Macroeconomics Semester 1 Flashcards

Question

What is a market?

Answer 1

This is the mean of transferring goods or services from one agent to another. All transfers are to outside of the household, voluntary for mutual benefit and directly reciprocated (unlike a gift). Markets will be monitored by institutions, who will set laws and ‘rules’ to regulate the social interaction among people.

Answer 2

Private property. This means that the person possessing it has the right to exclude others from it, benefit from it and then also exchange it with others.

Answer 3

Capitalism is an economic system characterised by the prominence of markets and privately owned firms. These will be regulated by a government, and different capitalist markets will be different depending on the amount of government intervention into the free market.

Answer 4

We assume rationality in economic models because this means every individual aims to maximise utility/satisfaction based on the info available to them. Therefore in economic models: -People don’t do random stuff -People take opportunities when they arise -People face issues or scarcity (finite resources) -No ‘Dues ex Machina’ (a trend will continue to follow its path, and there will not be a sudden diversion from the path)

Answer 5

This means that the outcome of the model is self perpetuating. The model will therefore not change unless an external force is introduced which alters the situation in the model. However, assumptions matter for these models to reach equilibrium, and it is at this point economists tend to disagree.

Answer 6

An absolute advantage will occur when one country/firm can produce a good more efficiently than another.

Answer 7

This is when an agent is able to produce a good **relatively** more productively than another country, even if they don’t have an absolute advantage on that good.

Answer 8

David Ricardo said that if a country has comparative advantage, it should always aim to produce and trade with another country, as even if the country doesn’t have an absolute advantage, specialisation will still cause the quantity of output to increase, therefore benefiting both countries.

Answer 9

No, there will likely be a range. Any combination of goods which at least matches the previous quantities of both goods for both countries is a possible realistic equilibrium outcome of the trades which occur.

Answer 10

An isocost line will represent and graph showing the cost of two production factor inputs (e.g coal and workers) for different technologies, and as a result this will show the constant different combinations of the two goods which will cost the same. If wages become more expensive, the the isocost lines will change to represent the new number of workers (and output) which will be available, and by putting different isocost lines on the graph for different technologies, it will show which technology is most efficient for given raw prices/wages.

Answer 11

The first adopter of new tech is called an entrepreneur, and they will benefit from more profits (known as Schumpeteriam, or innovation, rent) until their competitors copy and adopt the new technology, which can be slowed through patents.

Answer 12

This is the process by which old technologies and the firms that adapt them are swept away by the new, as they cannot compete in the market. However, it is this destruction that causes economic growth.

Answer 13

In the 17th century, British wages for coal started to rise compared to the likes of France, so this meant that an incentive came around for British workers to innovate technology, and reduce the need to hire workers. It was this incentive that prompted the revolution. The same occurred in the textiles industry, causing the ‘spinning Jenny’ which massively improved textile’s efficiency, and was later implemented in a factory size, massively reducing reliance on human labour.

Answer 14

The Malthusian trap is when a small population growth would see farmers income rise, following which the farming families would have more children, so more could work on the farm. However, as the area of land available remains the same size, there would be diminishing returns to labour, and as a result families would now not be able to afford to feed the growing family, because wages would fall. This would then cause the trap, as populations would shrink again and the process would start again.

Answer 15

-He assumed that there would be a geometric growth in population, and therefore each person would have two children, which isn’t true. -Furthermore, not everyone in England was a farmer, but Malthus worked in a church and therefore was constantly facing people who experiences the issues of his theory. -Another assumption was diminishing marginal returns in agriculture, which won’t necessarily be true should there be technological advance.

Answer 16

In the 1800s, when technological advance was made, which allowed the wages curve to shift outwards, meaning even if population was going to fall before, the increase in wages meant that the families could now be provided for. Since 1800, the UK has seen real wages and labour productivity rise side by side, with the only dip coming in 1920s when the universal suffrage occurred.

