Theme 2 Flashcards

Question

Cost-push inflation

Answer 1

Arises when production costs increase, causing firms to raise prices. Factors like rising raw material prices, higher prices, or supply chain disruptions can lead to cost-push inflation. When businesses respond to rising unit costs by increasing prices to protect their profit margins. It can come about from both domestic and external.

Answer 2

Increase in money supply, not matched by a corresponding increase in economic output, can lead to excess demand for goods + services, leading to inflation. e.g. central banks printing excessive amounts of money

Answer 3

Inflation erodes the purchasing power of money, reducing the real value of savings Fixed-incomes earners will experience reduced real incomes People on fixed pensions may find it challenging to maintain their standard of living

Answer 4

Firms may face rising production costs, reducing profit margins May increase prices to maintain profitablity

Answer 5

Inflation can increase the cost of servicing government debt Tax brackets may not be adjusted for inflation

Answer 6

While workers may see nominal wages increase, their real wages may decline due to deflation Labour unions may negotiate for higher

Answer 7

What people and businesses expect to happen to consumer price in the future. If people expect higher prices, this can feed through to higher wage claims.

Answer 8

Milton Friedman was a leading advocate Suggests the the amount of money in an economy plays a crucial role in determining the overall price level If the centra bank increases the money supply too rapidly, it can lead to inflation because there is too much money chasing too few goods Often critical of using fiscal policy

Answer 9

Inequality - has a regressive effect on lower-income families in developed countries - most of their wealth is held in cash Falling real income - if wages rises lag price increases each year Negative real interest rates - if the interest rate on savings is lower than inflation Cost of borrowing - high inflation may lead to higher interest rates for businesses and consumers with debts

Answer 10

Workers with strong wage bargaining power (e.g. some trade unions) Debtors if real interest rates on loans become negative Producers if their prices continue to rise faster than costs

Answer 11

Retired people relying on fixed pensions Lenders if real interest rates on loans are negative Savers if real returns on their savings are negative Workers in low-paid jobs with little or no bargaining power

Answer 12

Pandemic-related supply shortages - supply couldn't keep up with demand Conflict in Ukraine leading to a surge in energy prices Labour shortages

Answer 13

Charging excessive or unreasonable prices for goods in response to a situation of increased demand or limited supply. Sellers take advantage of this situation by charging prices that are much higher than what would be considered under normal market conditions.

Answer 14

The growth of the money supply can be a cause of inflation when it outpaces the growth of real economic output As money supply grows, people have more to spend. If the supply does not increase at the same rate, there will be excess demand. This means suppliers can increase their prices. Expectations of future inflation can further exacerbate the problem. If people anticipate prices to rise further, they may make purchases sooner which will increase excess demand.

Answer 15

How high the rate of inflation is in one country compared to another. This is important as it could affect the balance of trade. Countries with high inflation will see exports decline and vice versa. This can lead to imbalances in the balance of trade and countries with high inflation will become less competitive in the global marketplace

Answer 16

When a country experiences high inflation, investors may start to worry about the stability of the economy. They may fear that the high inflation will lead to a decline in the value of the country's currency. To protect their assets, investors may decide to move their money out of the country.

Answer 17

If inflation is high, the government will have to offer a higher yield (or interest rate) to entice investors to lend it money. This is because investors will want to be compensated for the inflation eroding the value of their investment. This then means government must pay off their bonds at a higher rate.

Answer 18

Deflation is a sustained period when the general price level goods and services is falling. This means that a weighted basket of goods and services is becoming less expensive over time.

Answer 19

Increased real income of families Rise in demand for 'luxury products' Asset prices falling can improve housing affordability (asset price deflation)

Answer 20

Holding back on spending if consumer expect prices to keep falling Debt increase - real value of debt rises with deflation Lower profit margins due to reduced prices Real cost of borrowing increases - interest rates will rise if nominal rates of interest do not fall in line with prices

Answer 21

Pressure on the gov. to raise the value of state welfare benefits High inflation can cause real GDP growth to slow down High inflation can make gov. borrowing more expensive when they issue new bonds Can lead to a worsening of international competitiveness causing a fall in exports

