Theme 2 Flashcards
(120 cards)
1
Q
Circular flow of income withdrawals :
A
- imports
- taxes
- savings
-rent, wages, interest, profit
2
Q
Circular flow of income injected:
A
- investment
- government spending
- exports
3
Q
Expenditure method to calculate the level of activity
A
Trying to add up the total amount of money spent in the UK
4
Q
Output method to calculate the level of activity
A
Recording of the total output produced by firms
5
Q
Income method to calculate the level of activity
A
Total value of income for firms
6
Q
Why are calculations of economic activity inaccurate?
A
There may be payment like cash-in-hand or black market deals
7
Q
What are the 7 government objectives?
A
-percentage of growth
-amount of debt
-balance of payments
-rate of unemployment
-interest rates
-sustainability
-reduce inequality
8
Q
Equation for aggregate demand
A
Ad = C + I + G + (x-m)
9
Q
What is consumption?
A
Total expenditure on goods and services by individuals
10
Q
What is marginal propensity to consume?
A
Proportion of an increase in income that is spent
11
Q
What is marginal propensity to save?
A
Proportion of an increase in income that is saved
12
Q
Factors that influence consumer spending:
A
-Real disposable
-changes in employment
- availability and cost of credit
-rate of interest
-the wealth effect
-inflation
-expectations
-consumer confidence
-level of savings
-households saving ratio
13
Q
What is capital investment?
A
ONLY machinery, equipment, factory, robotics to create capital goods
14
Q
What is gross investment?
A
Total amount that the economy spends on new capital
15
Q
What is the wealth effect?
A
Increase in wealth leads to an increase in consumption, assets
16
Q
Factors influencing planned business investment:
A
-Interest rates
-availability of credit
-expected profits and retained profits
-actual and expected demand
-business confidence (animal spirits)
-rate of technological change
-price of the product
-government policy
17
Q
What is the accelerator effect?
A
increase in GDP accelerates the level of investment
18
Q
What is a budget deficit?
A
When government spending is greater than income (taxes) for more than a year
19
Q
What is debt measured as?
A
As a percentage of our GDP
20
Q
What are the 3 areas of government spending?
A
Transfer payments, recurring spending, capital expenditure
21
Q
How much does government spending make up of our GDP?
A
40-45%
22
Q
What do the government do to inject money into the economy?
A
Invest in goods, infrastructure or social welfare
23
Q
What is the multiplier effect?
A
Government spending can lead to a larger final change in GDP
24
Q
What is offsetting economic declines?
A
During recession the government can increase spending to stimulate economic activity
25
What is the multiplier formula?
1/mps
1/1-mpc
1/mpw
26
What does an increase in MPC lead to?
Higher multiplier value
27
What are leakages?
(Saving, taxes and imports) can cause a decrease in the multiplier
28
What else can affect the multiplier?
The time frame may put a restraint on its size.
29
What is the balance of payments?
Movement of all money going in or out of the uk
30
What is the relationship between the current account (imports and exports) and the financial account?
When the current is positive the financial must be negative and vice versa
31
What is the output gap?
Difference between the actual level of GDP and it’s estimated potential level
32
What is a negative output gap?
Economies output of GDP is below its potential-corresponds to higher unemployment and underutilisation or resources.
33
What is a positive output gap?
Exceeds potential output
34
What can cause a fall in AD?
-fall in net exports
-cut in government spending
-higher interest rates
- decline in household wealth and confidence
35
What can cause an increase in AD?
-depreciation of the exchange rate
-cuts in direct and indirect taxes
-increase in house prices (wealth effect)
-expansion of supply of credit and lowest interest rates
36
What is an economic shock?
When unexpected events causes changes in the level of demand, output and supply
37
What is aggregate supply?
The total output of goods and services that firms are willing and able to supply at a given price level
38
What is long run aggregate supply (LRAS)?
Maximum output when all factors of production are fully and efficiently employed
39
What is an important point of SRAS?
We assume that productivity, costs of production and the state of technology is constant when drawing the SRAS
40
What factors cause a shift in SRAS?
