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ECON (MACRO & MICRO) > PAPER 2 > Flashcards

PAPER 2 Flashcards

1
Q

What is Fiscal Policy

A

the manipulation of government spending and taxation in order to influence aggregate demand and the level of economic activity

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2
Q

What does contractionary fiscal policy do?

A

reduce AD.
Why may the government want to do that?
- To reduce inflation
- To reduce budge deficit/national debt (reduce amount of borrowing gov is doing)
- redistribute income

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3
Q

What does expansionary fiscal policy do?

A

Increases AD.
Why may the government want to do that?
- Boosts Economic growth
- Reduces Unemployment (Firms will be producing more)
- Increase inflation (demand-pull inflation)

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4
Q

What are some examples of expansionary fiscal policy?

A
  1. Reduction in income tax
    increases disposable income per household, more ad.
  2. Reduction in corporate tax
    increases profit margins, corporations could invest which would shift ad out.
  3. Increase in government spending
    - health care, education etc.
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5
Q

How can expansionary fiscal policy (reduction of income tax) grow LRAS?

A
  1. Reduction in income tax
    - This would make the inactive, (outside labour force) to become incentivised to become active increasing quantity of labour boosting LRAS.
    - More of an incentive to produce more and work harder as they can keep more of the money.
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6
Q

Diagram showing effect of expansionary fiscal policy, with explanation

A

https://ibb.co/KGf851G

increases AD and leads to higher real GDP and inflation.

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7
Q

What is monetary policy?

A

changes to interest rates, money supply and the exchange rate by the central bank in order to influence AD.

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8
Q

What is the aim of monetary policy?

A

keep inflation low
and
Stable economic growth. (keeps unemployment low)

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9
Q

What’s the UKs target for inflation and why is it important?

A

2% CPI.
important factor in enabling higher investment in the long-term

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10
Q

What does contractionary monetary policy do?

A

Decreases AD.
Why may the government want to do that?
- Reduce inflation
- Reduce excess debt & promote saving

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11
Q

What does expansionary monetary policy do?

A

Increase AD.
Why may the government want to do that?
- Increase inflation
- Increase growth
- Reduce unemployment

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12
Q

What does expansionary monetary policy transmission mechanism do?

A
  1. Lower credit card interest rates.
    - Lower borrowing costs for consumers, makes it cheaper to borrow, which incentivise more borrowing and less saving, increases marginal propensity to consume meaning consumers will be spending money on big ticket items like cars, furniture, jewellery therefore ad increases as consumption rises.
  2. Weaker exchange rate
    Savers have less of an incentive to save, therefore they look to move money out of the country. And a weak exchange rate would lead to an increase in net exports.
  3. Mortgage rates would decrease
    this would mean people would have more disposible income leading to more consumption.
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13
Q

What are some causes of unemployment?

A

Demand deficient

  • High interest rates
  • global recession
  • negative mutiliplier effect
  • finanical crissis

Supply Side

  • Frictional
  • Structural - mismatch of skills
  • Geographical immobility
  • real wage unemployment
  • technological change
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14
Q

What are some economy costs of unemployment?

A
  • Lost Output
  • Deterioration of gov finances
    Spending on benefits go up, lower tax revenue (income tax), increase gov spending on areas which suffer from higher unemployment. higher crime rates etc.
  • Social Costs
    High levels of crime, high levels of divorces which brings stress, depression for nhs
  • Reduced trade in other countries
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15
Q

What are some individual costs of unemployment?

A
  • Loss of income
    reduced spending, high level of spending
  • Loss of status
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16
Q

What are some benefits of unemployment?

A
  • Firms benefit from a greater choice of workers
  • Workers have time to search for the best job for them
17
Q

What is deflation?

A

The persistent fall of prices in an economy in a year

18
Q

What are the consequences of deflation?

A

Demand side
- Delayed spending
- Positive real interest rates
- Increases real value of debt

Supply Side
- Falling prices for consumers
- Falling input prices for firms

Good/Bad based on if:
Anticipated or unanticipated

19
Q

When does protectionism occur?

A

when countries place restrictions on imports into the economy.

20
Q

what are some different types of protectionism

A

Tariffs – This is a tax on imports.
Quotas – This is a physical limit on the quantity of imports
Embargoes – This is a total ban on a good, this may be done to stop dangerous substances
Subsidies – If a govt subsidises domestic production this gives them an unfair advantage over competitors. This is quite common

21
Q

What are some benefits of protectionism?

A

Infant industry argument – protect new industries against free trade. Protectionism can enable some industries to survive.
Diversify the economy – tariffs and protectionism can help develop new industries to give more diversification to the economy
Raise revenue for the government.
Protect certain key industries from international competition to try and safeguard jobs.

22
Q

What are the potential costs of protectionism?