Answer 17

The better life index was created by the OECD, which allows you to weight different economic and social factors depending on how important you feel they are to overall well-being.

Answer 18

No, although over many years the overall growth trend will be positive, there will be bumps in the road caused by recessions, this could be due to many factors such as war (WW2), disease (Spanish flu in 1920) or economic crisis (such as in 2009).

Answer 19

The agricultural society in Britain before the 1800s would of had far more volatility in output due to the reliance on weather, and as a result its growth rate varies much more than GDP does. However, industry and service sectors were far less volatile, as there were less external variables which these sectors were dependent on.

Answer 20

When output is declining. A recession will be over when the economy begins to grow again. It is officially defined as when the economy shrinks in at least two successive quarters.

Answer 21

Since the Industrial Revolution, specialisation and industrialisation has meant that much of the population depends on paid employment from firms rather than harvests. As a result of this, periods of negative growth have become more significant because if the economy produces less, fewer people will be employed by the now more prominent firms. And as a knock on effect of this, more people will then be going without income.

Answer 22

Okuns law is the relationship between growth rate and unemployment. By plotting the data if countries, there is a clean trend that when GDP growth is high, the change unemployment rate is negative, and the opposite when GDP growth is low.

Answer 23

Unemployment is a person who is not working a present (not linked to a firm), wants to be employed and is ready to start working within two weeks, and has been looking for a job or is ready to start one soon. People who aren’t working by choice are out of the labour force and **not** unemployed, they are considered to be economically inactive.

Answer 24

Short term: short spells due to temporary circumstances that resolve themselves quickly(usually less than a year) Long term: long periods of unemployment, defined by the OECD as longer than a year. It is this unemployment which will rise during recessions, and has a massively negative impact on welfare.

Answer 25

-Household shocks: if affects one particular household -Economy shocks: It affects all households in the economy -Industry shocks: affects a particular industry as well as the households linked to it. Shocks can also be demand side (Taylor Swift’s Eras Tour causing a potential $5billion gain to the economy), or supply side (the Evergreen ship blocked the Suez Canal).

Answer 26

-Self insurance: saving and borrowing where other households aren’t involved. -Co-insurance: support from social networks, social safety net or the government. Co-insurance can also be informal, when you can borrow between family and friends and this relies on trust. However, if the shock is an economy shock and everyone is struggling for money, then this will not be a viable option.

Answer 27

-They reflect the idea that people prefer smooth consumption. This means spending partially in the present (potentially through borrowing is current income is low), but they will also not increase consumption drastically when income does rise, as some of this will be needed to repay previous debt, and the rest will be important to save, incase of a unexpected shock or to spend in the future (during retirement). -Tax payments also show households aren’t entirely selfish. They are willing to support each other to smooth the effects of good and bad fortune, with the knowledge they will then be supported should they find themselves in difficulty. Co-insurance is also evidence of altruism (acting selflessly to aid others for the concern of their well-being).

Answer 28

Households will change consumption based on long-term shocks, but will have very little acknowledgment of short term shocks on their consumption level.

Answer 29

Households will make plans based under uncertainty about the future, and do their best based on the information they have. The more uncertainty, the more households may save and delay consumption. Households may not follow through with plans due to: -Credit constraints -Time inconsistency -Limited co-insurance

Answer 30

If an individual cannot provide good evidence to a bank that they will be able to pay back what they wish to borrow in the future, they may not actually be able to borrow. This will then cause a binding restriction on the amount of current spending a household can make, known as credit constraint.

Answer 31

This refers to the fact that we may fail to consider all the incentives we will have to face in the future when committing to a plan, so we don’t always save as we initially planned to. This is not, however, actually a failure of rationality, it is just a product of discounting the future at different rates due to ‘present bias’.

