Unit 2 Flashcards

Question

What are the Limits to GDP as a measure of Standard of Living? (what does it not take into account)

Answer 1

Quality of Life Pollution Levels (Externalities) Income Distribution Population Size + Age Distribution Quality of goods (esp technological goods)

Answer 2

This is a theory that estimates how much the exchange rate needs adjusting so that an exchange between countries is equivalent, according to each currency’s purchasing power. For example, if a car cost £15,000 and the exchange rate between the UK and the US is 1.5 £ per $, then in the US, the car should cost $10,000. This means both cars cost the same number of US dollars, and the same number of pounds Sterling.

Answer 3

The combined monetary of all goods + services produced within a country's borders during a specific time period

Answer 4

The Office for National Statistics is trying to develop more ways of measuring national well-being. It should give a wider picture of society and the standard of living within the UK. In the UK in 2012, 91% of people were satisfied with their family life. Those in Iceland were the most satisfied in the world, where 95% were happy. Greece has the lowest life satisfaction rating of the OECD countries, as of 2015.

Answer 5

Generally, the higher the GDP per capita, the higher the average life satisfaction score. However, the UK economy grew by 5% in GDP per capita between 2007 and 2014, but showed no change in life satisfaction.

Answer 6

Happiness Economics tries to measure any factor that is associated with increased/decreased levels of Subjective Well-Being This may include things like political freedom, or family relationships

Answer 7

Many economists claim that 'psychological surveys' can give a reliable measure of how happy and satisfied people are with their lives.

Answer 8

The ONS runs the National Well-being programme It records statistics concerning (e.g.) peoples health, relationships, education and finances; along with people's own assessment of their personal well-being. The aim is to help the government devise policies that achieve better outcomes in those areas that are particularly important to people.

Answer 9

GDP doesn't necessarily have a positive correlation with happiness When incomes are not sufficient to meet basic needs, increasing GDP does lead to greater happiness People in rich countries tend not to be much happier than those in poor countries; and as people get richer, their happiness levels generally don't increase along with their income

Answer 10

Anxiety increased slightly | Happiness stayed unchanged

Answer 11

Value: something's monetary worth Volume: the amount/quality of something

Answer 12

The rate at which the general level of prices for goods and services is rising

Answer 13

A reduction in the increasing rate of Inflation

Answer 14

The rate at which the general level of prices for goods and services is falling

Answer 15

People who owe money to the businesses (e.g. Consumers)

Answer 16

People who you owe money to (e.g. Suppliers, Banks)

Answer 17

Retail Price Index Includes mortgage repayments, (which can have distorting effects)

Answer 18

CPI (main way) | RPI (alternative)

Answer 19

Consumer Price Index Like RPI, but Excludes: o House Prices o Council Tax o Mortgage Interest Payments The Government tends to use CPI

Answer 20

The Change in Average Prices over a given period of time

Answer 21

The quantity of goods + services that a Given Amount of Money will Buy for a typical household (e.g £1000 a month)

Answer 22

- This is RPI, but with mortgage payments removed

Answer 23

1. Survey: The Family Expenditure Survey is sent to around 10000 different UK households from around 150 different locations- they track where/how much/ what they spend their money on, over a 2 week period 2. Basket: A Typical Basket of Goods is created - the 700 (approximately) Most Commonly Used Goods + Services in a Variety of Outlets 3. Weights: Weights are Attached to Signify Importance (the Proportion of that Good within all goods). They weight it by the % of income spent on it, and is between 0 and 1 4. Base Year: A Base Year is selected, to use their price level. They give it an index of 100 5. Measure: Index numbers are generated, showing the rate of change in inflation. There is a monthly collection of data. 6. Re-do over time: The basket of goods + services and weights can be changed every year

Answer 24

1. There is No Typical Family- it may not be representative of all consumers 2. New Goods must be Included, and Goods No Longer in Use are Removed 3. RPI/CPI Doesn’t take the Quality of these goods into account 4. If the basket Changes, it's hard to compare the basket with past baskets 5. May be Inaccurate/ have errors 6. Other countries may use different measures- hard to compare between countries