Answer 22

Can lead to fiscal drag - this happens when people's wages/incomes are rising in nominal terms which causes them to pay more in direct and indirect taxation - UPWARD SHIFT IN THE LAFFER CURVE - tax brackets frozen until 2029 Can cause a reduction in the real value of the governments existing debt

Answer 23

A wage-price spiral is a situation where workers bid for higher wages because they have seen the real incomes eroded by fast-rising prices This can lead to a further burst of cost-push inflation Rising inflation → falling real incomes → workers bid for improved wages → leads to high labour costs → firms raise they're price

Answer 24

Refers to a combination of stagnant economic growth, rising unemployment and high and rising inflation

Answer 25

A measure that tracks changes in the average price level of a basket of goods and services purchased by a typical household over time. Used to assess inflation. It is weighted so different components account for different proportions of the basket

Answer 26

Not fully representative of all consumers - inaccurate for non-typical households Errors or inaccuracies in data Many services in the digital economy do not have a price Time lags

Answer 27

Basket of goods and services may not be accurately reflected Substitution bias - consumers tend to adjust their spending patterns in response to price changes Geographic variation - May not capture regional variance Subgroups and demographics - CPI represents an average consumer, and the inflation experience can vary among groups

Answer 28

Refers to individuals who are not currently employed but are actively seeking and are available for work

Answer 29

When individuals are employed but their job does not fully utilise their skills and qualifications

Answer 30

Claimant Count - measure of unemployment based on the number of people who are claiming unemployment benefits - provides a narrow definition of unemployment International Labour Organisation (ILO) and UK Labour Force Survey - defines unemployment as individuals of working age who are without work, actively seeking work, and available for work UK Labour Force survey response rate has gone from 48% - 20% over the past decade

Answer 31

Brexit has made it harder for businesses to recruit migrants from the EU Skill gaps and low pay cause problems in recruitment and retention 1.3 million unemployed in UK -2023 25% of working population or 8.7 million people economically inactive - 2023

Answer 32

Occurs when there is a mismatch between the skills of the workforce and requirements of available jobs

Answer 33

Temporary unemployment when individuals are between jobs or have entered the workforce

Answer 34

Linked to seasonal variations in demand e.g. tourism or agriculture

Answer 35

Arises from a lack of aggregate demand during economic downturns

Answer 36

Real wage unemployment is a situation in which wages are set above the equilibrium level, resulting in an excess supply of labor or unemployment. E.g. minimum wage

Answer 37

Reduced income can lead to lower consumer spending, impacting businesses

Answer 38

High unemployment can lead to a larger labour pool, potentially reducing wage pressures

Answer 39

Lost income, reduced job prospects, psychological stress

Answer 40

Increased spending on unemployment benefits and lost tax revenue

Answer 41

Social unrest, reduced well-being, inequality

Answer 42

People who have been unemployed for 12 months or more. Structural supply-side problem

Answer 43

When one person in ten in the labour force is out of work. In practice, the true level of unemployment may be higher than this

Answer 44

Unemployment rate for 16-24 year olds

Answer 45

Lack of experience - weak human capital Lack of education/training Age discrimination Economic downturns - often young people are the first yo be laid off Automation and technological advancements Frictional after entering workforce

Answer 46

Inactive work seekers. These are people who have ceased to seek work because they believe there are no suitable jobs

Answer 47

People who don't have work but aren't counted in government reports, for example, people who have stopped looking for a job

Answer 48

Large amount of people on disability benefits with chronic illnesses Having to care for elderly relatives Rise in self-employment, zero-hours contracts and agency work

Answer 49

Work arrangement where people perform short-term, flexible, and often freelance work e.g. Uber or food delivery

Answer 50

People who are of working age not in employment and who have not been actively seeking work

Answer 51

Students remaining in full-time education Caring for family members Long-term sickness Early retirements

Answer 52

Improving financial incentives - make work pay and lower some barriers for people seeking jobs. e.g. tax-free childcare, increase minimum wage, reforms to rented housing Investment in human capital and labour market flexibility - employer or government funded programmes such as degree apprenticeships, T-Levels, STEM education

Answer 53

A record of all economic transactions between a country and the rest of the world. It is divided into two main components - current account and capital and financial accounts

