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Macro advanced info > theme 4 > Flashcards

theme 4 Flashcards

1
Q

How are strategies influencing growth and development categorised?

A
  • Market Based
  • Interventionist
  • Other strategies
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2
Q

What are the market based strategies for growth and development?

A
  • Trade liberalisation
  • Promotion of FDI
  • Removal of government subsidies
  • Floating exchange rates
  • Microfinance schemes
  • Privatisation.
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3
Q

What are the two ways to measure income inequality?

A
  • Lorenz curve

- Gini coefficient

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4
Q

What does the Lorenz curve show?

A

-Plots cumulative population against cumulative income.

One perfectly equal line and then which is the real, the degree of bend is the inequality.

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5
Q

What is income inequality and what is wealth inequality.

What is the relationship between the two?

A
  • Income inequality is the extent to which income is distributed in an uneven manner (flow concept)
  • Wealth inequality is the extent to which wealth is distributed in an uneven manner (stock concept).

-Wealth inequality Is more common as it can be passed through generations.

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6
Q

What does the gini coefficient show?

A

worked out by area under Lorenz curve, between 1 and 0 the higher the coefficient the more inequality

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7
Q

What is the cause of inequality in a country?

A
  • Wages - higher wages due to higher qualifications or time worked.
  • Globalisation may have benefitted a small part of the country
  • Kuznets hy
  • Industrialisation may have happened in urban areas, but rural areas poor.

-Variations in health and education

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8
Q

What are 4 causes of inequality between countries?

A
  • Trade benefits some countries more than others.

- Different factor endowments (prebisch-singer) hypothesis.

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9
Q

What is the theory of Economic change on growth and development?

What is an evaluation of this theory?

A

Kuznets hypotheses, as a country grows it industrialises and industrial wages rise faster than farmers which causes inequality that is decreased through taxes.

-Pikkety discredited this theory as he suggest as when the rate of return of capital grows the richer get richer.

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10
Q

What is the significance of capitalism system on inequality?

A
  • Reason for wage differentials
  • Reason that some people own more than others
  • The free market forces ignore equality.
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11
Q

What is the theory of absolute advantage?

PAPER 3

A

When a country can produce more cheaply in absolute terms than another country

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12
Q

What is the theory of comparative advantage?
What does this theory suggest?
PAPER 3

A

When a country can produce at a lower opportunity cost compared to another country.
-Trade is advantageous if opportunity cost is different.

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13
Q

What are the limitations and assumptions of comparative advantage?
PAPER 3

A
  • Comparative advantage suggests that there are no transport costs.
  • Assumes costs are constant and no economies of scale
  • Assumes goods are homogenous
  • Factors of production are completely mobile
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14
Q

What are the advantages of comparative advantage?

PAPER 3

A
  • Increases world output as countries specialise
  • Decreases costs as countries benefit from economies of scale.
  • Trade allows greater choice and thus increases consumer welfare.
  • Trade also means greater competition which present incentives to innovate
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15
Q

What are the disadvantages of comparative advantage?

PAPER 3

A
  • Leads to over dependence on some imports and some exports.
  • Can lead to structural unemployment as jobs are lost to other firms who are more competitive.
  • Environmental issues due to transport.
  • Loss of culture and sovereignty.
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16
Q

How do you draw comparative advantage on a graph?
and how do you find it
PAPER 3

A
  • Each axis is a good
  • Join up lines.
  • Go on axis with the biggest difference, and this good has the comparative advantage.
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17
Q

What is an example of a comparative advantage table with two products and numbers.

A

UK and US + Cars and Vans
UK 100 cars or 200 vans
US 200 cars or 600 vans

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18
Q

What are the three types of taxes and what are they?

A
  • Progressive taxes: as income increases marginal rate of tax increases, eg Income tax. (Pay a higher % of income on tax).
  • Regressive tax: those on a higher income pay a lower % of income on tax, eg VAT.
  • proportional tax: proportion of tax stays the same while income rises or falls. 10% of income.
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19
Q

What do tax changes impact?

