Theme 2: The UK economy - performance and policies

Question 1

inflation

Answer 1

a sustained increase in the general price level

Question 2

deflation

Answer 2

a sustained fall in the general price level

Question 3

UK inflation target

Answer 3

2%

Question 4

disinflation

Answer 4

a fall in the rate of inflation

Question 5

demand-pull inflation

Answer 5

inflation caused by excess aggregate demand in an economy

Question 6

cost-push inflation

Answer 6

inflation caused by increases in the costs of production for producers

Question 7

unemployment

Answer 7

those who are not working but actively seeking work

Question 8

underemployment

Answer 8

those who are working but want to work more hours or are working in a job that requires lower skills than what they have

Question 9

structural unemployment

Answer 9

occurs when there is a mismatch between jobs and skills in an economy

Question 10

cyclical unemployment (demand deficient unemployment)

Answer 10

unemployment cause by a fall in aggregate demand in an economy

Question 11

seasonal unemployment

Answer 11

occurs when certain seasons come to an end and labour is no longer required until next season

Question 12

frictional unemployment

Answer 12

occurs when people are between jobs or when they first enter the job market

Question 13

claimant count

Answer 13

measure of unemployment that tacks the number of people receiving benefits for being unemployed

Question 14

balance of payments

Answer 14

a record of a country’s financial transactions with the rest of the world

Question 15

consumer price index (CPI)

Answer 15

a measure that tracks changes in the average price level using a weighted basket of goods and services purchased by the average household

Question 16

gross domestic product (GDP)

Answer 16

the value of all goods and services produced in an economy over a period of time

Question 17

nominal GDP

Answer 17

the actual value of all goods and services produced in an economy which does not take inflation into account

Question 18

real GDP

Answer 18

the value of all goods and services produced in an economy over a period of time and has been adjusted for inflation

Question 19

gross national product (GNP)

Answer 19

The value of goods and services produced by a country’s factors of production both domestically and abroad

Question 20

disposable income

Answer 20

amount of money households have available after direct taxes

Question 21

aggregate demand

Answer 21

the total demand for all goods and services produced in an economy at any given price level

Question 22

AD formula

Answer 22

AD = C + I + G + (X - M)

Question 23

investment

Answer 23

spending on capital goods by firms

Question 24

gross investment

Answer 24

total investment to replace old capital goods which have depreciated and to buy new capital goods

Question 25

net investment

Answer 25

investment that has been adjusted for depreciation (net investment = gross investment - depreciation)

Question 26

current government spending

Answer 26

spending on providing public services, such as NHS salaries

Question 27

capital government spending

Answer 27

spending on investment in new public infrastructure

Question 28

government budget

Answer 28

when the government lays out their spending and taxation plans

Question 29

budget deficit

Answer 29

when government spending exceeds government revenue

Question 30

budget surplus

Answer 30

when government revenue exceeds government spending

Question 31

aggregate supply (AS)

Answer 31

the total supply of goods and services produced within an economy at any given price level

Question 32

short-run aggregate supply (SRAS)

Answer 32

influenced by changes in the costs of production, and is a period where at least one factor of production is fixed

Question 33

long-run aggregate supply (LRAS)

Answer 33

influenced by a change in the productive capacity of the economy

Question 34

national income

Answer 34

measure the monetary value of the flow of output of goods and services produced in an economy

Question 35

wealth

Answer 35

a stock of assets that can be used to generate an income

Question 36

income

Answer 36

a flow of assets in the economy

Question 37

multiplier ratio

Answer 37

ratio change in real income to the injection that created the change

Question 38

multiplier formula

Answer 38

1 ÷ (1 - MPC) OR 1 ÷ MPW = 1 ÷ (MPM + MPS + MPT)

Question 39

marginal propensity to consume (MPC)

Answer 39

proportion of additional income that is spent on consumption

Question 40

marginal propensity to save (MPS)

Answer 40

proportion of additional income that is saved

Question 41

marginal propensity to tax (MPT)

Answer 41

proportion of additional income that is paid in tax

Question 42

marginal propensity to import (MPM)

Answer 42

proportion of additional income that is spent on imports

Question 43

formulas for all MPC MPS MPT and MPM

Answer 43

Change in C/S/T/M ÷ change in Y (income)

Question 44

real GDP formula

Answer 44

nominal GDP x (100 ÷ price index)

Question 45

short-run economic growth

Answer 45

changes to any components of AD will cause short-run economic growth

Question 46

long-run economic growth

Answer 46

caused by an improvement to the quality or quantity of the factors of production

Question 47

actual growth

Answer 47

occurs when there is an increase in GDP

Question 48

potential growth

Answer 48

increase in the productive potential of an economy

Question 49

output gap

Answer 49

difference between the actual level of output and the maximum potential level of output

Question 50

positive output gap (inflationary gap)

Answer 50

occurs when real GDP is greater than the maximum potential real GDP

Question 51

negative output gap (deflationary gap)

Answer 51

occurs when real GDP is less than the maximum potential real GDP

Question 52

macroeconomic objectives

Answer 52

• economic growth • low and stable inflation • low unemployment • balanced trade on current account • low in equality • environmental protection • balanced government budget

Question 53

demand-side policies

Answer 53

aim to shift AD in an economy by using either fiscal or monetary policies

Question 54

fiscal policy

Answer 54

involves the use of government spending and taxation and borrowing to influence AD in the economy

Question 55

direct taxes

Answer 55

taxes imposed on an individual's income or a firm's profits and are paid directly to the government

Question 56

indirect taxes

Answer 56

taxes imposed on the spending of goods and services, which the supplier is responsible for sending payment to the government

Question 57

progressive tax

Answer 57

the marginal rate of tax rises as incomes rise

Question 58

regressive tax

Answer 58

the rate of tax falls as incomes rise, e.g. taxes on tobacco

Question 59

monetary policy

Answer 59

involves adjusting interest rates and the money supply to influence AD in the economy

Question 60

supply-side policies

Answer 60

a set of economic measures and strategies that aim to improve the long-run productive capacity of an economy

Question 61

interventionist supply-side policies

Answer 61

require direct government intervention to increase the full employment level of output