Answer 54

Balance of trade in goods - difference in value of exports and imports of tangible goods Balance of trade in services - difference in value of exports and imports of services traded Income balance (primary income) - earnings from abroad (dividends, interest, wages) and payments made to foreign investors Current transfers (secondary income) - transactions of money without counterpart item of economic value - foreign aid, remittances

Answer 55

Monetary flows generated from owning of cross-border financial assets. It represents the yield of UK investments abroad and that of foreign-owned investment in the UK

Answer 56

Current transfers between residents and non-residents - no counterpart item of value traded back - e.g. foreign aid, remittances, diaspora contributes

Answer 57

The total demand for goods and services within a country. It measures spending by consumers, firms, government and overseas consumers and firms AD = C + I + G + NX

Answer 58

The amount consumers have left over after taxes; they can choose to spend or save this money

Answer 59

Refers to how much a consumer changes their spending following a change in income MPC = change in consumption / change in income

Answer 60

How much consumers change their saving following a change in income MPC + MPS = 1

Answer 61

Consumption / income

Answer 62

Availability and cost of credit Expectations Confidence - animal spirits Asset prices Time Lags

Answer 63

Actual and expected demand Expected profits and business taxes I/R and availability of business finance Business confidence - animal spirits

Answer 64

Keynes coined the notion of animal spirits which refers to a mix of confidence, trust, mood and expectations When confidence is low, MPS is increased for individuals and businesses

Answer 65

Injection of demand for capital goods industries Can lift productivity/incomes Economies of scale and increased competitiveness Investment helps to sustain export - led growth

Answer 66

Positive relationship between planned capital investment and the rate of change of national income. Firms invest in capital goods (like machines, factories) to meet growing demand. If consumer demand rises, businesses anticipate higher future sales. This leads them to increase investment, even if the demand rise is small. The reverse is true: falling demand leads to sharp cuts in investment

Answer 67

Gross investment - capital depreciation If gross investment > depreciation, net investment will be positive and businesses will have higher productive capacity

Answer 68

The total amount the economy spends on new capital

Answer 69

Welfare spending - transfer payments Public services - current spending State investment - capital spending

Answer 70

Income tax National insurance Corporation tax Inheritance tax VAT Assets

Answer 71

Salary of NHS employees NHS drugs Road maintenance Army logistics supplies

Answer 72

The act of selling goods and services to another country. Income from exports count as an injection into the circular flow of income and exports to the AD

Answer 73

Difference between the value of exports and imports. When the value of exports and imports. When value of exports > imports, there is a trade surplus

Answer 74

Relative prices of exports in world markets - e.g. inflation Exchange rate - stronger currency makes exports more expensive Non-price demand factors e.g. demand and branding Strength of AD in key export markets

Answer 75

The wealth effect is the idea that an increase in an individual's wealth will lead to an increase in their consumption. The concept is based on the idea that when people feel wealthier, they are more likely to feel confident in their financial situation and therefore more willing to spend money on goods and services.

Answer 76

The total amount that producers in an economy are willing and able to produce at a given price level in a given time

Answer 77

Increased cost of labour - wages, employment taxes Increased cost of raw materials/commodities - energy costs, war, weather events Exchange rates and imports Changes in productivity Taxation/regulation Technological advancements (SR+LR) - leads to more efficient production

Answer 78

A measure of efficiency indicated by output per person employed or value of output per hour worked

Answer 79

Physical capital such as transport networks, energy, power and water supplies and telecommunications

Answer 80

Q2CELL + productivity Changes in labour supply available for production Changes in the stock of capital inputs including infrastructure Changes to the stock of natural resources Changes in the efficiency of allocation of factor inputs Improvements in the quality of inputs / productivity Advances in the state of technology Improvements in institutions such as banking/legal system

Answer 81

A model of the economy which shows the movement of goods + services between households and firms, and their corresponding payments in money terms.

Answer 82

The value of the flow of goods and services from firms to households

Answer 83

The value of spending by households on goods and service

Answer 84

The value of income paid by firms to households in return for land, labour and capital

Answer 85

When an initial increase in an injection or decrease in a leakage leads to a greater final increase in the level of real GDP or the final change in equilibrium national output from an initial change in AD

Answer 86

When an initial decrease in an injection or increase in leakage leads to a lower level of real GDP

Answer 87

1/MPS or 1/(1-MPC)

Answer 88

1/(MPS+MPM+MRT) M = import T = taxation

Answer 89

The increase in the real value of goods and services produced as measured by the annual percentage change in real GDP. It is also defined as a long-run increase in a country's productive capacity.