Answer 25

1. “Shoe-Leather Costs” : As the price of things increase, people will take time to search and discover more about prices 2. “Menu Costs” : Restaurants are Forced to Show Increased Prices 3. Money Loses its Value, and People Lose Confidence in Money, as the Value of Savings is Reduced 4. Firms’ Real Incomes Fall 5. Price Increases leads to Higher Wage Demand so People can Maintain Living Standards -> This can lead to Inflation Getting Out of Control (Wage Price Spiral) 6. Disrupts Business Planning, Leading to Lower Capital Investment 7. Possible Cause of Long Term High Unemployment; due to a Lack of Competitiveness 8. High Inflation = High interest Rates = Less E. Growth = Possible Recession

Answer 26

Demand side deflation can cause a deflationary spiral, where the price level doesn't stop decreasing It's very hard to get out of. e.g. Japan's price level

Answer 27

It measures household purchasing power with the Family Expenditure Survey. The survey finds out what consumers spend their income on. From this, a basket of goods is created. The goods are weighted according to how much income is spent on each item. Petrol has a higher weighting than tea, for example. Each year, the basket is updated to account for changes in spending patterns.

Answer 28

With high inflation, interest rates are likely to be higher, so the cost of investing will be higher and firms are less likely to invest. Workers might demand higher wages, which could increase the costs of production for firms. Firms may be less price competitive on a global scale if inflation is high. This depends on what happens in other countries, though. Unpredictable inflation will reduce business confidence, since they are not aware of what their costs will be. This could mean there is less investment.

Answer 29

The government will have to increase the value of the state pension and welfare payments, because the cost of living is increasing.

Answer 30

Real incomes fall with inflation, so workers will have less disposable income. If firms face higher costs, there could be more redundancies when firms try and cut their costs.

Answer 31

Those on low and fixed incomes are hit hardest by inflation, due to its regressive effect, because the cost of necessities such as food and water becomes expensive. The purchasing power of money falls, which affects those with high incomes the least. If consumers have loans, the value of the repayment will be lower, because the amount owed does not increase with inflation, so the real value of debt decreases.

Answer 32

Demand Pull Cost Push Growth of the Money Supply

Answer 33

This is from the demand side of the economy When AD is growing unsustainably, there is pressure on resources/spare capacity/LLCE. Producers increase their prices and earn more profits. It usually occurs when resources are fully employed. (Shown by shifting AD right on the LRAS curve)

Answer 34

This is from the supply side of the economy, and occurs when firms face rising costs. It is to do with a short run supply shock, which increases the cost of production, shifting SRAS left/up As firms face an increase in their cost of production, they're more likely to pass on these extra costs to consumers; increasing the price level and thus causing cost push inflationary pressure (Shown through shifting SRAS left)

Answer 35

Growing the money supply will cause increased inflationary pressures, as individuals + firms may spend their excess money on goods + services, raising AD. In addition, the increase in the demand for labour resulting from higher demand for goods + services* will cause a rise in wages and costs of production. *(as labour is derived demand from goods + services)

Answer 36

People who are economically active, but are not in employment The unemployed consist of those registered as able, available and willing to work; but who cannot find work, despite an active search.

Answer 37

These of working age who are looking for work

Answer 38

People who have been unable to find employment, and are no longer looking for work

Answer 39

People who are economically active (regardless of whether they’re employed or unemployed)

Answer 40

Those who are employed, but are not working to their full potential

Answer 41

Full Employment Claimant Count Labour Force Survey

Answer 42

A situation where people who are economically active in the workforce, and are willing + are able to work, and are able to find employment

Answer 43

Claimant Count: The number of people claiming Jobseeker’s Allowance Monthly Count of the Unemployed

Answer 44

1.57 million

Answer 45

International Labour Organisation measure (Internationally Agreed standard measure of unemployment) Monthly Count Survey of 60,000 households (100,000 adults ish). They have to tick a box if they fit the ILOs definition of unemploymeny

Answer 46

2.53 million

Answer 47

Occurs when there is a long term decline for the goods + services in an industry It is to do with the Immobility of Labour (occupational or geographical) Occupational: It is very difficult to find work in another industry if the skills they have aren’t transferable or needed Geographical: Workers are not willing to move to a different place to find a job Also, labour may be replaced by Capital (Machinery)

Answer 48

When you have left a job, and are looking for another This is very common; and also why there can never be 100% full employment