A
  • Incentives to work
  • Tax revenue
  • Income distribution
  • Real output and employment
  • Price level
  • Trade balance
  • FDI
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20
Q

How do tax changes impact incentives to work?

What evidence is opposite this argument?

A
  • high marginal tax rates will discourage people from working as free market economists argue that the supply of labour is elastic.
  • High taxes could cause people to move abroad which will cause the poverty trap.
  • A change in income tax is more likely to have an impact compared to a change in VAT
  • Nordic countries have high tax rates yet high growth.
  • In addition, higher taxes mean people have to work longer hours to maintain income.
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21
Q

How do tax changes impact tax revenue?

What shows this?

A

-Laffer curve shows that increasing tax rate will increase revenue to a maximum point. (T star)
After this point incentives decrease and people start avoiding taxes more which decreases revenue.

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22
Q

What is the impact of tax changes on income distribution?

What types help equality the most?

A
  • Progressive taxes increase income equality
  • Regressive taxes decrease income equality
  • Inheritance taxes are progressive and so are corporation taxes as it takes money from shareholders who are likely to be well off.

-The tax system must also be supported by benefits.

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23
Q

What is the impact of tax changes on real output and employment?

A
  • An increase in direct taxes will decrease disposable income and thus decrease AD.
  • An increase in indirect taxes causing higher costs for firms will decrease SRAS.
  • Income taxes cause a disincentive to work which will decrease LRAS.
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24
Q

What is the impact of tax changes on Trade Balance?

A
  • Direct taxes decrease disposable income so demand for foreign goods will decrease so imports will decrease, so trade balance will improve.
  • However, lower AD in the economy will reduce competitiveness in the long run as there will be less investment
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25
Q

what is the impact of tax changes on FDI flows?

What is the consequence of this?

A
  • Low taxes on profit will incentivise foreign firms to invest
  • However, this could cause a ‘race to the bottom’ where each country attempts to decrease taxes on profits and this decreases their revenue.
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26
Q

What is globalisation?

A

-Refers to the growing interdependence of countries and the rapid change it brings about.

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27
Q

What are then characteristics of globalisation?

A
  • Free trade of goods and services
  • Free movement of labour
  • Free movement of capital
  • Free interchange of technology and intellectual capital.
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28
Q

What are the factors that have contributed to globalisation?

A
  • Development in communication and transport.
  • Trade liberalisation
  • Transnational corporations
  • International financial markets
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29
Q

How has development in communication and transport aided globalisation?

A
  • Decreases the importance of distance.
  • Internet connection has sped up financial flows and business decisions.
  • Containerisation has reduce shipping costs.
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30
Q

How has trade liberalisation aided globalisation?

A
  • The WTO has organised a succession of trade agreements that have encouraged free trade.
  • The breaking down of the Soviet bloc in 1945 and the opening of china has expanded free trade.
  • Increased prevalence of trade blocs like the EU
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31
Q

How have TNCS aided globalisation?

A

-In order to increase profit they move to countries with lower labour costs.
Eg toyota has plants in 26 countries and sells cars in 140 countries.

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32
Q

What does globalisation impact?

A
  • Consumers
  • Workers
  • Producers
  • Government
  • Environment
  • Economic growth
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33
Q

What are the advantages and disadvantages of globalisation on consumers?

A

ADV- Consumers have a greater choice of goods.
-Lower prices as firms can take advantage of comparative advantage and produce in countries with lower costs.

DIS- could cause a rise in prices as incomes are rising do demand increases.
-Loss of culture.

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34
Q

What are the advantages and disadvantages of globalisation on workers?

A

DIS- those working in sweatshops like Bangladesh will see poor working conditions

  • -Increased migration may impact workers by lowering wages
  • The wages for high skilled workers will increase as there will be more demand for their work and thus increase inequality.
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35
Q

What are the advantages and disadvantages of globalisation on producers?

A

ADV -Firms are able to reduce risk as they can source from more countries and sell in more.
-They can employ low skilled workers more cheaply and can exploit comparative advantage.

DIS- firms who cannot compete internationally will lose out.