A
  • Protectionism leads to retaliation and therefore higher import prices and higher consumer prices.
  • Consumers will have to pay higher prices for imports of goods (e.g. electronic goods from China, food from Africa)

-Higher prices lead to lower overall demand causing job losses in other industries

-Exporters will see a fall in demand, causing less output and possibly unemployment

-Protectionism can encourage inefficient firms to stay in business and there is less scope for specialisation and economies of scale.

-Protectionism can keep smaller national firms which can’t benefit from the same economies of scale. There is less competitive pressure for firms and economies to cut costs.

23
Q

Diagram of tariff protectionism

A

https://www.economicshelp.org/wp-content/uploads/2008/01/effect-of-tariffs.png

Losers from tariffs
- Domestic consumers who pay higher prices (P1 to P2). There is a lost consumer surplus of areas (1+2+3+4)

  • Foreign exporting firms. Exports fall from (Q4-Q1) to (Q3-Q2)
  • Domestic exporting firms hit by retaliatory tariffs (not shown in above diagram)

-There is a net welfare loss to the domestic economy of (2+4)

-Other firms in the economy who see lower demand. Because prices rise for this good, consumers have less disposable income to spend on other goods. Therefore, other firms see a decline in demand.

Winners from Tariffs
- Government gains tariff revenue of area (3)

  • Domestic producers who are able to sell a higher quantity to the domestic market. Domestic supply increases from Q1 to Q2. There is an increase in producer surplus of area (1)
24
Q

How does trade promote growth and development?

A
  • Exploit comparative advantage (natural resources)
    exports go up, AD goes up, Growth increases, development increases
  • Consumers benefit from lower prices
    Increases choice and improved political relations (grow trade ties)
  • Economies of scale and efficiency benefits
    Increasing output lowering costs, profits increase, corporate tax revenue increases, more money for development
  • Technological transfer and growth of secondary industry.
25
Q

How does aid promote growth and development?

A
  • Stimulation
  • Education
  • Health and Nutrition
26
Q

what is the aim of foreign aid?

A

to fill the savings gap in developing countries and promote economic development.

27
Q

Costs of inflation

A
  • lower purchasing power
  • Erosion of saving
  • Lower export
  • Wage / consumer price spirals (menu costs)
  • Fiscal drag
    When workers pay is rising in line of cost of living, meaning they get dragged into higher tax bands, but actually they are worst off
28
Q

benefits of inflation

A
  • Workers with high wages
  • Consumption is natural
  • Firms encouraged to increase output
  • Can keep unemployment low in a recession
  • Reduces real value of debt
  • Improvement of gov finances
29
Q

What are the different types of unemployment?

A

Cyclical
Structural
Frictional
Seasonal

30
Q

What is cyclical unemployment?

A

unemployment due to a period of negative economic growth, or economic slowdown. In a recession, cyclical unemployment will tend to rise sharply.

31
Q

What is structural unemployment?

A

is caused by a mismatch of skills between the unemployed and available jobs.

Structural unemployed is caused by changes in the economy, such as deindustrialisation, which leaves some unemployed workers unable to find work in new industries with different skill requirements.

32
Q

What is Frictional unemployment?

A

that occurs from the inevitable time delays in finding new employment in a free market.

33
Q

What is Seasonal unemployment?

A

occurs when people are unemployed at particular times of the year when demand for labour is lower than usual.

34
Q

what is a budget defecit

A

the annual shortfall between government spending and tax revenue.

35
Q

Pros of budget defecit

A
  • Higher Growth, lower unemployment
  • Benefit of growth
    Eduction, healthcare, infrastructure, public services
  • Redistribtion of income
  • Incentives of tax cuts
36
Q

Cons of budget deficit

A
  • Deterioration of gov finances
  • Inflation conflict
  • current account deficit conflict
  • x inefficiency
    ( a firm lacks the incentive to control costs.)
37
Q

What is a current account deficit

A

the value of goods and services imported is greater than the value of exports

38
Q

causes of current account deficit

A
  • Overvalued exchange rate
    If the currency is overvalued, imports will be cheaper, and therefore there will be a higher quantity of imports. Exports will become uncompetitive, and therefore there will be a fall in the quantity of exports.
  • Economic growth
    If there is an increase in national income, people will tend to have more disposable income to consume goods.
  • Higher inflation
    If UK inflation rises faster than our main competitors then it will make UK exports less competitive and imports more competitive.

-Recession in other countries
If the UK’s main trading partners experience negative economic growth, then they will buy less of our exports, worsening the UK current account.

  • Borrowing money
    If countries are borrowing money to invest e.g. third world countries, then this will lead to deterioration in current account position.
39
Q

consequences of current account deficit

A
  • foreigners have greater claim on domestic assets
  • large deficit could be unsustainable
  • it may indicate unbalanced economy
  • large deficit could cause depreciation in exchange rate and cost-push inflation
  • for countries in fixed exchange rate - it may indicate they have become uncompetitive - due to higher inflation and if exports over priced reduce domestic demand

ECON (MACRO & MICRO) (19 decks)

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