Answer 49

When there is a lack of AD in the economy, here is less demand for labour: Labour is derived demand for goods + services. If the demand for them falls, the demand for labour falls. Firms are either forced to close, or make workers redundant due to failing profits A decrease in AD always means an increase in cyclical unemployment

Answer 50

Some season/weather based industries require more employment at peak demand times. Workers will only be unemployed for seasons/periods, until there's peak demand again

Answer 51

Classical Economists argue that if you let Wages Fall to the Equilibrium Level, there would be no Unemployment. Because Wages are Above this level, there is Unemployment. This is due to excess supply

Answer 52

Individual: More Leisure Time Redundancy Pay Businesses: Bigger Pool of Surplus Labour Less Pressure to Pay High Wages Less risk of Industrial/Strike Action

Answer 53

Economy: Less Income = Less Spending = Less Demand = Lower Inflation Society Increased chance of Volunteer Work

Answer 54

``` Individual: Loss of Income Fall in Real Living Standards Increased Health Risks Stress/ Possible Marital Problems Social Exclusion (Stigma) The Longer the Duration of Unemployment, the Lower the Chances of Finding Fresh Employment ``` Business: Fall in Demand for Products Negative Multiplier Effects

Answer 55

``` Government: Increased Spending on Unemployment Benefits Fall in Revenue from Income Tax Fall in Revenue from Corporation Tax May lead to a Budget Deficit ``` Economy: Lower GDP Unemployment can be seen as an Inefficient Way of Allocating Resources -> Labour Market Failure Fall in Potential GDP if the Unemployed Completely Leave the Labour Force Increase in Inequality Society: Increase in Crime, Violence + Vandalism Areas become Run Down Increased Depression

Answer 56

1. Education (= More Qualifications + Skills) 2. Lower Taxation (=More money Firms Get) 3. More Job Advertisements’ 4. Raise AD Levels 5. Give Subsidies to Small Businesses

Answer 57

Consumers: If consumers are unemployed, they have less disposable income and their standard of living may fall as a result. There are also psychological consequences of losing a job, which could affect the mental health of workers. Firms: With a higher rate of unemployment, firms have a larger supply of labour to employ from. This causes wages to fall, which would help firms reduce their costs.However, with higher rates of unemployment, since consumers have less disposable income, consumer spending falls so firms may lose profits. Producers which sell inferior goods might see a rise in sales. It might cost firms to retrain workers, especially if they have been out of work for a long time. Workers: With unemployment, there is a waste of workers’ resources. They could also lose their existing skills if they are not fully utilised. The government: If the unemployment rate increases, the government may have to spend more on JSA, which incurs an opportunity cost because the money could have been invested elsewhere.The government would also receive less revenue from income tax, and from indirect taxes on expenditure, since the unemployed have less disposable income to spend. Society: There is an opportunity cost to society, since workers could have produced goods and services if they were employed.There could be negative externalities in the form of crime and vandalism, if the unemployment rate increases.

Answer 58

If the number of the economically inactive increases, the size of the labour force may decrease, which means the productive potential of the economy could fall.

Answer 59

Migrants are usually of working age, so the supply of labour at all wage rates tends to increase with more migration. Migrants tend to bring high quality skills to the domestic workforce, which can increase productivity and increase the skillset of the labour market. This could increase global competitiveness. Migrant labour affects the wages of the lowest paid in the domestic labour market, by bringing them down. This is because migrants are usually from economies with lower average wages than the UK NMW. However, this impact is only small. For the medium and higher income households, it is hard to find evidence of worker displacement or depressed wages. The skills of migrant labour could substitute those of the domestic market, so workers could be replaced. If the skills complement the domestic labour market, there could be a welfare gain through higher productivities.

Answer 60

It's kinda like the minimum wage diagram

Answer 61

Doesn't take into account any income worked abroad + sent back into the country (Remittances). This would increase the living standards of those in the domestic country FDI can influence the GDP/GDP per Capita; but a lot of that income will be sent back into the domestic country, and not spent in the country the FDI invests in.