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36
Q

What are the advantages and disadvantages of globalisation on government?

A

ADV- gov could receive more TAX revenue as TNCS make large profits.
-If the Govs use right policies they can maximise gain

-Dis, TNCS have the power to bride and lobby governments.

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37
Q

What is the impact of globalisation on the environment?

A

ADV-countries can work together to exchange ideas on climate change.

DIS-THe increase in world production has increased demand for raw materials
-Increased transport around the world has increased emissions.

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38
Q

What are the advantages and disadvantages of globalisation on economic growth?

A

ADV-Globalisation increases investment, which is an injection in the economy which can have a multiplier effect.

  • TNCS may bring world class management techniques which will benefit the industry
  • Trade will increase output as it allows for exploitation of comparative advantage.

-DIS
TNCS could cause political instability
-Comparative cost advantages can change over time and will leave the country which will cause structural unemployment.

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39
Q

What are the reasons for restrictions for free trade?

A
  • TO PROTECT INFANT INDUSTRIES. New start ups have high AC due to sunk costs. Therefore, they would be unable to compete internationally. They can be protected until they are able to compete. Eg this has worked well in Japan but seen as ineffective as firms grow to be inefficient.
  • JOB PROTECTION, government may be concerned about firms losing out to foreign competition and thus there will be job losses within the country.
  • DUMPING, when a country sells surplus good in another country at a low price, harming domestic producers. In China, tariffs are put on stainless steel tubes from EU and Japan to prevent dumping.
  • PROTECTION FROM UNFAIR COMPETITION- domestic firms may have to compete with other countries who have lower costs, eg very low labour costs or no regulation costs.
  • TERMS OF TRADE, when demand imports increase, price of imports increase which worsens terms of trade. Restrictions will reduce the supply of good and improve terms of trade.
  • DANGER OF OVERSPECIALISATION- protectionism prevents firms from being overly reliant.
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40
Q

What is a synoptic point for protectionism?

A

-Most of the time protectionism to protect individual markets or jobs.

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41
Q

What are the 3 types of restrictions?

A
  • Tarrifs - a tax on imports, which makes them more expensive.
  • Quotas- a limit on the level of imports allowed into a country
  • Subsidies - a payment made to a producer to reduce costs and increase competitiveness, either to make exports competitive or to protect from exports.
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42
Q

What are the 4 types of non tariff barriers?

A
  • Embargoes- total bans
  • Import licensing - some countries are allowed to import and licenses are scarce.
  • Legal and technical standards - certain conditions must be met. Eg EU has high standards which decreases imports from outside of the block.
  • Voluntary export restraint agreements- a country will agree on a limit the volume they export/
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43
Q

What is the impact of restrictions on consumers?

A
  • They pay a higher price. It also increased prices of domestic goods as importing raw materials may be more expensive due to restrictions.
  • less choice
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44
Q

What is the impact of restrictions on producers?

A
  • Domestic producers benefit as they can sell at a higher price as they do not have to compete.
  • However, may suffer higher prices on imports they need on production.

-Foreign more efficient producers lose out and domestic less efficient producers continue.

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45
Q

What is the impact of restrictions on workers?

A

-Evidence shows there is little impact on employment figures.
-In the long run the closing down of inefficient firms will lead to a reallocation of resources and these workers will be able to get more stable jobs.
Following steel tariffs in. Argentina 2018, 16 jobs have been lost elsewhere in the economy for every one that has been gained in steel.

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46
Q

What is the impact of restrictions on governments?

A
  • In the short-run they benefit from tariff revenues.

- However, in the long run it stifles growth which can lead to an inefficient economy.

47
Q

What is the impact of restrictions on living standards?

A

As tariff diagram shows there is deadweight welfare loss.

-Can also cause trade wars Us-China

48
Q

What is the impact of restrictions on equity?

A

-Regressive affect as the increase in prices affects poorer members of society more.

49
Q

What is the tariff diagram?

What can be shown on it?