Answer 32

In many countries which have a lack of established social regulation, they will make social security such as: -health insurance -no insurance against natural disasters -no unemployment insurance -lack of basic social security transfers. In many countries, this occurs purely because risks are uninsurable, and a market to insure against these risks don’t exist, since it isn’t profitable for firms to offer it.

Answer 33

Firms don’t have as strong a preference for smoothing as households, as they will adjust their investment for both temporary and permanent shocks, to maximise their profits. Firms will invest when demand is high, and when they have high expectations for future demand, so high demand -> high capacity utilisation-> investment-> even higher demand.

Answer 34

Business confidence makes up a fairly large proportion of GDP, and therefore, as investment tends to follow business confidence, it is important business confidence remains stable to ensure investment remains constant. We can see investment (and therefore business confidence) is crucial for GDP growth, so the government will often intervene with economic policy to help keep investment high and stable, by attempting to remove any uncertainty for firms.

Answer 35

Investment is more volatile than consumption, since investment adapts to both short and long term shocks, where as households will only adapt to short-term shocks.

Answer 36

-If the recession is paired with high inflation, it will be caused by firms putting up prices, and hence lowering demand in the economy. -If it is due to households, then it will cause inflation to fall because firms will lower prices in an effort to spike demand.

Answer 37

-CPI index: this uses a basket of goods based on a fortnightly survey of households (with more prominent goods weighting heavier in the basket), and measures the prices of these goods (excluding exports, but including imports and consumption taxes on goods). -GDP deflator: this tracks the change in prices of all domestically produced final goods and services. However, instead of a basket of goods the GDP deflator tracks the price changes of components of domestic GDP (however, exports are excluded, and imports are included). It can also be expressed as the ratio of the nominal to real GDP, and is normally only used for a data purpose to change nominal GDP to real on a series.

Answer 38

A balance sheet is a record of assets, liabilities, and net worth of an economic actor such as a household, bank, firm or government.

Answer 39

Liabilities are anything of value that are owed.

Answer 40

Net worth is assets minus liabilities.

Answer 41

This is because a loan will create both an asset and a liability on your balance sheet. If you borrow money you will receive cash as an asset, and the debt will be an equally valued liability. Obviously, once interest has been added to a loan the liability will then increase in size.

Answer 42

A bank is a firm that makes profits through its lending and borrowing activities. They create money in the form of bank deposits during the process of supplying credit.

Answer 43

Base money is cash held by households, firms, and banks, and the balances held by commercial banks in their accounts at the central bank, known as reserves. Base money is the liability of the central bank.

Answer 44

Bank money is money in the form of bank deposits created by commercial banks when they extend credit to firms and households. Bank money is the liability of commercial banks.

Answer 45

The amount of broad money in the economy is measured by the stock of money in circulation. This is defined as the sum of bank money and the base money that is in the hands of the non-bank public. It is the amount of money in the hands of the non-bank public.

Answer 46

This is a form of payment (notes and coins), which can legally be accepted as payment by law (cannot be rejected), where as bank deposits and cheques would not be a legal tender.

Answer 47

The central bank is the only bank that can create base money. Usually, but not always, this is part of the government. Commercial banks have accounts at this bank, holding base money. For this reason, commercial bank reserves will always be equivalent to cash, so a commercial bank can withdraw thus from the central bank when necessary.

Answer 48

Commercial banks make a profit by charging interest when a household or firm takes a loan out of the bank. This means when the loan is repaid, some additional money will also enter the banks assets, and this is called bank money, which will cause the banks net worth to rise.

Answer 49

Commercial banks make a profit by charging interest when a household or firm takes a loan out of the bank. This means when the loan is repaid, some additional money will also enter the banks assets, and this is called bank money, which will cause the banks net worth to rise.

Answer 50

A maturity transformation is the practice of borrowing money-short term and then lending it long term. A bank accepts deposits, which it will promise to repay at short or no notice, and then makes long-term loans. The lenders deposits will be liquid (can be withdrawn from the bank at any time), but the loans from banks to borrowers will be illiquid (cannot be immediately withdraw into legal tender).