Answer 62

GNI = GDP + Net factor income* (* income earned by domestic workers/firms - income earned by foreign workers/firms earning incomes at the domestic country)

Answer 63

The main triggers for demand pull inflation are: - A depreciation in the exchange rate, which causes imports to become more expensive, whilst exports become cheaper. This causes AD to rise. - Expansionary fiscal policy: lower taxes or more government spending. This means consumers have more disposable income, so consumer spending increases. - Lower interest rates makes saving less attractive and borrowing more attractive, so consumer spending increases. - High growth in UK export markets means UK exports increase and AD increases. (Mainly, it's any feature that affects AD)

Answer 64

This occurs when: - Raw materials become more expensive, such as when oil prices rise. - Labour becomes more expensive. This could be through trade unions,for example. - Increase in Oil Prices: Basically everything is due to oil, so oil is very important. So, an increase will affect everything. - Depreciation in the exchange rate, which causes imports to become more expensive, which pushes up the price of raw materials. - Monopolies, using their dominant market position to exploit consumers with high prices. (Mainly, it's any increase in the costs of production)

Answer 65

Cost Push Inflation It not only causes inflation, but reduces growth too. Demand pull inflation causes a right shift of AD, and promotes productivity, so it's not seen as too bad. There's not much the economy or government can do to control cost push.

Answer 66

Lower costs of production Better productivity Improvement in productive capacity It is considered okay, and can even be beneficial in the short run

Answer 67

1) Falling price of goods - Consumers have an incentive to delay purchases - Consumption is delayed until prices fall further - Reduction in E. Growth 2) Deflation reduces the effects of interest rates. They now want save, instead of borrow (the real interest rate is the nominal - inflation. if the inflation rate is negative; real = nominal - - inflation = nominal + inflation = positive outcome) 3) Deflation increases the real value of debt. Firms cut wages as low prices means they don't need as much (for example). Cutting wages increases real value. Taking out loans further increases debt, discouraging borrowing

Answer 68

Nominal Interest Rate - Inflation Rate

Answer 69

1. Must have Active Sought work in the Previous 4 Weeks 2. Available to Start work in the Next 2 Weeks 3. 16+ (The criteria is less tight than the claimant count.)

Answer 70

There is a very Tight Criteria: 1. Resigned in the past 6 months/ Refused the past 3 jobs 2. 18 to retirement age 3. Savings Cap (If you’ve saved too much, you won’t get it) 4. Actively Seeking Work 5. Be Available for Work 6. Attend Fortnightly Jobsearch Reviews 7. Partner’s Income is Taken into Account

Answer 71

+ It is used worldwide, which allows for cross country comparison - It's a survey, which can lead to a sampling error

Answer 72

+ Cheaper than the LFS - Doesn't include all unemployed people (there's a high criteria to receive JSA) - It may be targeted by fraudsters (however it's not as big as an issue nowadays)

Answer 73

It doesn't include tho who are: ``` Economically Inactive (discouraged workers; the hidden unemployed- eg part time carers) Underemployed ``` Doesn't show the demographics of unemployed people

Answer 74

Demand Deficiency

Answer 75

A Set of accounts Showing the transactions conducted between residents of a country, and the rest of the world

Answer 76

Current Account Capital Account Financial Account

Answer 77

Trade in Goods Trade in Services Investment Income (e.g. remittances) International transfers (e.g. aid) (always looks at the VALUE, not volume)

Answer 78

Trade in Goods: Negative Trade in Services: Positive Investment Income: Positive International Transfers: Negative We have an overall Current Account Deficit (especially because the negative value of trade in goods is huge)

Answer 79

Value of Imports > Exports

Answer 80

-The UK doesn’t really produce many products (We are mainly in the Service Sector). Therefore, we don’t export as much Also, the UK has a trade deficit mainly because of Supply Side reasons: These are long term, and hard to rectify

Answer 81

Strong Growth of Consumer Spending (Imports meet the excess demand) Strong Exchange Rate (imports cheap, exports dear) Boom in Home Country Recession in Foreign Country

