Theme 2: The UK economy – performance and policies Flashcards

Question

What are the costs of high inflation?

Answer 1

-Lower purchasing power -Erosion of savings -Lower export competitiveness -Wage/consumer price spirals -Fiscal drag -Inflationary noise

Answer 2

-Means that people are less able to buy what they need if wages and real incomes dont rise in line with inflation

Answer 3

As inflation increases, money in savings decreases in value. Nominal value of savings is eroded. Savings cant grow at the same rate that inflation does.

Answer 4

Government get more tax money as workers are earning more money so they are pushed into next tax band (Fiscal drag)

Answer 5

People are less able to buy what they need if wages and incomes dont rise in line with inflation.

Answer 6

Prices are falling, inflation rate is negative

Answer 7

Inflation at a slower rate

Answer 8

-Workers with higher wages - happier workers -Consumption is natural - consumption isn't delayed -Firms encouraged to increase output -Can keep unemployment low in a recession -Reduces real value of debt -Improvement of government finances

Answer 9

-Debt becomes easier to pay back. Debt is always fixed. The debt is now a smaller percentage of your income because wages are increasing due to inflation

Answer 10

Those who are willing, of a working age, able to work and are actively seeking work but do not have a job.

Answer 11

Unemployed/economically inactive x 100

Answer 12

Cyclical unemployment - Lack of demand in the economy therefore there is less demand for firms to hire labour Structural - Occupational - Workers dont have skillset to change profession. Geographical - Workers are not willing to move. Frictional - People who have just finished a job and are looking for a new one. Seasonal - Workers have jobs which depend on the season. e.g. Farmers Casual - Workers that have a contract maybe unemployed till they get a new contract Real wage - Where wages are fixed above equilibrium rate causing excess supply of labour

Answer 13

-Trade in goods -Trade in services -Investment income -Transfers

Answer 14

When the value of imports > value of exports

Answer 15

Strong exchange rate - Makes our exports more expensive to buy as another country has to buy more of our currency to buy our g/s which is unattractive. Recession in another country - Causes exports to decrease as their demand decreases so they will buy less exports from us Growth domestically - Consumers and firms have higher demand so they import more g/s to satisfy the demand

Answer 16

Lack of competitiveness of price and quality. Lack of investment means less efficiency so costs increase. Lack of productivity of inputs and outputs so there is a higher cost per unit High relative inflation can cause prices of exports to be higher Poor quality exports -> poor imports Resource depletion

Answer 17

High income abroad Lower incomes at home Weak exchange rate

Answer 18

Low relative inflation Strong investment Gains in comparative advantage New resource discoveries

Answer 19

Higher net exports, high AD, increased growth, increased inflation Appreciation of the exchange rate Financial account deficit Sign of an unbalanced economy

Answer 20

Level of real disposable income - Higher disposable income means higher MPC as people have more purchasing power Lower interest rates - Low cost of borrowing leads to a greater incentive to borrow money to spend Consumer confidence - High consumer confidence means higher MPC Asset prices - They link to how wealthy people feel. More wealthy feeling -> higher MPC Household indebtedness

Answer 21

Firms will borrow to invest -> lower interest rates so cost of borrowing is low so there is a greater MPI.

Answer 22

Expected profit is high so firms will invest as there us the incentive. If expected profit is lower then there will be less investment.

Answer 23

When an initial injection leads to a greater increase in real GDP. Initial injection triggers further spending.

Answer 24

Changes in investment can be directly linked to changes in rate of GDP growth

Answer 25

Taxation - MPT Savings - MPS Imports - MPM

Answer 26

Corporation tax is tax on business profits. Therefore, higher corporation tax will lead to less profits for business so they have less money to reinvest. Lower corporation tax means business have more retained profit to invest in capital goods.

Answer 27

If a business is working near max capacity, they will need to invest so they can increase spare capacity. Vice versa

Answer 28

If competitors are improving and competition is strong then business will invest to equal their competitors.

Answer 29

If there is high AD in other countries, they will demand more of our exports meaning firms will invest more to meet the increased demand

Answer 30

Low price of capital means investment is less costly

Answer 31

Interest rates Business confidence Corporation tax Level of spare capacity Level of competition Price of capital Growth in other countries Animal spirits Access to capital Gearing of firms

Answer 32

% of invested money which has been borrowed. High gearing means more money has been borrowed to invest.

Answer 33

Welfare spending Current spending Capital spending Debt interest payments

Answer 34

When the government spend on maintenance of public services and payment of public service workers e.g. NHS and public transport

Answer 35

Spending on infrastructure e.g. building hospitals, schools, railways

Answer 36

Spending on benefits and pensions

Answer 37

Interest to pay on debts

Answer 38

Gov spending > Tax revenue

Answer 39

Gov spending < Tax revenue

Answer 40

Total stock of debt overtime. Accumulation of budget deficits.

Answer 41

Real disposable income earned abroad Real disposable income earned at home Strong or weak exchange rate Protectionism at home and abroad Relative inflation levels at home

Answer 42

Stronger Pound Imports Cheaper Exports Dearer Weak exchange rate Imports Dearer Exports Cheaper

Answer 43

Boom abroad means MPC to import increases so it is likely they buy more of our exports.

Answer 44

Boom in the UK means MPC to import is likely to rise. Imports rise and AD shifts left.

Answer 45

High inflation in the UK means our exports are more expensive due to inflation, so our exports decrease as other countries have to pay more.