-unit wage cost are higher from increased minimums wage
-labour productivity
-key raw materials and component prices
-businesses indirect taxes
-cost of imports
-supply shocks (natural disasters, brexit)
41
What is the classical model of LRAS?
A straight line as we’re using the full resources
42
What are the key factors influences LRAS?
-labour supply
-stock of capital inputs
-stock of natural resources
-efficiency of allocation
-improvements in quality of productivity
-advances in the state of technology
-improvements in institutions (banking, legal system)
43
What factors influence demand for exports?
-relative prices in world markets
-the exchange rate
-non-price demand factors
-strength of AD in key export markets
44
What does the Keynesian long run aggregate supply curve suggest?
The economy can still be below full employment even in the long run
45
How is the classical different to the Keynes model?
Classical has both the SRAS and the LRAS, classical wages are fixed
46
What is fiscal policy?
A governments policy regarding taxation and public spending
47
What is progressive taxes?
As income increases, the rate of tax also increases
48
what are proportional taxes?
marginal rate of tax is consistent leading to a constant average rate of tax.
49
what are regressive taxes?
the rate of tax paid falls as income rises
50
what is the aim of tight fiscal policy?
control inflation
51
what method is used tight fiscal policy?
increase in taxes, decrease in government spending.
52
what is the aim of loose fiscal policy?
stimulate economic growth
53
what method is used loose fiscal policy?
increase government spending, decrease in taxes
54
evaluations of expansionary fiscal policy:
whether it leads to higher market interest rates, acceleration in the rate of price inflation, MPS and spend in households, MPI, rise in business confidence.
55
what is crowding out?
government issue bonds and increase their money by taking loans from people. Increase the yield to increase demand - interest rates increase (less money in the private sector).
56
what are the fiscal policy attempts to reduce inequality?
public pensions, targeted welfare payments, state benefits, education, health, social housing, wage subsidies, employment training, progressive tax
57
what does monetary policy use?
interest rates, exchange rates, QE and QT
58
what happens to exchange rates when interest rates rise?
appreciates
59
who sets the base interest rate?
the bank of England monetary policy committee (MPC)
60
factors considered by the MPC when setting interest rates?
GDP, bank lending figures, equity markets and share prices, confidence, wage growth, unemployment figures, trends of foreign exchange rates, international data
61
what is the transmission mechanism of monetary policy?
changes in interest rates influence AD, output and prices
62
what is involved in tight monetary policy?
raising interest rates to control inflation
63
what does tight monetary policy do to economic growth?
decrease with less output
64
what does tight monetary policy do to unemployment?
raises it
65
what does tight monetary policy do to the debt?
deficit would increase/worsen
66
what does tight monetary policy do to inequality?
worsen, more unemployment means more people facing inequality
67
what does tight monetary policy do to BofP?
decrease in imports, so initially improve - secondary effect of reduced inflation is an increase in exports(more competitive)
68
what is hot money?
moving money around the world to increase the return through higher interest rates.
69
what does hot money lead to?
exchange rate appreciating as there is more demand for the pound
70
what is involved in loose monetary policy?
lowering interest rates and increasing the availability of credit to encourage economic growth
71
how can the exchange rate affect the rate of inflation?
changes in price of imports, commodity prices, changes in price of exports.
72
explain the process of QE?
band of England electronically creates money - buys back bonds from banks - they now have more money to lend - and therefore people borrow more - and hopefully spend for to inject into the circular flow
73
explain the process of QT?
bank sell bonds to banks so there is less money to lend and less injections into the circular flow
74
what are the economic effects of high interest rates in the UK
less consumer spending, more saving, less investment (high cost of borrowing), appreciation of exchange rates (SPICED), reduction In the value of assets - wealth affect
75
evaluations of QE:
time lag, BofE is the biggest holder of gov. debt so limited effects, QE keeps interest rates low, higher income people borrowing for investment, low consumer confidence and animal spirits.
76
what is the liquidity trap?
when interests rates are low, any further drop will have no impact. Liquidity (money) is trapped - nobody borrowing
77
what is explained by the Phillips curve?
that there is a trade off between the inflation rate and unemployment rate.