Answer 82

``` Lack of Competitiveness of Domestic Exports: Low investment Low productivity High relative inflation High unit labour costs ``` Insufficient Production of Resources from home country Research + Development Gap -- The UK has a smaller share of global patent New lower cost competition for the UK (e.g. China, India + Eastern European countries)

Answer 83

Higher Standard of Living | Better Quality Goods

Answer 84

Lower Aggregate Demand -> May trigger a Recession, increase unemployment, etc. Lower Company Profits and Business Confidence May worsen the North/South divide (UK- some regions rely more on exports)

Answer 85

1. Depends on whether it's demand-side or supply-side factors causing it; (demand side factors aren't too worrying, but supply is) 2. Depends on proportion of AD that (X-M) takes up 3. May be other parts of the account that push the current account into a deficit

Answer 86

When the Value of a Country’s Exports > Imports

Answer 87

Low Value of the Pound = People overseas buy our products World Boom = Higher Demand for our products Recession = Lower Demand for Imports Improved Quality/ Design/ Availability / Reliability of Products

Answer 88

Increase in International Competitiveness Greater Confidence in UK Economy Greater FDI: Foreign Direct investment (Businesses Opening Factories Abroad)

Answer 89

Inflationary Pressure: Exports are high, in relation to Imports Value of the Pound will Increase: Leads to a Fall in International Competitiveness Living Standards May Fall: Lots of Exports = Less Available for Domestic Consumption

Answer 90

By selling more exports to foreign countries, the UK will have a greater inflow of money into the circular flow of income. This will increase AD and improve the rate of economic growth. This also positively affects employment In the UK, during periods of economic decline or recessions, the current account deficit falls. This is because consumer spending falls. During periods of economic growth, when consumers have higher incomes and they can afford to consume more, there is a larger deficit on the current account. If imported raw materials are expensive, there could be cost-push inflation in the UK, since firms face higher production costs.

Answer 91

In theory, the sum of all countries’ trade balances should be zero, since what one country exports will be imported by another country. If the UK’s main export market, such as the EU, faces an economic downturn then demand for UK goods and services will fall, since consumers in the EU are less able to afford imports.International trade has meant countries have become interdependent. Therefore, the economic conditions in one country affect another country, since the quantity they export or import will change.

Answer 92

Total demand for a country's goods + services at a given price level in a given time period (It's a measure of value, not volume)

Answer 93

C + I + G + (X-M) Consumer Spending + Investments + Government Spending + (Exports - Imports)

Answer 94

Consumption: 60% Investment: 15% Government Spending: 25% Net Exports: around 1%

Answer 95

Economic Growth / AD

Answer 96

Changes in price level cause movement along the demand curve

Answer 97

Wealth Effect/Real Balance Effect International Competitiveness Argument Interest Effect (They look at how the price level can affect some component of AD)

Answer 98

As the price level decreases, real incomes/the purchasing power are increasing. This increases consumption, increasing AD.

Answer 99

As the price level decreases, exports become more competitive and imports become less competitive. This leads to less spending on imports and more selling on exports. This increases (X-M), increasing AD.

Answer 100

As price level decreases, interest rates can be kept lower in the economy*. *most central banks adopt their interest rate policies to meet the inflation target Low interest rates stimulate higher consumption + higher interest rates; and reduces the exchange rate, increasing net export. This increases C + I + (X-M), increasing AD.

Answer 101

There is an inverse relationship between Price Level and Real National Output/Real GDP. As Price Level increases, 'C + I + G + (X-M)*' will decrease, and vice versa. *This is all INDEPENDENT from Price Level

Answer 102

- The amount Households Spend on Goods + Services to Satisfy their Current Wants - Consumption can be for Both Durable + Non-Durable Goods

Answer 103

- Asset Prices - Confidence in the Economy - Disposable Income - Interest Rate - Ease + Availability of Obtaining Loans/ Credit Cards - Age of the Population - Level of real disposable income/income tax

Answer 104

- Existing owners of assets (houses, shares, bonds) have High Confidence (due to Higher Wealth) and thus will spend more - Also, they can sell + re-mortgage if they own a house

Answer 105

In a boom, people have higher confidence; which will make them spend more The opposite occurs during a recession

Answer 106

More disposable income means more spending More income tax means less spending

Answer 107

Lower interest rates means a lower rate of return on saving; discouraging saving and leading to more spending

Answer 108

Low availability of credit reduces how much banks are willing to lend. This reduces the impact of borrowing/lower interest rates. This means less spending

Answer 109

Longer Lives = More Spending

Answer 110

1. High interest rates mean more saving; low interest rates mean low spending 2. The cost of buying on credit rises and interest payments on any variable rate loans/mortgages already taken out will rise, reducing consumers' discretionary income. 3. Rises in the interest rate may also lead to a fall in average house prices (as demand for houses falls because of the increased cost of taking out a mortgage), creating a negative wealth effect in the economy

Answer 111

Consumer income which is not spent is saved.

Answer 112

o In the UK, most people own their houses. This means that a rise in the price of houses makes people feel wealthier, so they are likely to spend more. This is the wealth effect. o A consumer’s housing equity is the difference between the market value of a property and how much loan is remaining to be paid. If house prices increase, consumers experience a rise in equity, so they might be paying less on their mortgage than the house is worth on the market. This makes consumers feel wealthier, so they are more willing to spend.