A
  • Start with domestic supply and demand.
  • Add world supply and shift it up.
  • Central square is government revenue
  • Left triangle is welfare loss of world efficiency.
  • Right triangle is deadweight loss for consumers.
50
Q

What is the quota diagram?

what can be shown on it

A
  • Start with domestic supply and demand + world supply.
  • Add in a quantity that is lower than the free market supply and shift the domestic supply curve out.
  • Middle bottom triangle is deadweight loss in consumer efficiency.
  • Right triangle is deadweight loss of consumer surplus.
51
Q

What are the three types of exchange rates?

A
  • Floating
  • Managed
  • Fixed
52
Q

What is the exchange rate?

A

-The purchasing power of a currency in terms of what it can purchase in another currency.

53
Q

How can exchange rate prices be expressed?

A
  • Spot exchange rate, is the actual rate.
  • Forward exchange rates involve agreeing on a price in the future.
  • Bilateral exchange rate is one currency against another.
  • EER shows the value of one currency against the proportion of trade that a country does with each currency.
54
Q

What is a floating exchange rate system?

A

-When exchange rate is dictated by demand and supply (free market forces). Eg UK

55
Q

What are the arguments for floating exchange rates?

A
  • Interest rates are reserved for domestic monetary policy only, to control inflation.
  • Can auto correct a trade deficit, as high imports can cause weak pound.
  • Can reduce speculation as that is more effective when overvalued or undervalued.
56
Q

What is managed floating?

How is it done?

A
  • This is when the currency is left to demand and supply, but the government may intervene to prevent large changes.
  • Done by buying and selling currency and changing interest rates.
57
Q

What is a fixed exchange rate system?

What country uses this?

A

-When one currency is fixed in terms of another eg 1 cuban dollar is worth 2 US dollars.

  • Guernsey pound is set in terms of GPB
  • Saudi Riyal in terms of US dollar.
58
Q

What are the arguments for and against a fixed exchange rate?

A
  • FOR
  • Fixed exchange rate is good as investors know true cost of the deal.
  • Less costs associating with hedging and forward exchange rates.
  • AGAINST
  • If the currency is falling below a fixed the level the government have to intervene with interest rates.
59
Q

How are there changes in currencies?

A
  • Appreciation this is when value of currency increases due to market forces
  • Depreciation is when value of currency decreases due to market forces.

-Revaluation is when value of the currency increases through intervention.
-Devaluation is when value of currency decreases through intervention.
(FIXED SYSTEMS).

60
Q

What are the factors that cause an increase in value of exchange rate?

A

-Any change to supply of demand.

  • Increase in demand of amount of British goods that foreigners want to buy.
  • Increase in demand for FDI in UK, increase demand to put money in British banks.
  • Increase in demand for UK holidays.
  • Amount of speculation to the pound.
61
Q

What cause cause a decrease in the value of the exchange rate?

A
  • Increase in demand of foreign goods in the UK
  • the number of British firms that want to invest abroad
  • the number of britons that want to holiday abroad or place money in foreign banks
  • Amount of speculation to the pound
62
Q

What are the general determinants of exports and imports?

When does speculation work?

A
  • Imports and exports
  • level of investment
  • Holidays
  • Speculation

-speculation is the biggest short term determinant.

63
Q

How can governments intervene in currency markets?

A
  • Gov can use interest rates
  • Gold and foreign currency reserves
  • COMPETITIVE Devaluation
  • When countries devalues currency to make exports cheaper.
  • However, this can cause inflation
  • Also other countries can follow.
64
Q

What are the two theories about current account balance and exchange rates?

A
  • Marshall-Lerner condition .A currency devaluation will only have a positive impact if the sum of the price elasticity of imports and exports are greater than 1.
  • J curve, the current account deficit will decrease before it improves. In the short run, demand is inelastic as people are in contracts or unable to switch straight away. This will cause price of imports to increase.
65
Q

What is the impact of exchange rate on economic growth and unemployment?

A

-A weaker exchange rate is likely to increase exports, since they become cheaper, and decrease imports which will increase AD. This will increase unemployment and economic growth.

66
Q

What is the impact of the exchange rate on the rate of inflation?