Answer 90

Expansionary monetary policy - decrease in interest rates Expansionary fiscal policy Depreciating exchange rate helps to boost exports Strong growth of asset prices Improved business confidence

Answer 91

Sustained increase in a country's productive capacity Improvements in productivity - a growing labour supply and technological change Shifts in the composition of industries Increased human capital Advancements in a country's essential infrastructure Increase in entrepeneurship New resource discoveries

Answer 92

Difference between the actual level of GDP and its estimated potential level

Answer 93

An economy's actual output is below potential output

Answer 94

Where an economy's actual output exceeds its potential output Potential output represents the level of production an economy can sustainably achieve when all its available resources are fully utilized without causing inflationary effects. Positive output gap can lead to rising demand-pull and cost-push inflationary effects

Answer 95

Refers to the fluctuations of economic activity in an economy over time. It involves alternating periods of peaks and troughs

Answer 96

Falling real GDP Rising unemployment Disinflation Reduced business investment

Answer 97

Fall in confidence Rising cyclical unemployment Lower rate of inflation Rising fiscal deficit

Answer 98

Follows a recession, can come from: Cuts in interest rates One or more types of fiscal stimulus Rebound in business and consumer confidence

Answer 99

Refers to medium-long term damage done to the economies of one or more countries following a severe economic shock which then leads to a recession. e.g. fall in investment leading to an ageing of existing capital stock, or rise in long-term unemployment and economic inactivity

Answer 100

Period where the percentage rate of growth of GDP is fast and higher than the long-term trend

Answer 101

Weakening of the rate of growth, GDP is still rising but at a slower rate

Answer 102

Period of at least six months where an economy experiences negative growth

Answer 103

Increase in GDP after a recession

Answer 104

Prolonged downturn where a nation's GDP falls by at least 10%

Answer 105

Seeks to achieve long-term prosperity while also considering the well-being of current and future generations, as well as the health of the environment

Answer 106

Waste from production and consumption Pollution and increasing climate change risks Depletion of natural capital Loss of biodiversity

Answer 107

Design for longevity Closed-loop systems - recycling and repurposing instead of disposal Renewable energy Sharing and collaborative consumption - reduces demand for new products, minimising waste Regeneration of ecosystems

Answer 108

Carbon taxes Carbon trading schemes - permits Tougher environmental regulations Spending to protect biodiversity Investment in sustainable technologies Tax relief on R&D initiatives

Answer 109

A development strategy where a country focusses on increasing exports as a driver of expansion. e.g. China, South Korea, Taiwan, Vietnam

Answer 110

Specialisation - comparative advantage Foreign exchange earnings - can be used to import, service external debt, and fund development projects Economies of scale - link to specification Technology transfer and innovation as firms are introduced to international markets Job creation - positive multiplier effect

Answer 111

Vulnerability to external shocks Dependence on commodity prices for countries exporting them Currency appreciation - makes exports less competitive Lack of diversification - overreliance on a few key industries Environmental concerns - may prioritise production over environmental sustainability

Answer 112

Increased SoL Job creation Reduced poverty Increased government revenue Investment opportunities - growth attracts domestic and foreign investment

Answer 113

Inflation if AS can't keep up with demand Resource depletion Income inequality Financial instability if growth is fuelled by excessive spending and speculative investment

Answer 114

Alternative to GDP, GNI = GDP + Net Primary Income + Net Secondary Income

Answer 115

Economic growth - strong, sustained, sustainable Low and stable inflation Balance the budget - no debt Sustainability Low unemployment Fair distribution of income Balanced trade - CA

Answer 116

Policies which can impact the level of demand in the economy

Answer 117

Use of government spending and taxation to increase the level of AD in the economy. Used to: Used to stimulate economic in a recession Stabilise economic growth Reduce rate of inflation - 2% UK target Redistributed income (↓ tax on poor) Reduce unemployment

Answer 118

Changes to government spending and taxation to decrease AD Used to: Reduce inflation (mainly monetary policy) Reduce budget deficit + debt Redistribute income (↑ tax on rich) ↓ CA deficit