Answer 51

The bank will be exposed to liquidity risk (the risk that an asset cannot be exchange rapidly enough for cash to prevent a financial loss), or a default risk (the risk that credit given as loans will not be repaid).

Answer 52

If all depositors wanted their funds at the same time, the fact that many of the banks assets may be in an illiquid form means that they may not be able to repay all the demanded withdrawals of deposits. If a bank goes bankrupt and cannot honour its liabilities, this is known as a bank run.

Answer 53

If a bank is heavily involved in the economy/financial system and is at risk of bankruptcy, the government may decide to provide funds to rescue them, as the failure of a bank could threaten livelihoods of people all throughout the economy, which is why the Bank of Scotland was rescued during the financial crisis.

Answer 54

The short-term interest rate is the price of borrowing base money.

Answer 55

There’s two main ways that a commercial bank can loan money. Either they can get the money from the central bank, which they would have to loan at the policy rate, or they can loan it from another bank, which they would have to do at the short term interest rate.

Answer 56

It works in terms of supply and demand. -The demand for base money depends on how many transactions commercial banks have to make. -The supply of base money is Simone a decision by the central bank.

Answer 57

The policy rate is the interest rate which is set by the central bank. It applies to banks that borrow base money from each other, and also from the central bank.

Answer 58

This is the average interest rate charged by commercial banks to firms and households. This rate will usually be above the policy rate, and the difference between the two is the spread (or markup) on commercial lending.

Answer 59

This is because the short-term interest rate must be around the policy rate level, or one bank would never go to another bank to receive a loan because if the policy rate was much lower, they would simply be able to get the loan at a cheaper price because the central bank offers a lower interest. Therefore, the two rates always remain relatively similar.

Answer 60

-If a default means a bank is going to collapse, then they may be able to receive a loan or payment from the central bank to prevent this, and save a potential disaster for the financial market. -They can also ask shareholders for money to raise equity, but this will only work if shareholders have a high level of trust that they will receive future profits on their shares. -Banks can also put a claim on an asset of the individual they are loaning to, so should that player default on their loan, the asset becomes an asset of the bank, which would increase the banks net worth should they lose out on the loan repayment.

Answer 61

In developing countries where there is a more uncertain economic environment. In 2014 Brazil had a policy rate of 11%, but the lending rate was 32%.

Answer 62

-This is a financial instrument issued by governments which promises to pay flows of money at specific intervals. -Every bond will have a yield, which is the implied rate of return that the buyer gets on their money when they buy a bond at its market price. Essentially, it is the interest rate on the bond.

Answer 63

The present value is the break-even price which you would pay for a contract which would make you indifferent between buying the contract and not buying it. It has to equal whatever the amount of money would give the price of the asset at the end of the contract, if you were to just put that money into the bank instead at the current interest rate. The same concept still applies when the contract lasts for multiple years, and you get a payment from the contract year year. The present value will be the sum of the payment from the contract each year/(1 + interest rate)^the year of the contract.

Answer 64

A firm will asses if it should make an investment on an asset depending on the difference of the present value and the costs of making the said investment. If this is possible (present value profits is greater than the cost), then it will be beneficial in the firm going for this investment.

Answer 65

A bond will last for a predetermined period of time, called the maturity of the bond. The lender of the bind receives two payments, the fixed payment every period, and the face value of the bond paid when the bond matures. We call these fixed payments coupons.