Answer 113

Expectations about the state of the economy Job prospects; higher wages, promotion Level of unemployment

Answer 114

The Addition to the Capital Stock of the Economy Factories, Machines, Offices + Stocks of Materials used to Produce Other Goods + Services When firms spend money on capital goods to increase their productive capacity (think of it like consumption, but for firms)

Answer 115

Human Capital: Investment in Education + Training of Workers | Physical Capital: Investment in Factories, Materials, etc.

Answer 116

Borrowing Money Using Retained Profits

Answer 117

Gross Investments: Investments Before Depreciation Net Investments: Investments After Deprectiation

Answer 118

When Something Wears Out / is Used Up

Answer 119

- Changes in the Cost of Capital - Changes in Technology - Expectations + Business Confidence - Access to Credit - Level of Spare Capacity - Interest Rates - Corporation Tax

Answer 120

How you expect the Future of the Economy, and your Company to be (Basically, it's your gut feeling, and your belief on how things are gong.): When animal spirits are strong, investment is sufficient to maintain aggregate demand; when they are weak aggregate demand falls, and the economy lapses into depression Keynes thought that if there was great uncertainty, only a manic, strong-willed entrepreneur would put capital at risk.

Answer 121

State / Expected State of the Economy Expected profit Expected demand in the economy

Answer 122

If firms expect a high rate of return, they will invest more. Firms need to be certain about the future, otherwise they will postpone their investments. Also, expectations about society and politics could affect investment. For example, if a change in government might happen, or if commodity prices are due to rise, businesses may postpone their investment decisions.

Answer 123

If growth is high, firms will be making more revenue due to higher rates of consumer spending. This means they have more profits available to invest.

Answer 124

This is related to the rate of market demand. The higher demand is, the more likely it is that firms will invest. This is because they expect higher sales, so they might direct capital goods into the markets where consumer demand is increasing.

Answer 125

Investment increases as interest rates falls. This means that the cost of borrowing is less and the return to lending is higher. The higher interest rates are, the greater the opportunity cost of not saving the money. Moreover, high interest rates might make firms expect a fall in consumer spending, which is likely to discourage investment.

Answer 126

If banks and lenders are unwilling to lend, such as shortly after the financial crisis when banks became more risk averse, firms will find it harder to gain access to credit, so it is either more expensive or not possible to gain the funds for investment. Firms could use retained profits, however. The availability of funds is dependent on the level of saving in the economy.The more consumers are saving, the more available fund are for lending, and therefore for investing.

Answer 127

The rate of corporation tax could affect investment. Lower taxes means firms keep more retained profits, which could encourage investment.

Answer 128

A higher level of spare capacity means a lower marginal propensity to invest. This is because the spare capacity can be used, instead of increasing the number of factories, etc

Answer 129

Government Spending on State-Provided Goods + Services that are Provided on a Recurrent Basis

Answer 130

1. Current Spending (e. g. maintenance of public services + payment of public sector wages) 2.Capital Spending (infrastructure projects) 3.Welfare Spending (benefits + pensions, usually the biggest part of gov.spending for developed countries) 4.Debt Interest Payments (Numbers 1-3 act as an Injection help boost AD, 4 doesn't stay in the country's economy)

Answer 131

- National Income - Level of Economic Activity - Age of the Population - Tax Revenue - Demographic Changes - Demand for Merit and Demerit Goods

Answer 132

- The Trade Cycle | - Fiscal Policies

Answer 133

Real output increases when there are periods of economic growth. This is the recovery stage. The boom is when economic growth is fast, and it could be inflationary or unsustainable. During recessions, there real output in the economy falls, and there is negative economic growth. During recessions, governments might increase spending to try and stimulate the economy. This could involve spending on welfare payments to help people who have lost their jobs, or cutting taxes. This will increase the government deficit, and they may have to finance this. During periods of economic growth, governments may receive more tax revenue since consumers will be spending more and earning more. They may decide to spend less, since the economy does not need stimulating, and fewer people will be claiming benefits.

Answer 134

Governments might spend on public goods and merit goods, as well as welfare payments. Fiscal policy is a demand-side policy, so it works by influencing the level or composition of AD. Discretionary fiscal policy is a policy which is implemented through one-off policy changes. Automatic stabilisers are policies which off set fluctuations in the economy. These include transfer payments and taxes. They are triggered without government intervention. The government might use expansionary fiscal policy during periods of economic decline. This involves increasing spending on transfer payments or on boosting AD, or by reducing taxes. During periods of economic growth, governments might use contractionary fiscal policy by decreasing expenditure on purchases and transfer payments. Additionally, tax rates might increase. This reduces the size of the government budget deficit

Answer 135

Goods + Services Produced in the Home Country that are Sold to Overseas. (discusses revenue/value, not volume)

Answer 136

Goods + services a Home Country buys from Overseas | discusses expenditure/value, not volume

Answer 137

Revenue from Exports - Expenditure on Imports

Answer 138

The relationship of one Currency to Another

Answer 139

Strong Pound, Imports Cheap, Exports Dear

Answer 140

When the £ goes up in value, overseas investors change their currency to £ as the values higher More demand for the £ increases the value of the £

Answer 141