Answer 119

Increase in government spending on healthcare, infrastructure, public sector wages can directly ↑ AD

Answer 120

↓ income tax - ↑ disposable income - ↑ MPC - higher impact if reduction in a regressive tax as this will benefit the poor which will have a large impact due to high MPC ↓ corporation tax - ↑ retained profits - ↑ MPI

Answer 121

Trade-offs - demand-pull inflation/CA deficit Worsening government finances - cost and O/C of funding Crowding out effect Time lags

Answer 122

Size of output gap Size of multiplier Consumer/business confidence Original state of government finances - affordable? Laffer curve Automatic stabilisers reduce need for fiscal policy Crowding in vs crowding out LR benefits to LRAS (T+G)

Answer 123

Government spending/taxation vary without direct government decision-making If an economy has progressive income tax system and welfare system: In a boom, ↑ incomes will push workers into higher tax bands and ↑average rate of tax (tax paid as proportion of total income) and slow down rising consumption Lower unemployment means government spending on benefits reduce which reduces G Vice versa for a recession This will dampen fluctuations in the economic cycle

Answer 124

Classical view Government borrowing through issuing bonds, people buy with savings G increases demand for loanable funds (↑ yield) ↑ in I/R is likely to be transferred to loans in general Consumer/business borrowing will ↓ as IR/ ↑

Answer 125

Keynesian view G leads to ↑ I This improves economic environment and increases opportunities for businesses (↑I) through the stimulation of economic activity, boosting demand for products, improved productivity and improved confidence

Answer 126

Fairness Certainty Convenience Efficiency

Answer 127

Taxation should be fair and equitable - can be achieved through progressive, proportional, or regressive taxation systems

Answer 128

Taxation should minimise economic distortions and deadweight losses.

Answer 129

Taxes should not distort economic decision-making.

Answer 130

Similar taxpayers in similar circumstances should be treated equally in terms of their tax liabilities

Answer 131

Tax burdens should be distributed in a way that is fair and reflects differences in the ability to pay.

Answer 132

Marginal and average tax rate increases as the amount of taxable income increases - e.g. UK tax system

Answer 133

Where the average tax rate as a % decreases as the amount of taxable income increases, low-income taxpayers pay a higher percentage of their income in taxes than higher-income taxpayers

Answer 134

Marginal and average tax rate remains constant regardless of an individual's income or wealth

Answer 135

Fiscal balance = tax revenue - expenditure Surplus - T>G Deficit- G>T

Answer 136

Structural - deficit at FE Cyclical - deficit in a recession

Answer 137

Higher growth, lower employment in a recession Benefits of ↑G and incentives of tax cuts (LR implications may cancel out deficit) Redistribution of income (e.g. ↑ benefits) Crowding in

Answer 138

Deterioration of government finances - unsustainable ( ↓ FDI due to loss of confidence) ↓ in demand for government bonds meaning government has to increase yield which makes borrowing more expensive - cost and O/C of debt repayments Conflict of CA deficit + inflation targets Crowding out effect

Answer 139

What is original state of government finances SR/LR impacts Stage of economic growth - more useful in recession? Specific policy used Consumer / business confidence may reduce impact of ↓T Automatic stabilisers may reduce need

Answer 140

Confidence in government finances - cheaper borrowing and ↑FDI Flexibility with fiscal policy Less crowding out ↓ Inflation and CA deficit

Answer 141

Demand-side shock - ↓ growth ↑ U Implications of ↓ G Incentives distortion of ↑ T - ↓ to work and entrepreneurship Risk of income inequality

Answer 142

Is it necessary Could make debt worse if ↓ GDP because debt is measured compared to GDP Policy used? - don't have to use both at the same time Stage of the economic cycle

Answer 143

Accumulation over time - result of a country consistently running budget deficits Purpose - use to debt to finance critical infrastructure projects, public service, and other expenditures Debt servicing - servicing the national debt involves paying interest on the outstanding debt

Answer 144

Are automatic fiscal changes as an economy moves through different stages of the business cycle Impact depends on whether a government allows the automatic stabilisers to operate fully, and marginal propensity to save or consume

Answer 145

Estimates the final change in real national income that results from an initial change in government spending

Answer 146

Involves changes in the base rate of interest and the money supply to influence the rate of growth of AD