Answer 46

Increase in productivity Increase in workforce Investment Infrastructure movement Increase in competition New resource discoveries

Answer 47

A - Oil prices

Answer 48

A rise in the value of the pound means the pound has appreciated. Therefore it is more expensive for consumers in other countries to buy our exports. This is a less attractive option, so they will demand less as they don't want to buy more of our currency. This causes AD to shift left. Exports become expensive so aggregate demand falls

Answer 49

Total spending on goods and services

Answer 50

-Money flows around the economy between consumers/households and firms -Withdrawals are taxation, savings, imports

Answer 51

-The rate at which the currency of one country would have to be converted into that of another country to buy the same amount of goods and services in each country -Comparison between countries, taking into account different cost of living.

Answer 52

Number of people claiming unemployment benefit/jobseekers allowance

Answer 53

Increase in raw material price (1) This causes price to increase as producers need to make same amount of profit as before so they increase price of good/service

Answer 54

Economy operates at full capacity/no spare capacity (1) so there are no unused factors of production/ resources (1)

Answer 55

Cost of borrowing (1) Reward for saving (1)

Answer 56

It is GDP plus net income paid into the country by other countries for things such as dividends or interest (1)

Answer 57

AD = C + I + G Leads to a depreciation in the exchange rate. AD will increase as our exports are now cheaper to buy for foreign consumers so value of exports increases. Value of imports decreases as the pound goes less distance in other countries. AD shifts right.

Answer 58

* The value/price of one currency in terms of another (1)

Answer 59

Does not include housing costs (1) Monthly rent or mortgage interest repayments form a large part of consumers spending (1)

Answer 60

-Business confidence, high business confidence means a business will be more likely to invest. Vice versa. Firms will only invest if there is less uncertainty about future costs and revenues, and sales. Firms are reluctant to commit to capital spending while there is economic uncertainty -Demand for exports lower the demand in a country to which a firm is trying to export, the less the investment. Uncertainty over the UK’s future trade relationship has discouraged companies from investing. Trade tensions are also affecting investment

Answer 61

The spiral begins with deflation which is where there is a sustained fall in the general price level. Consumers notice the falling prices and decide to delay their purchases and wait for prices to fall further. This causes a reduction in AD as consumption is a component of AD. The fall in AD lowers the price level again and so consumers further delay their purchases. And the cycle repeats.

Answer 62

-Technological advancements = Improve quality of FOPs -Changes in relative productivity = process innovation often results in productivity improvement -Changes in education and training = often results in better quality FOPs -Changes in government regulations = increases quantity of FOPs

Answer 63

-Changes in costs of raw materials and energy = As the price of input costs rise, fewer goods/services can be produced with the same amount of money -Changes in exchange rates = Producers often import raw materials Stronger currency = cheaper imports Cheaper imports = decrease in input costs Lower costs = more output -Changes in tax rates = Taxes represent an additional cost for firms Decreasing taxes = decrease in costs Lower costs = more output

Answer 64

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

Answer 65

-Increase inflation -Increase growth -Reduce unemployment

Answer 66

Reduce inflation Reduce excess debt and promote saving Reduce current account deficit Slow down growth

Answer 67

A policy aimed to increase the productive capacity of an economy, shifting LRAS to the right

Answer 68

-Aims to increase the role of the government -Gov spending on education/training -Gov sending on infrastructure -Subsidies to firms to promote investment

Answer 69

-Aims to reduce the role of the government Tax reform: -Lower income tax -Lower corporation tax Labour market reform: -Reduce benefits -Reduce minimum wage Competition policy: -Privatisation -Trade liberalisation -Deregulation

Answer 70

1) When an increase in price leads to an increase in real GDP 2) When a decrease in price leads to a decrease in real GDP

Answer 71

* Decreases reward for saving (1) * Consumption will increase, AD and inflation rises (1)

Answer 72

RPI - Retail price index (Includes payments on mortgage and rent) CPI - Consumer price index

Answer 73

Lower chance of deflationary spiral

Answer 74

SRAS shifts left and price level increases

Answer 75

Higher prices means workers demand higher incomes ---> costs for firms increases ---> SRAS shifts inwards ---> that means even higher prices and the spiral repeats. This can lead to hyperinflation

Answer 76

Advantage: 1. Protects from deflation and a deflationary spiral 2. Reduces real value of debt -----> Improves inequality 3. High inflation decreases value of real wages which lowers costs for firms and government Disadvantages: 1. Can lead to a decrease in real wages and savings which can worsen inequality. 2. Price wage spiral 3. Uncertainty. Difficult to predict future prices

Answer 77

% change in real GDP = % change in nominal GDP - inflation rate

Answer 78

An increase in real GDP

Answer 79

GDP + net income from abroad

Answer 80

Not everyone who is unemployed will claim benefits, there is a stigma around benefits. Therefore it underestimates unemployment

Answer 81

Only surveys 80000 households so it may not give an accurate representation of unemployment

Answer 82

Someone isn't using their skills or isn't working enough hours

Answer 83

-Wages -Oil prices -Weather -Import prices -technology

Answer 84

A policy which changes government spending and taxation to influence AD

Answer 85

-Boost growth -Reduce unemployment -Increase inflation (demand pull) -Redistribute income

Answer 86

-Reduce inflation -Reduce budget deficit -Redistribute income -Reduce current account deficit

Answer 87

This increases pensioners' savings as the return on savings is greater, which means pensioners have more real disposable income which means they can increase consumption leading to demand-pull inflation

Answer 88

When unemployment is low, firms compete to hire the few remaining workers, increasing the wage that they are willing to pay. So wages increase, and firms will then increase their prices, so that they can make a profit despite the higher wage costs. And so, as unemployment decreases, the price level increases, which, as we know, is inflation!

Theme 2: The UK economy – performance and policies Flashcards

(117 cards)