Flashcards in Section C Deck (89):
What is macroeconomics?
Looking at the economy as a whole.
What are the macroeconomic objectives?
Inflation, Unemployment, Environmental protection, Economic growth and balance of payments.
What is economic growth?
The increase of an economy's national income.
What is the most common measure of economic growth?
Gross Domestic Product (GDP).
Identify the four limitations of GDP as a measure of economic growth
Inflation, Population changes, Statistical errors and the hidden economy.
What are the four parts to the economic cycle?
Boom, Downturn, Recession and Recovery.
The economic cycle is due to...
Fluctuations in GDP.
State the four benefits of economic growth
Higher incomes, More leisure, Longer life expectancy and better public services.
A rise in the general price level.
How is inflation measured?
Consumer Price Index (CPI-the prices of about 600 goods and services purchased by several thousand families are recorded each month. An average price is calculated and converted into an index number.) or Retail Price Index (RPI-similar to CPI but also includes house prices and Council Tax)
What is demand pull inflation caused by?
Rising demand in the economy.
What happens if aggregate demand increases?
What could cause rising aggregate demand?
Consumer spending, Government spending, Investment by firms and demand for exports.
What is cost push inflation caused by?
Rising costs in the economy.
What could cause rising costs?
Costs of imports, Rising wages, Increased sales tax and businesses wanting to increase profit margins.
Define money supply
The stock of notes, coins, bank deposits and other financial assets in the economy.
How is money supply inflation caused?
When households, firms or the government borrow more money to fund extra spending. The extra lent by banks increases demand and, in turn, price.
What are the six consequences of inflation?
Reduced purchasing power; reduced value of savings; increased business costs; balance of payments problems; unemployment and increases in government spending.
What are the three costs of inflation for businesses?
Higher production costs, higher wage demands and conflict and more time and money spent searching for cheaper goods.
Why does inflation have an effect on the balance of payments?
If inflation is higher than in other countries, prices f domestic goods will be higher than overseas, reducing demand for exports.
How does inflation cause unemployment?
Firms find it difficult planning into the future, so they become uncertain. That uncertainty discourages investment, hindering job creation.
What are the four functions of money?
Medium of exchange, Store of value, Unit of account and Standard for deferred payments.
What four effects does hyperinflation have on the four functions of money?
Money may cease to be a medium of exchange; Value of savings will fall-money is a poor store of value; Money may not function as a unit of account as there may be uncertainty of goods' value and those with debt will be benefited as the amount repaid will have less purchasing power.
What is unemployment?
If a person is actively seeking work but can't find a job.
What is the term used to describe those out of work but don't meet the criteria of unemployment?
Name the five types of unemployment
Cyclical, Structural, Frictional, Seasonal and Voluntary.
Which two parts of the economic cycle does cyclical unemployment occur?
During downturn and recession.
Define labour mobility
The ability of workers to move from one job to another.
What are the three types of structural unemployment?
Sectoral, Technological and Regional.
Define frictional unemployment
Short-term unemployment which occurs when people move between jobs. It isn't a serious problem to an economy.
Define those that are voluntarily unemployed
A minority of people in society who choose not to work.
Give two reasons why people may be voluntarily unemployed
They may think wages are too low or they may hate their boss.
What are exports?
Goods and services sold overseas.
What are imports?
Goods and services brought from other countries.
What is visible trade?
Trade in physical goods with overseas nations.
What is invisible trade?
Trade in services.
What is the balance of payments?
A record of all international business transactions.
The current account shows the value of...
all imports and exports over a period of time.
What is a current account deficit?
When imports > exports.
What is a current account surplus?
When exports > imports.
What are the four effects of a current account surplus?
Rising exports employment, higher currency reserves, shortages of domestic goods and rising exchange rates.
What are the four effects of a current account deficit?
Higher external debts, unemployment, declining industries and falling exchange rates.
What does the government aim for in terms of the balance of payments?
What four things are governments using to prevent and cope with environmental problems?
Legislation, Regulations, Taxation and Subsidies.
Give three examples of legislation
Air, Waste and Water.
