
  • When interest rates rise, consumer spending decreases and aggregate demand falls. Borrowing becomes less attractive and saving is more attractive.
116
Q

What is the effect of interest rates on firms?

A
  • Higher interest rates will raise costs, lower profits, reduce business confidence and make entrepreneurs more cautious. As a result, investment in the economy is likely to fall.
  • Lower interest rates will also lower interest payments on current borrowings for businesses. This will help to boost their profits because costs will be lower. There will also be increased business confidence and stimulate more investement.
117
Q

What is quantitative easing?

A

Buying of financial assets, such as government bonds from commercial banks. which results in a flow of money from the central bank to commercial banks.

118
Q

What is the use of asset purchasing by central banks?

A

This results in a flow of money from the central bank to commercial banks. This results extra cash can be used by commercial banks as a basis for making new loans to consumers and businesses. When more loans are granted, aggregate demand will increase.

119
Q

What is aggregate supply?

A

total amount of goods and services produced in a country at a given price level in a given time period.

120
Q

What are supply side policies?

A

government measures designed to increase aggregate supply in the economy.

121
Q

What is the impact of supply side policies on productivity?

A
  • Supply side policy improves the quality and speed at which businesses can operate.
  • This leads to an increase in output per factor input as land, labour and capital are used more efficiently and effectively.
  • Therefore productivity increases.
  • By reducing production costs supply-side policy will also lead to an increase in total output as it becomes cheaper to produce.
  • This will lead to rightward shift of the supply curve, also reducing price.
122
Q

What are some types of supply side policies?

A
  • Privatization
  • Deregulation
  • Education and Training
  • Infrastructure Spending
  • Lower Business Taxes to stimulate investment
  • Lower income taxes to encourage working
123
Q

What is the impact of the supply side policy ‘privatization’ on macroeconomic objectives?

A

Transferring activities to the private sector brings new owners with an incentive to be efficient and cut costs where this replaces inefficient public sector service.

124
Q

What is the impact of the supply side policy ‘Deregulation’ on macroeconomic objectives

A

Deregulation is the opening up of markets to new competition through the removal of rules and regulations that create barriers to entry. This might lead to:
* The creation of competetive markets leading to greater efficiency.
~Firms strive to reduce costs in order to compete effectively.
~Firms strive to meet consumer demand by reducing price and providing a greater range of products.
* Less government intervention allows firms to produce to the needs of the market.

125
Q

What is the impact of the supply side policy ‘Education and Training’ on macroeconomic objectives?

A

If the quality of human capital can be improved, the workforce would be more productive. Furthermore investing in education improves the quality of human capital which makes them more employable.

126
Q

What is the impact of supply side policies ‘to boost regions with high unemployment’ on macroeconomic objectives?

A

Introducing policies to reform labour markets can help reduce unemployment in an area. By controlling wages, it will be easier for firms to hire and fire people.

127
Q

What impact the supply side policy ‘Infrastructure spending’ have on macroeconomic objectives?

A

Infrastructure spending can increase the productive potential of the economy by improving the quality of infrastructure. This can be done by investing in transport and communications systems, which will improve the distribution of goods and services. Additionally, investment in education and healthcare will improve the quality of human capital, which will also help private sector firms because workers will be better educated and healthier.

128
Q

What impact does the supply side policy ‘lower business taxes to stimulate investment’ have on macroeconomic objectives?

A

If businesses have more money after taxes, they will be more likely to invest in new machinery, buildings, and research and development. This investment will lead to increased employment, increased productivity and economic growth.

129
Q

What impact does the supply side policy ‘lower income taxes to encourage working’ have on macroeconomic objectives?

A

If people are taxed less they will choose to work more hours, take fewer holidays and retire later. This would increase the total amount of work done in the economy and so increase the economy’s output.

130
Q

What are examples of governmental controls?

A
  • Regulation
  • Legislation
  • Fines
  • Pollution Permits
131
Q

What are the advantages of Regulation?

