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Economics Year 12 > Theme 2 > Flashcards

Theme 2 Flashcards

(50 cards)

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1
Q

Closed economy

A

Where there is no foreign trade

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2
Q

Components of aggregate demand (AD)

A

Consumption (65%) + Investment (15%) + gov spending (25%) + (Imports - exports) (-5%)
AD = C + I + G + (x - m)

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3
Q

MPC (definition and equation)

A

Marginal propensity to consume

△C / △Y

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4
Q

MPS (definition and equation)

A

Marginal propensity to save

△S / △Y

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5
Q

Factors influencing AD

A
  • disposable income
  • the wealth effect (peoples wealth increases they spend more money)
  • inflation (prices increase and consumption falls)
  • expectations (buying before an expected price increase)
  • interest rates (consumption decreases when rates increase)
  • unemployment (increased unemployment decreases spending)
  • availability of credit (more available to borrow increases spending)
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6
Q

Real (income)

A

Allowing for inflation

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7
Q

Net investment equation

A

Gross investment - capital depreciation

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8
Q

The accelerator theory

A

An increase in national income leads to a bigger increase in planned investment.

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9
Q

Factors influencing planned business investment

A
  • interest rates / availability of credit
  • expected profits and business taxes
  • business confidence (greater confidence leads to larger investments)
  • cost and number of substitutes
  • risk of investment
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10
Q

Government spending

A
  • transfer payments (benefits eg. Pensions)
  • recurring spending (public services eg. Teacher wages)
  • investment projects (state investment eg. Building schools)
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11
Q

The output gap

A

The difference between the actual level of GDP and its estimated potential level. Usually measured as a percentage of the level of total output.

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12
Q

Negative output gap

A

The economy’s output is below the full capacity. Often corresponds to higher unemployment and under utilised resources. Leads to disinflationary effects.

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13
Q

Net trade equation

A

(X - M)

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14
Q

Trade balance

A

The difference between the value of exports and the imports.
When the value of exports exceeds the value of imports = surplus
When the value of imports exceeds the value of exports = deficit

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15
Q

Factors influencing exports of goods and services

A
  • relative prices of exports in world markets
  • the exchange rate
  • non price demand factors eg. Brand and design
  • strength of aggregate demand in key export markets
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16
Q

Free floating exchange rates

A

Currency value is set by market forces (supply, demand)
Currency appreciates and depreciates

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17
Q

Benefits of a free floating exchange rate

A
  • shock absorption
  • reduced speculative attacks
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18
Q

Disadvantages of a free floating exchange rate

A
  • exchange rate volatility
  • currency risk
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19
Q

Fixed exchange rates

A

Central bank fixes the currency value - pegged to one or more currencies

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20
Q

Benefits of a fixed exchange rates

A
  • price stability
  • reduced exchange rate risk
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21
Q

Disadvantages of a fixed exchange rate

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A
  • lack of flexibility
  • speculative attacks
22
Q

Reasons for a fall in AD

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A
  • fall in net exports (m>x)
  • cut in gov spending
  • higher interest rates
  • decline is household wealth and confidence
23
Q

Reasons for an increase in AD

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A
  • depreciation of the exchange rate
  • cuts in direct and indirect taxes
  • increase in house prices
  • expansion of supply of credit + lower interest rates
24
Q

The multiplier effect definition

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A

Happens when an initial change in spending, leads to a larger and more widespread final impact on an economies total output of income.

25
Positive multiplier effect
When an initial increase in injection leads to a greater final increase in the level of real GDP. Opposite for negative multiplier.
26
Multiplier formula
1 / marginal propensity to save Or 1 / (1 - MPC)
27
When does a high or low multiplier effect occur
High multiplier value when: - economy has plenty of spare capacity to meet higher AD - MPM and tax is low - high MPC extra income Low multiplier effect when: - economy is close to capacity during a boom phase - propensity it import goods and services is high - higher inflation causes rising interest rates which dampens AD
28
Long run aggregate supply (LRAS)
The maximum possible output. Represents output when all factors of production are fully utilised and efficiently employed.
29
Factors influencing long run aggregate supply
- higher productivity of labour and capital - innovation and enterprise - growing population and increased labour market participation - capital investment - stock of natural environmental resources
30
Macro economic objectives
- reduce unemployment - economic growth - reduce the debt - sustainability - reduce inequality - control inflation - balance of payments (increase exports)
31
Contractionary policy (fiscal)
Objective is to reduce AD Increase taxation and reduce government spending As a result: - increased unemployment as demand is dropped - increased sustainability as we produce less - decrease in economic growth as output decreases - increase in balance of payments as we do not import as much and exports are cheap - decrease in the deficit as gov spending decreases - reduction in inequality however number of people facing increases
32
How does tight policy lead to an appreciation of the £
An increased rate of interest causes demand for the £ to increase so the value of the pound increases due to the fixed amount in circulation. (Investors wants money in UK banks due to high return). This leads to an appreciation of the pound.
33
How does a strong pound impact the balance of payments
**S**trong **P**ound **I**mports **C**heap **E**xports **D**ear
34
Loose monetary policy
Main objective is to stimulate economic growth Reduces the rate of interest Increases the amount available to borrow As a result: - causes a decrease in unemployment - causes an increase in economic growth - causes a decrease in sustainability - deficit will lessen (more employed so more tax revenue)
35
How does loose policy lead to a depreciation of the £
A lower interest rate will decrease the demand for the £ so the value of the pound decreases due to investors not wanting money in UK banks due to the low return. This leads to a depreciation of the pound.
36
How does a weak £ impact the balance of payments
**W**eak **I**mports **D**ear **E**xports **C**heap
37
Tight monetary policy
- increases the rate of interest - reduces amount available to borrow -main objective to control inflation As a result - causes an increase in unemployment - causes an increase in sustainability - deficit will worsen (less employed so less tax revenue)
38
Loose fiscal policy
- increases AD - increase in gov spending and decrease in taxation As a result - decreased unemployment - decrease in sustainability - increase in inflation - increased inequality gap - decrease in balance of payments - increase in the deficit
39
Quantitative easing method
- when the economy is sluggish the central bank buys assets like government bonds from commercial banks. Banks get cash in return for selling bonds. - this increases the amount of money in the financial system and encourages banks to lend more and consumers and businesses to spend more.
40
QE definition
It is a way of injecting money into the economy to stimulate growth.
41
Eval points of QE
- commercial banks may be reluctant to lend to businesses who need finance (risk averse) - makes economy dependant on low interest rates.
42
Liquidity trap
Occurs when interest rates are very low, yet consumers prefer to hoard cash rather than spend or invest their money in higher yielding bonds or other investments.
43
Price deflation definition
Occurs when the rate of inflation becomes negative
44
Supplyside causes of deflation
- improved productivity - technological advances - significant fall in wage rates - high exchange rate causing import prices to fall
45
Fiscal deficit
Difference between gov spending and taxation within a year (same as budget deficit)
46
Supplyside policies
A set of economic measures and strategies that aim to improve the long run productive capacity and efficiency of an economy.
47
Trend growth
Long term non inflationary increase in GDP
48
Marginal revenue product for labour (MRPL) equation
MRPL = marginal product of labour x marginal revenue
49
Profit maximisation position
MC = MR
50

Economics Year 12 (4 decks)

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