Why are taxes imposed on those who damage the environment?
To ensure the social costs are met by those who impose them.
Give an example of taxation used to reduce environmental damage
Tax on petrol.
What are policy instruments?
The tools used by the government to achieve its macroeconomic objectives.
What is economic policy?
The actions a government a government might take when controlling the economy.
What two policies are used to influence the aggregate demand in the economy?
Fiscal and Monetary Policy.
Define fiscal policy
The adjustment of taxation and government expenditure to influence aggregate demand in the economy.
What is budget deficit?
When government expenditure exceeds taxation.
What is budget surplus?
When government expenditure subceeds taxation.
What are the main items of government expenditure?
Healthcare, education, defence, transport, universal credit and job seekers allowance.
Why do governments impose taxes?
To pay for public services, discourage activities with negative externalities, control aggregate demand in the economy and reduce the gap between the rich and poor.
What is a direct tax?
A tax imposed on income and wealth.
What is an indirect tax?
A tax imposed on spending.
Give two examples of a direct tax
Income and Corporation tax.
Give two examples of an indirect tax
VAT and excise duties.
What does expansionary fiscal policy cause?
Increased demand and budget deficit.
What happens to spending and taxation in expansionary fiscal policy?
Spending increases, taxation decreases.
What does contractionary fiscal policy cause?
Reduced demand and budget surplus.
What are the two objectives of expansionary fiscal policy?
Unemployment and Economic Growth.
What are the two objectives of contractionary fiscal policy?
Inflation and Current account deficit.
Define monetary policy
The adjustment of interest rates and money supply to influence the aggregate demand in the economy.
Define interest rates?
The price paid to lenders for borrowed money.
Who sets interest rates?
The central bank. (The base rate influences any other interest rates in the economy)
Identify the effects of high interest rates on consumers
Less borrowing, less income due to higher mortgage payments, higher savings due to higher returns, therefore less spending.
Identify the effects of low interest rates on consumers
More borrowing, more income due to lower mortgage payments, lower savings due to lower returns, therefore more spending.
Identify the effects of high interest rates on firms
Higher exchange rates making exports dearer and imports cheaper, less borrowing and less profit due to higher interest to pay on current loans, therefore less investment.
Identify the effects of low interest rates on firms
Lower exchange rates making exports dearer and imports cheaper, more borrowing, more profit due to lower interest to pay on current loans, therefore more investment.
What is the money supply?
The total amount of money that circulates in the economy. (basically, all the notes and coins plus all money held in banks)
What is a tight monetary supply?
Where interest rates are high and the money supply is low.
What is a loose monetary supply?
Where interest rates are low and the money supply is high.
Which objective(s) is the tight monetary supply used for?
To reduce inflation.
Which objective(s) is the loose monetary supply used for?
To reduce unemployment and promote economic growth.
Which objective does lower interest rates aim towards?
To cut current account deficit. (increased exports demand and reduced imports demand)
What are supply side policies?
Policies that aim to increase the productive potential of the economy, promoting economic growth, by increasing aggregate supply.
Which three markets do supply side policies focus on?
Labour, Capital and Goods markets.
What are the three aims of supply side policies?
Improve labour flexibility, promote competition through privatisation, deregulation and helping small firms, and increase both public and private sector investment.
Identify the aim of labour markets
To increase labour flexibility.
Give four ways to increase labour productivity
Improve flexibility(flexitime), restore incentives, improve labour quality(education and training), and increase workforce(migration).
Identify the aim of product markets
To promote competition and reduce 'red tape' in business.
What is privatisation?
Breaking up state monopolies, promoting competition which raises efficiency, quality and lowers prices.
What is deregulation?
The removal of rules and regulations that discourage business activity and prevent competition.
How do governments help small firms and what benefit does it have?
Lower taxes for small firms and reducing 'red tape' because if more small firms are started, aggregate supply will increase.
Identify the aim of capital markets
To increase investment in the economy.
Give four ways that governments increase investment
Investing more in infrastructure(healthcare/education), economic stability, low interest rates and financial incentives for investors.