Answer 66

The price of a bond = discounted present value of coupons + discounted present value of the face value when it matures. Or, for a bond with a maturity of T years: Price = C/(1+i)^1 + …. + C/(1+i)^T + F/(1+i)^T

Answer 67

-The yield of a bond is the (coupon/market price of the bond) x 100. Hence, the yield is important because it is the implied rate of return a buyer gets on their bond when bought at a market price. -When the price of the bond falls, the yield will rise a vice versa. -If the yield is the same as the interest rate, then buying a bond will have the same as saving that money in a bank at the current interest rate. For the equation of working out the price of a bond by yields, look at the week 4 slides. -As a saver can choose between a bond and saving in a bank, the yield and the interest rate will often be very similar. If it wasn’t money would be switched very quickly from one asset to the other by traders until the rates equalised, a strategy known as arbitrage.

Answer 68

-Operational costs: These include the administration costs of making loans, such as wages and rents. -Interest costs: The interest a bank must pay on a liability such as a deposit, -Revenue: The repayment and interest on of the loans which the bank has extended to customers. -Expected return: The return on the loans it provides, taking into account not all customers will repay their loans.

Answer 69

This means that the value of a banks assets is less than the value of a banks liabilities, it has negative equity.

Answer 70

This is the total assets divided by their net worth (equity).

Answer 71

This is borrowing with collateral, using its financial assets, so it has positive default risk. Collateral means something provided to a lender as a guarantee of repayment

Answer 72

-By lowering the policy rate, people will receive lower mortgage repayments since the bank lending rate will also fall, and more disposable income will become available, increasing consumption. -Furthermore, they can also afford to lend to more risky clients, as they can borrow more money from the money market to compensate incase of default. -Finally, less interest is charged so risky borrowers are more willing to be accepted by a bank. -Of course, higher policy rates will increase desire to save and reduce consumption, so this can help counter inflation in the economy.

Answer 73

The ‘lender’ is the principle and the ‘borrower’ is the agent. It is often not possible for the lender to write a contract ensuring the loan will be repaid by the borrower. This is because it is impossible to ensure that the borrower will use the funds in a prudent way that will allow repayment according to the terms of the loan. One solution of this is for the borrower to put some of her equity into the project, to ensure the interests of the two players are more closely aligned, since collateral forces the borrower to have an incentive to work hard, and it is a signal to the lender that the borrower is confident the project will succeed.

Answer 74

This is when those with less wealth borrow on unfavourable terms, compared to those who have more wealth. This is proven by the fact that one in eight US families had their request for credit rejected, and the assets of these credit-constrained families were on average 63% lower than the unconstrained. I’d an individual’s low wealth prevents a loan, this is known as credit-excluded, if they can still borrow, they are merely credit constrained.

Answer 75

-If the value of one’s house goes up by 10% in the Uk, the number of start up businesses rises by 5%. -Asset poor families in the US often have to take payday loans p, which have an average annual interest rate of 486%.

Answer 76

-Firms may adopt a new technology at the same time -Firms may have similar beliefs about expected future demand.

Answer 77

One way to do this would be through the multiplier. The multiplier is how a rise in one persons income or firms investment then has a knock on effect on others spending. -If the total increase in GDP is equal to the initial increase in spending, we say that the multiplier is equal to 1. -If the total increase in GDP is greater or less than the initial increase in spending, then the multiplier is greater or less than 1.

Answer 78

This is a mechanism in which the direct and indirect effect of a change in autonomous spending effects aggregate output. The multiplier is 1/1-MPC This is done by combining the very different behaviours of consumption-smoothing and non-smoothing households to represent consumption spending for the economy as a whole. This is the aggregate consumption function.

Answer 79

This is an equation that shows how consumption spending in the economy as a whole depends on other variables. For example, in the multiplier model, the other variables are current disposable income and autonomous (would happen regardless of income) consumption.

Answer 80

This is consumption that is independent of current income.

Answer 81

Aggregate consumption = autonomous consumption + income dependent consumption. C = C0 +C1(Y), where C1 is the effect of one addition unit of income, also known as the marginal propensity to consume. C0 is autonomous consumption. The gradient of aggregate consumption will be equal to the MPC.