Answer 147

It has short term action and implementation It is flexible (can change 0.1% at a time) UK central bank is independent - political neutrality

Answer 148

Excessive inflation as a trade off for growth Widen CA deficit - ↑ M I/R after a certain point will lose effect Negative impact on savers Time lags - BofE says I/R cuts take up to 2 years to have full impact on AD

Answer 149

Size of output gap Consumer/ business confidence Banks willingness to lend Size of the rate cut

Answer 150

↓ demand-pull inflation Discourage debt which can lead to banking failure Sustainable borrowing + lending, less chance of asset-price bubbles Reduce CA deficit

Answer 151

Lower growth and higher unemployment Impact on the indebted ↓ I - ↓ LRAS Worsening CA deficit through E/R appreciating

Answer 152

Used if traditional monetary policy fails due to low availability of credit, low consumer confidence, low willingness of banks to lend - Central bank creates money electronically - Buys government bonds from commercial banks and financial institution - This injects liquidity into the financial system, effectively increasing the money supply - Bonds yields are reduced as the central bank purchasing increases demand - Borrowing is cheaper for firms and individuals which boosts economic activity

Answer 153

Demand for products are likely to alter depending on the change in I/R Cost of borrowing is likely to change with changes in I/R Company share prices may fall as interest rates rise. This may mean investors look elsewhere to invest - increase of shares on the market means fall in price

Answer 154

1930s Greatest and longest economic recession in modern history Caused by the stock market crash of 1929 Increase animal spirits following WWI led many people to invest in stocks Keynesian demand-side policies aided in recovery

Answer 155

2008-09 Worst economic disaster since stock market. Started with subprime mortgage lending crisis in 2007 and resulted in the failure of investment bank in 2008

Answer 156

Belief that the primary factor driving economic activity and short-term fluctuations is demand Also called Keynesian economics, who advocated that government intervention to help overcome low AD in the short-run

Answer 157

Set of economic measures and strategies that aim to improve the long-run productive capacity and efficiency of an economy Primary goal to supply-side policies is to stimulate long-term economic growth, increase productivity, and create a more favourable environment for businesses to operate Achieve all four main macro objectives

Answer 158

Interventionist - promote more of a role for government to influence LRAS Market based - take away role of government in economy, let markets be freer

Answer 159

R&D spending is only 1.74% of GDP Regional economic imbalances 400,000 rise in economic inactivity since 2020

Answer 160

Tax cuts - income and corporation (↑ Quantity of labour and Q2 of capital) Labour market reform - ↓ benefits (↑ Quantity of labour) - ↓ minimum wage and trade union power (↓ costs for businesses) Competition policy - privatisation, deregulation, trade liberalisation

Answer 161

Privatisation of Royal Mail Deregulation of the UK retail energy market Tax free childcare Creating 20 institutes of technology Reforms to the UK immigration system Super-deduction tax incentive for business capital investment

Answer 162

Government spending on education/healthcare - ↑ quality of labour Government spending on infrastructure - transport ↓ LR costs of production Subsidies - promote investment

Answer 163

No guarantee for success Costly to government (esp. interventionist) - SR CA implications Time lags Negative stakeholder impacts (i.e. impact on people on benefits, what is being deregulated? Output gap - more effective when economy is booming and at FE, Keynesian argue demand-side policies in recession

Answer 164

Cyclical unemployment in a recession can be reduced by demand-side policies boosting AD Real-wage unemployment can be reduced through decreasing min wage or trade union power Structural unemployment (NRU) - occupational and geographical immobility and frictional unemployment (NRU) can be helped by supply-side policies to improve mobility of labour, force people to get jobs instead of waiting for a better one (↓ benefits).

Answer 165

Reducing demand-pull inflation through contractionary demand-side policy Cost-push inflation is hard to control as usually short-term uncontrollable shocks such as global commodity prices. Long-term inflation can be tackled with supply-side policies, ↑ productive capacity

Answer 166

Economic growth vs inflation Economic growth vs CA deficit - growing economy means growing MPC which in the UK, leads to a high MCM Economic growth vs budget deficit - reducing a budget deficit may be due to increase in tax which would reduce AD Economic growth vs sustainability - Kuznets curve Unemployment vs inflation - Phillips curve

Theme 2 Flashcards

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