78
what is the implication of the Phillips curve?
any attempt by government to reduce unemployment was likely to lead to increased inflation.
79
what is stagflation?
the curve breaking down as the economy suffered from unemployment and rising inflation (1960's)
80
what is deflation?
negative inflation, prices are dropping - often leading to a recession
81
what are the demand - side causes of inflation?
fall in AD, large negative output gap
82
what are the supply-side causes of deflation?
improved productivity, technological advances, fall in wage rate, high exchange rate
83
what is disinflation?
price rising at a slower rate
84
what problems does deflation cause in the economy?
people wait for prices to drop further, debts increase, cost of borrowing increases, lower profit margins, worse confidence and more saving, income distribution, exporters become more competitive after time.
85
what is gross domestic product?
output generated within a countries boarders
86
what is gross national product?
output generated by a countries citizens, domestically and abroad
87
what is frictional unemployment?
out of work due to personal short term unemployment
88
what is structural unemployment?
your skills are no longer relevant
89
what is cyclical unemployment?
economic reasons
90
what is seasonal unemployment?
parts of the year when there is no work in your job
91
what are the likely causes of unemployment?
non-transferrable, no available jobs, lack of education, low consumption, lack of entrepreneurship
92
consequences of employment on employment?
non-transferrable skills will lead to a smaller amount of available employees and the producer produces and sells less, therefore making less profit
93
what is the consumer price index?
used in the UK - excludes mortgage interest payments
93
what are the differences between the claimant count and the labour force survey?
LFS is used in Europe, LFS is 16-70, CC is 18-66, LFS has a wider criteria e.g., age and job and measures students and retirees.
94
what is the retail price index?
a measure of inflation that includes mortgage payments
95
what is inflation?
general price rises
96
what is deflation?
general price falls
97
what is demand pull inflation?
consumers have too much money, spend too much, and prices start to rise as we outbid each other
98
what is cost push inflation?
suppliers see an increase in their own costs so they push onto the consumer
99
how do they measure uk inflation
basket of goods (650 goods)
100
what is the balance of payments?
measures all international economic transactions between the UK and its trading partners
101
what is the current account?
used to judge the diffenrce between what we import and what we export
102
how do supply side policies stimulate production?
reducing costs faced by firms, improving the productivity of human and physical capital
103
what is a trade union?
organised association of workers in a profession, seeks to protect workers pay and rights.
104
what is privatisation?
selling a state industry to the private sector, now run by shareholders and seeks to get profit.
105
positives of privatisation?
gov. receives a large lump sum, no longer has to pay running costs, customer gets better service / more innovation
106
what is deregulation?
opening up of a state monopoly, the market is now open to competition
107
disadvantages of privatisation?
prices go up if there's profit making, quality may be as bad as before, no longer answerable to the tax payer, cancelled services in some areas
108
advantages of deregulation?
increased competition, more efficiency, more consumer choice
109
disadvantages of deregulation?
creates a private monopoly, depublication of services, private firms cut costs, better to stick with firms we know and trust
110
what is deregulation of labour markets?
where the government reduce the amount of employee rights - makes it easier for firms to hire and fire workers
111
what is a zero hour contract?
employer is not obligated to provide any minimum number of hours to an employee
112
benefits of zero hour contracts?
flexibility, cost low and profit high, more profits invested, staff can do more hours which improves output
113
issues with zero hour contracts?
staff under pressure, people who are looking for full time employment will struggle, unpredictable, skilled workers may be missed or underutilised, difficulty getting staff, impact on social life
114
what is redundancy?
employees dismissed for economic reasons
115
what is income?
the flow of money into a household at a given point in time
116
what is wealth?
value of assets within a household at a any given time
117
what are the ways of reducing inequality?
paying benefits, a progressive tax system, greater investment in education healthcare and infrastructure
118
what is the happiness indicator?
the economics of happiness relates economic decisions to a wider measure of welfare, looking beyond income and wealth
119
what is sustainability?
meeting the needs of today without taking away resources from the future