Answer 82

The value will be higher for credit constrained households. Low wealth households have an average MPC of 0.8, but this is much lower for well-off households. Despite this, even in rich countries, 1 in 4 households are credit constrained.

Answer 83

The value will be higher for credit constrained households. Low wealth households have an average MPC of 0.8, but this is much lower for well-off households. Despite this, even in rich countries, 1 in 4 households are credit constrained.

Answer 84

Over the next year, consumer non-durables only fell by 3%, however durables fell in consumption by 10%. This will be because households were less confident in their future job security, as well as the risk of assets such as houses fall in price. This meant purchases of goods like cars and new fridges being postponed.

Answer 85

There will be output (income) on the x-axis, and aggregate demand on the y-axis. As output equals aggregate demand, there will be a 45° line straight through the origin, representing where the two match in value. When the multiplier line crosses this line, we can determine output/AD in the economy as being here.

Answer 86

We assume that investment is independent of income. It will instead depend on interest rates and business expectations.

Answer 87

A cut in investment-> this lower spending will also then cause lower production and lower incomes -> firms will fire workers as a result of this -> this then leads to an even further decline in spending. Diagrammatically, the multiplier curve will just shift downwards, since investment is independent of income, so not impacted by the MPC.

Answer 88

We assume that there are under-utilised resources within the economy, and we also assume that wages are not impacted by the change in output. Similarly, we also assume costs don’t rise output does, and firms will be happy to supply extra units of goods to meet new demands without adjusting prices. If there wasn’t under-utilised resources, the multiplier would be smaller.

Answer 89

If a family has a mortgages on its house, and the price of the house falls, then a likely reaction for the family will be to save more. This is known as precautionary saving, and will usually take place when a situation occurs meaning a household falls below their target wealth, this occurred in 1929 after there was a fall in investment, and ended up resulting in the Great Depression.

Answer 90

-If not constrained, then the improvement in your networth will cause raise your wealth relative to the target wealth. We would then predict that this would reduce your precautionary savings, and increase consumption. -For constrained households, a rise in house price would lead to an increase in consumption spending as higher collateral means that you can borrow more.

Answer 91

1) Dividends: Allocate the funds to managerial or employee salaries, or dividends for owners. 2) Savings, or paying off an existing debt 3)Invest abroad: build new capacity in another country 4) Invest at home: in the home country. Choice 4 is invest in our multiplier model.

Answer 92

-If the discount rate (p) is better than interest rate and return on investment, they will keep the funds and increase consumption spending. -If r (interest is highest), they will repay a debt or buy a financial asset -If return on investment (pi) is greatest, they will invest.

Answer 93

When the government is included, we have also to include government spending, as well as income left after tax for consumers spending C1. Net exports will also be impacted by the marginal propensity to import. So the new equation for the multiplier model is: AD = C0 + C1(1 -t)Y + I + G + X - mY, where M in the marginal propensity to import.

Answer 94

Much of government spending (excluding transfers) is on public services, health and education. This won’t change in a systematic way with changes in income, so is therefore referred to as exogenous.

Answer 95

1) It’s size, if the government spending (which is much more stable than private spending) makes up a large amount of GDP, this will help keep the economy from high volatility. 2) The government can help by providing unemployment benefits 3) They can intervene using fiscal policy

Answer 96

This is changes in taxes or government spending in order to stabilise the economy.

Answer 97

-Correlated risk: A surge in insurance claims means a provider may not be able to pay everyone, Co-insurance within family and friends may be insufficient. -Hidden actions: moral hazards can occur if a person is too well insured. -Hidden attributes: Asymmetric information can cause issues, if for example you learn the firm you own is financial difficulty, but your insurer or bank lender does not.

Answer 98

These are the characteristics of the tax and transfer system in the economy that have the effect of offsetting an expansion or contraction of the economy. An example of this is the unemployment benefits system.