A
  • Corrects Market Failures: Regulation can address situations where the market alone doesn’t provide optimal outcomes. For instance, regulations requiring safety standards ensure consumer protection.
  • Promotes Social Objectives: Regulations can enforce social goals that may not be reflected in market prices. Minimum wage laws aim to ensure a basic standard of living.
132
Q

What are the advantages of Legislation?

A
  • Provides Clear Framework: Legislation establishes clear rules for businesses and consumers, fostering a predictable and stable economic environment.
  • Protects Consumers and Workers: Laws can protect vulnerable groups from exploitation. Food safety regulations aim to prevent illnesses.
133
Q

What are the advantages of fines?

A
  • Deters Unwanted Behavior: Fines discourage businesses or individuals from engaging in harmful activities. Fines for pollution encourage cleaner production methods.
  • Raises Revenue: Fines can generate income for the government, potentially funding further economic interventions.
134
Q

What are the advantages of pollution permits?

A
  • Reduces Pollution Levels: By limiting the total amount of pollution allowed, permits guarantee a decrease in emissions.
  • Market-Based Solution: Companies can choose to invest in cleaner technologies or buy additional permits, encouraging innovation.
  • Revenue Generation: The sale of permits can provide government revenue for environmental protection initiatives.
135
Q

What does offset mean?

A

if something, such as a cost or sum of money, offsets another cost it has the effect of reducing or balancing it, so that the situation stays the same.

136
Q

What is the impact of policies to reduce inflation and its trade-off with unemployment?

A

Inflation can be reduced using monetary and fiscal policies. Raising interest rates or raising taxation can decrease aggregate demand in an economy.

However this would lead to a increase in unemployment as there is lower demand for goods and services.

137
Q

What is the impact of policies to reduce unemployment and its trade-off with inflation?

A

In order to increase employment, a government can use expansionary fiscal policy and monetary policy. Taxation can be decreased and interest rates can be lowered to stimulate spending. This will lead to increased demand for goods and services which will encourage employment.

However the increase in demand for goods and services will lead to demand pull inflation.

138
Q

What is the impact of policies to increase economic growth and its trade-off with inflation?

A

Governments can use expansionary fiscal policy and loosen monetary policy. By increasing gov spending, reducing taxes, reducing interest rates; AD would increase which would stimulate the economy.

However an increase in AD would result in demand pull inflation.

139
Q

What is the impact of policies to reduce inflation and its trade-off with economic growth?

A

Policies to reduce inflation include contractionary fiscal policy and tightened monetary policy. Increasing interest rates and taxation can decrease aggregate demand in an economy which would drive prices for goods and services down. (Disinflation)

However economic growth would also slow or decline as there is lower AD for goods and services.

140
Q

What is the impact of policies to increase economic growth and its trade-off with environmental protection?

A

Increasing economic growth is most commonly done by increasing AD in an economy. An increase in AD is done by reducing taxation, reducing interest rates.

However an increase in AD demand will lead to higher production of goods and services which means more non-renewable resources being used up. This can lead to pollution or environmental problems.

141
Q

What is the impact of policies to increase environmental protection and its trade-off with economic growth?

A

Increasing environmental protection will mean stricter regulation, fines, pollution permits and legislation. This will deter activity that harms the environment.

However this will result in restrictions on businesses to produce freely which will impact economic growth.

142
Q

What is the impact of policies to reduce inflation and its trade-off with the current account on balance of payments?

A

Governments can use tightened monetary policies and contractionary fiscal policy to reduce inflation. Raising interest rates and increasing taxation.

However increasing interest rates can increase exchange rates which will decrease demand for exports and have a negative impact on the current account on balance of payments. Contractionay fiscal policy will not have an impact on exchange rates.

143
Q

What is tightened/contractionary monetary policy?

A

a monetary policy that raises interest rates and reduces borrowing in the economy is a contractionary monetary policy or tight monetary policy.

144
Q

What is loosened/expansionary monetary policy?

A

A monetary policy that lowers interest rates and stimulates borrowing is an expansionary monetary policy or loose monetary policy.

IGCSE Edexcel Economics (4 decks)

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