A

-Fall in the exchange rate will cause an increase in prices of imports.
It will also increase AD which increases inflation.

67
Q

What is the impact of the exchange rate on FDI?

A

-A fall in the exchange rate may increase FDI as it is cheaper to invest. However, a significant fall shows instability.

68
Q

What are injections?

A
  • Monetary additions to the economy
  • Government spending (G)
  • Investment (I)
  • Exports (X)
69
Q

What are withdrawals?

A
  • Monetary leakages from the economy
  • Taxation (T)
  • Saving (S)
  • Imports (M)
70
Q

How do injections and withdrawal relate to growth?

A

-If the sum of the injections is greater than the withdrawals the economy is shrinking.

71
Q

What are the two types of fiscal policy and what are they?

A

-AUTOMATIC STABILISERS are mechanism which reduce the impact of changes in the economy on income.
BENEFITS AND TAXATION.

-DISCRETIONARY- when the government manipulates taxation and spending to influence the economy

72
Q

What do automatic stabilisers do?

A

-They cannot prevent fluctuations in the economy but they can reduce the impact that they have.

For example when the economy is in a recession more benefits are paid out reduces the fall in AD

When the economy is in a boom taxes increase which prevents AD from increasing too quickly.

73
Q

What is the difference between national debt and fiscal deficit?

A
  • National debt is the sum of all government debts built up over many years
  • Fiscal deficit is the annual T-G
74
Q

What is the UK’s national debt?

A

In 2018 it was 87.7% of GDP

2022 it is 104% of GDP

75
Q

What is a cyclical deficit?

A

-Is the part of the deficit that occurs when government spending and taxation fluctuates around the trade cycle

76
Q

What is structural deficit?

What is actual deficit?

A
  • The size of the deficit when the economy is at the peak of the boom. Cyclical deficit is zero
  • Trade deficit + Cyclical deficit.
77
Q

What is the impact of a structural deficit?

Why is it hard?

A
  • if a gov has a structural deficit it is likely to grow over time as the government has to borrow money to spend.
  • it is impossible to know which part of the deficit is which.
78
Q

What are the factors that impact the size of the deficit?

A
  • The trade cycle- during a downturn spending increases and tax revenues decrease.
  • Unforseen events, eg natural disasters.
  • Rate of interest as if rate of interest increases this will enlarge the deficit. UK pay at 7%
  • Government Aims - austerity vs spending. Austerity policy reduced deficit by 75% since 2010.
  • Number of dependents
  • Privatisation.
79
Q

What are the factors impacting the size of national debts?

A
  • if the government is continually running a deficit then national debt will increase over time
  • General consensus view that a deficit over 3% will contribute to national debt

-Ageing population also impacts as government has to run a structural deficit to fund pensions.

80
Q

What are the consequences of fiscal and national debts?

ISIIR

A

INTEREST RATES-High levels of borrowing may raise interest rates and even cause crowding out
SERVICING -Countries have to spent a large amount servicing their debt eg UK spends 70 billion a year, but only small proportion of GDP.
INEQUALITY-Economists can argue that it can cause intergenerational wealth inequality but this depends on capital vs current expenditure.
RATING-High levels of debt cause credit ratings to decrease for governments from AAA to D which can make them more risky to loan to.
-If a government borrows money from abroad it might find it hard to repay debt.
-Borrowing can help growth if it is spent on capital expenditure.

81
Q

What are the factors influencing growth and development Italy XI

A 
Donarumma- primary product dependency 
Spinazzola- volatility of commodity prices
Chiellini- savings gap
Bonucci- foreign currency gap
Jorghino- demographic factors
Veratti- debt 
Barella- access to credit
Insigne- Infrastructure 
Immobile- education and skills
Chiesa- absence of property rights.
82
Q

why is a primary product dependency a factor impacting growth and development?

What are the caveats to this?

A

-Primary products re susceptible to natural disasters that can wipe out production and leave farmers with no income.

-Prebisch singer hypothesis the long run price of primary goods declines in proportion to manufactured goods, which means those dependent on primary exports will see a fall in terms of trade.
(However, in recent years there has been an increase in the price of some commodities).