Answer 99

Is a single individual consumes less, her savings will increase. However, if everyone saves, the result may be lower rather than higher savings overall. The attempt to increase savings is thwarted if an increase in the saving rate is not matched by an increase in investment (or another source of AD). The lower level of output will mean savings do not actually increase, as employment and income will fall.

Answer 100

This is the use by the government of fiscal policy (via tax cuts and spending increases) with the intention of increasing aggregate demand.

Answer 101

This is the difference between government tax revenue and spending. When this is negative, there is a budget deficit, and when positive there is a budget surplus. It is normal for a deficit to grow when stabilising in a recession, but if a government decides ro reduce a deficit, this might amplify the fluctuations in the economy. If a government cuts back on spending, this is known as austerity.

Answer 102

This is the effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilisation, or when fiscal expansion is associated with a rise in the interest rate (meaning private sector borrowing becomes more expensive). For this reason, we would not normally expect a government to undertake fiscal expansion if unemployment is low, but in may in extreme circumstances such as war.

Answer 103

If businesses have a high trust that the government will help an economy recovery in a recession, this will improve business confidence. -If a household thinks that higher government spending will be followed by a rise in taxes, they may increase saving to make sure they can afford these extra taxes when they come.

Answer 104

Yes, many economists would argue that the multiplier will be greater for economies who are in or exiting a recession, compared to those who are in a or at the beginning of a boom, because they will be closer to full capacity, and not have spare resources in the economy. For example, US states hit more severely by the financial crisis in 2008 will have a higher multiplier than a less-affected state.

Answer 105

-If the multiplier is negative (which could happen if a rising fiscal deficit caused a fall in confidence), then a stimulus package would cause GDP to fall, and an austerity policy would cause GDP to rise. -If positive but less than 1, a fiscal stimulus would raise GDP but by less than government spending increase. -If the multiplier is greater than 1, then a fiscal stimulus would raise GDP more than the increase in government spending, and a policy of austerity would reinforce the recession conditions. A disagreement came during WW2, where some said the multiplier was around 0.8, and other economists argued it was close to zero, since during a war there is no idle resources.

Answer 106

Government debt is the total amount of money owed by the government at a specific point in time.

Answer 107

G - T, where G is government spending and T is tax revenue - transfers. A budget deficit will worsen in a downturn of a business cycle, and recover when the downturn reverses. A budget deficit will be funded by selling bonds to borrow, however, by selling these bonds, a government must add this to its debt until repaid. Foreigners can also buy these bonds, and are attractive to investors since they pay a fixed interest rate and are generally considered safe, as a government is unlikely to default.

Answer 108

This is when government bonds are considered too risky, this is rare to occur in developed countries, but not uncommon in developing and emerging countries. However, in 2010 there was a sharp increase in interest rates on bonds issued by Spain and Greek governments, which signalled a risk of default. If a country has an untrusted government for buying bonds, austerity could be the only option for that nation.

Answer 109

Like a household, a country has to pay interest on debt. And to pay this, taxes may have to increased. However, it is okay for a country to have debt at all times, since as some bonds mature, others will be issued, so the debt is simply rolled over. An every increasing debt-to-GDP ratio is problematic, but no one knows at one point problems will occur. UK government debt peaked at a percentage of GDP in 1947, at 250%

Answer 110

The face value of a government bond (level of debt) is denominated in nominal terms. So the value of the (say £1 million debt) in one year would be worth less 10 years later when it came to repaying the debt.

Answer 111

-When the Chinese economy slowed (who accounted for 32% of Australian exports in 2013), this was transmitted straight to impact Australia. -Imports will dampen fluctuations in the economy, since the marginal propensity to import shows part of a rise/fall in income will be the impact on imports.

Answer 112

When France adopted a fiscal stimulus plan in 1981, the two years later saw Germany grow faster than France themselves, since the additional disposable income saw French imports rise, and this meant that the largest benefit came to France’s trade partners, rather than France themselves. It also forced France to revalue their currency.