Government objectives

Question 1

Macroeconomic objectives

Answer 1

1)2% inflation plus or minus 1%
2)economic growth measured by real gdp
3)achieve full employment
4)balance of payments - current account equilibrium where outflows equal inflows
5)achieve a balanced budget where government spending equals tax revenue
6)reduce inequality
7)protect the environment

Question 2

What happens if spending on imports increases

Answer 2

The circular flow of income will contract and aggregate demand will decrease. This is because imports are a leakage from the circular flow and a negative component of AD

Question 3

Balance of payments

Answer 3

A record of transactions between one country and the rest of the world

Question 4

Two main sections of the balance of payments

Answer 4

-Current account
-capital and financial account

Question 5

Four parts of current account

Answer 5

-trade in goods
-trade in services
-investment income
-current transfers

Question 6

Exports injection or leakage?

Answer 6

Exports are an injection as they involve money from abroad entering the circular flow of income in exchange for British goods and services.

Question 7

Imports effect on current account

Answer 7

Decrease

Question 8

Exports effect on current account

Answer 8

Increase

Question 9

Investment income earned by a uk investor abroad

Answer 9

Will appear in the current account as a positive transaction because money is entering the UK. This will increase the current account

Question 10

Current transfers

Answer 10

When money is transferred abroad without getting any goods or services back in exchange. Common examples are aid which is sent abroad and workers wages which are sent back home (called remittances)

Question 11

current account surplus

Answer 11

when the current account is a positive number, which indicates that more money is entering the economy than leaving it

Question 12

current account deficit

Answer 12

when the current account is a negative number, which indicates that more money is leaving the economy than entering it

Question 13

current account equilibrium

Answer 13

total inflows equal total outflows

Question 14

capital and financial account

Answer 14

part of the balance of payments and tracks investment into, and out of, a country

Question 15

why do we want a current account equilibrium

Answer 15

-profit from foreign investment is sent overseas to investors meaning even more money is withdrawn from the UK economy
-At current account equilibrium, financial and capital account is zero meaning zero foreign investment and so less future earnings leak out of the country.

Question 16

factors affecting the current account

Answer 16

-exchange rates
-relative inflation
-costs
-quality
-income

Question 17

what happens if a countrys inflation rate is lower relative to other countries?

Answer 17

its exports will become relatively cheaper, so foreign consumers will buy more of its exports. This means that export revenue will increase, which will improve the current account

Question 18

effect of high production costs on current account

Answer 18

higher export prices will decrease export revenue, worsening the current account

Question 19

how does low quality of exports affect a country current account

Answer 19

a country which produces lower quality exports will sell less exports, which will cause export revenue to decrease. this will then decrease the current account

Question 20

how does an increase in national income affect the current account?

Answer 20

As income increases, spending on normal goods increases. If more normal goods are imported, import expenditure will increase and the current account will decrease

Question 21

inflation

Answer 21

a sustained increase in the general price level

Question 22

hyperinflation

Answer 22

occurs when inflation rises above 50%

Question 23

Demand pull inflation

Answer 23

When AD increases, pulling up the price level and leading to inflation.

Question 24

cost push inflation

Answer 24

an increase in costs causes the SRAS to shift left which leads to an increase in the price level

Question 25

deflation

Answer 25

a sustained decrease in the general price level

Question 26

deflationary spiral

Answer 26

begins with deflation. Consumers notice falling prices and delay purchases till prices fall further. This causes a reduction in AD as consumption is a component of AD. the fall in AD lowers the price level again and so consumers further delay their purchase. And the cycle repeats itself.

Question 27

Cause of an outward shift in SRAS

Answer 27

fall in costs

Question 28

Cause of an outward shift in LRAS

Answer 28

increase in the productivity or quantity of the factors of production

Question 29

benign deflation

Answer 29

when there is an outward shift in aggregate supply

Question 30

malignant deflation

Answer 30

when there is an inward shift in aggregate demand. Worries economists because of the risk of a deflationary spiral

Question 31

Causes of deflation

Answer 31

reduction in aggregate demand or an increase in aggregate supply

Question 32

causes of inflation

Answer 32

increase in aggregate demand or decrease in aggregate supply

Question 33

progressive tax

Answer 33

a tax where the proportion of your income paid in tax increases as income increases

Question 34

regressive tax

Answer 34

a tax where the proportion of your income paid in tax decreases as your income increases

Question 35

proportional tax

Answer 35

a tax where the proportion of your income paid in taxes stays the same, as your income increases

Question 36

Indirect tax

Answer 36

a tax paid by a producer when goods and services are purchased

Question 37

income tax

Answer 37

a tax which is paid directly by workers as a percentage of their income

Question 38

corporation tax

Answer 38

a tax which is paid by firms as a percentage of their profits

Question 39

direct tax

Answer 39

a tax paid directly to the government

Question 40

specific tax

Answer 40

a fixed amount of tax paid on each unit sold

Question 41

Ad valorem tax

Answer 41

charged as a percentage of the price of the good

Question 42

budget deficit

Answer 42

when government spending is greater than tax revenue

Question 43

budget surplus

Answer 43

when tax revenue is greater than government spending

Question 44

balanced budget

Answer 44

tax revenue=government spending

Question 45

government bond

Answer 45

a method that the government uses to borrow money They sell a bond to an investor and pay it back at a later date with interest

Question 46

national debt

Answer 46

total debt built up by government borrowing over time

Question 47

inequality

Answer 47

the difference in living standards between the rich and poor