-Dutch disease, this is when a country becomes a significant exporter in a short amount of time that the demand increases for their currency and after a period of time this decreases their competitiveness.

  • Countries like Saudi Arabia and Oil have grown with PPD.
  • Not all primary products have low income elasticity of demand eg diamonds.
83
Q

What is a country that suffers from primary product dependency?

A

-Ghana: Gold, Cocoa and Oil account for 75% of their total exports and had to ask IMF for loan in 2014 due to unsustainable balance of payments.

84
Q

How is commodity prices a factors influencing growth and development?

A

-Commodities have inelastic demand and price, which mean a small change will cause a large change in price.

  • This means producers income can be volatile and they may go into poverty.
  • They are not able to plan investment as income is volatile.

-When commodity prices rise, this causes over investment for when they eventually fall.

85
Q

How is a savings gap a factor that impacts growth and development?

A

-Developing countries have lower incomes so they save less, which means there is less money for banks to lend which reduces investment and consumption.

Harrod Domar model savings ratio/ capital output ratio

86
Q

How is a foreign currency gap factor that influences growth and development?

What is a country that has this?

A
  • developing countries can not earn enough foreign currency to finance the purchase of investment or other goods needed for faster economic growth.
  • Ethopia: in 2018 public debt was 60%, and most of it in foreign currency so may not have enough to pay back.
87
Q

How is a capital flight a factor that influences growth and development?

How does this link to a country?

A
  • Large amounts are taken out of a country rather than being left there to save and invest, decreasing liquidity of banks.
  • This is due to profit repatriation, hide it from government or due to low confidence.
  • Caused Argentine economic crisis of 2001
88
Q

How do demographic factors impact growth and development?

How does this link to a country?

A
  • Developing countries tend to have higher population growth. This makes it difficult to maintain living standards as if population grows by 5% economy must grow by 5%.
  • Developing countries have high brith rates which increases the number of dependents and does not increase workers. It also puts a strain on education and could increase youth unemployment
  • The population of Africa is expected to more than double by 2050
89
Q

How is debt a factor influencing growth and development?

How does this link to a country?

A
  • during 1970s and 1980s developing countries got loans from developed countries.
  • How they suffer from high interest repayments, sometimes higher than the loans and aid they receive from developing countries.

-Nigeria’s debt is 52% of GDP

90
Q

How is access to credit and banking influencing growth and development?

A
  • Developing countries have limited access to credit and banking compared to developing countries, who have complex systems. This means developing countries cannot have access to investment in the future.
  • Some families may have to use loan sharks who offer high interest rates and permanently leave individuals in debt.
91
Q

How is infrastructure a factor influencing growth and development?

-what is a country that has poor infradturcure?

A
  • In a developed country there is a complex network of buildings roads and ports.
  • Low levels of infrastructure make it hard for businesses to set up within the country.
  • however, development of infrastructure can be expensive.
  • India in 2012 they had power black outs
92
Q

How is education a factor impacting growth and development?

What is a country that shows this?

A
  • Poor education within these countries means that workers are low skilled and unable to read and write, so have low levels of productivity.
  • Ethopia suffers from high illiteracy at around 49%
93
Q

How does absence of property rights impact growth and development?

A
  • lack of property rights means businesses and individuals cannot decide what happens to their assets leading to reduced investments.
94
Q

What are non-economic factors that influence growth and development?

A
  • Corruption, leaders make decisions to benefit them and not the economy.
  • Diseases such as HIV and AIDs
  • Countries with poor climates and geographical terrain.
  • Many countries suffer from civil wars
95
Q

What are the 5 roles of the financial markets?

A
  1. Facilitate saving: they let individuals save at varying degrees of interest rates.
  2. Facilitated lending: bring together people who want to save and borrow
  3. Facilitate exchange of goods and services,
    millions of transactions go through financial markets by creating a payment system.
  4. To provide forward markets.
    Forward contracts can be used to hedge or speculate.
  5. To provide a market for equities (stocks and shares)
    stock market gives ownership to shareholders and capital to the company.
96
Q

What are examples of financial markets?

A
  • FOREX markets (currencies)
  • Capital markets (shares and bonds)
  • Derivative markets (futures)
  • Money markets treasury bills.
97
Q

Why are financial markets important?

A
  • To meet the demand for services: saving and borrowing.
  • Allow firms to raise finance
  • Allows for speculation (financial gain)
98
Q

What are the types of financial institutions?

A
  • Retail banks
  • Commercial banks
  • Investment banks
  • savings vehicles
  • Central bank.
99
Q

What is liquidity?

What is a liquid asset?

What is an illiquid asset?

A
  • The ease with which an asset can be turned into cash to settle a liability
  • Bonds/shares
  • Property
100
Q

What is the purpose for forward markets?

A
  • It prevents uncertainty for business and can prevent fluctuations in the exchange rate
  • It prevents uncertainty in the price of commodities.
101
Q

What is narrow money?

What is broad money?

A

M0 - money that is in circulation, bank notes and coins.

M4 includes the money that is kept in banks.

102
Q

What are the ways there can be market failure in the financial sector?

A
  • asymmetric information
  • Negative externalities
  • Moral hazard
  • Market Bubbles
  • Market rigging.
103
Q

What is asymmetric information in financial market and what is an example?

A
  • occurs as financial institutions have more information than the person they are lending to.
  • Banks have more information than regulators (FCA).
  • Eg in GFC packaging up sub-prime and prime mortgages as the same, which did not make buyers aware of the risk.
104
Q

What are the negative externalities caused by banks?

A

-The decisions of the banks can have a cost to a third party eg bailing out of the banks was paid by the tax payer. (850) billion.
-There was also a long term cost to the economy.
-

105
Q

How is moral hazard caused by banks?

A

-Banks will make decisions that are in their best interests knowing the potential risks.
eg 2008 mortgage lenders were taking adverse risks.
Employees sold mortgages to high risk individuals.

  • By selling more mortgages they would see higher bonuses.
  • The central bank is the lender of last resort and the banks know this.
106
Q

How are market bubbles caused by the financial market?

A
  • The price increases massively and then falls.
  • As the price rises this could lead to her behaviour as they believe the asset will continue to rise.
  • Housing bubble in USA
  • Dot Com bubble
107
Q

What is market rigging and what is an example in the financial markets?

A
  • This is where a group of individuals collude to fix prices or exchange information that that will give them a gain at the expense of other participants.
  • One example is insider trading, where individuals will know what will happen to the price in the future.
  • Large trades can impact the price of a commodity.
  • Libor Scandal 2008, financial institutions accused of fixing the libor rate.
108
Q

2 Adv and 2 Dis of increasing income tax.

A
  • ADV- decrease income inequality
  • could increase incentives to work as have to work more to maintain same lifestyle

-DIS-
reduce incentives to work
-High skilled individuals could move abroad

109
Q

2 Adv and 2 Dis of increasing VAT

A

-ADV
VAT is difficult to avoid and will not reduce incentives
-

DIS- regressive
-makes exports less competitive.

110
Q

2 Adv and 2 Dis of decreasing corporate tax?

A
  • ADV ,
  • Increase investment as retained profits will increase
  • makes it attractive place for TNCS to locate

DIS

  • could cause race to the bottom
  • May increase dividends rather than increasing investment/
111
Q

What factors must be considered to judge if national debt is too high?

A
  • Debt as a % of GDP
  • Whether the fiscal deficit is structural or cyclical
  • If spending is capital expenditure.
  • if economy is growing easier to service the debt.
112
Q

What are the problems facing macroeconomic policy makers?

A

-inaccurate info- short term figures like monthly GDP is difficult to measure and

113
Q

What do international governments use macroeconomic policies for?

A
  • Reduce fiscal deficits and national debts
  • Reduce poverty and inequality
  • Changes in interest rates and supply of money
  • International competitiveness
  • Regulation of transfer prices.

Macro advanced info (4 decks)

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