``` Real Income Exchange Rates State of the World Economy Degree of Protectionism International Competitiveness/Trade Deals ```

Answer 142

Higher Income Abroad = Higher X-M: If there is a boom abroad (for example) which increases the incomes of those abroad, their marginal propensity to import goods is likely to increase. This increases our exports Higher Domestic Imports = Lower X-M: If there is a boom in the UK (for example) which increases the incomes of those in the UK, their marginal propensity to import goods is likely to increase (sucking in of imports). This increases our imports

Answer 143

Strong Pound means Exports are Cheap and Imports are Dear (SPICED) Weak Pound means Exports are Cheap and Imports are Dear

Answer 144

1) Depends on which currency the pound depreciates against. (If it is the dollar or euro, it is likely to have a more significant effect, than a currency which is not from one of the UK’s major trading partners.) 2)Depends on the PED (the demand for UK exports has to be price elastic to lead to an increase in exports. If demand is price inelastic, exports will not increase significantly, and the value of exports will decrease.)

Answer 145

A decline in economic growth in one of the UK’s export markets means there will be a fall in exports. This is because consumer spending in those economies will fall, due to falling real incomes. For example, the UK’s largest export market is the EU. If they face an economic downturn then demand for UK goods and services will fall, since consumers in the EU are less able to afford imports.

Answer 146

Protectionism is the act of guarding a country’s industries from foreign competition. It can take the form of tariffs, quotas, regulation or embargoes. If the UK employed several protectionist measures, then the trade deficit will reduce. This is because the UK will be importing less due to tariffs and quotas on imports to the UK. Eval: However, since protectionism leads to retaliation, exports might decrease too, which undoes the effect of reduced imports.

Answer 147

The competitiveness of a country’s goods and services, which is influenced by supply-side policies, impacts how many exports the country has. A country can become more competitive by being innovative, having higher quality goods and services, operating in a niche market, having lower labour costs, being more productive or by having better infrastructure. These increase exports. Moreover, trade deals and being part of trading blocs can influence how much a country exports. This either opens up a country to, or closes a country from, significant export opportunities.

Answer 148

Aggregate supply shows the quantity of real GDP which is supplied at difference price levels in the economy.

Answer 149

The AS curve is upward sloping because at a higher price level, producers are willing to supply more because they can earn more profits.

Answer 150

Price Level

Answer 151

If AD increases, there is an expansion in the SRAS, and the output goes up. If AD falls, there is a contraction in SRAS, and the output goes down.

Answer 152

The SRAS curve shifts when there are changes in the conditions of supply: - The cost of employment might change, e.g. wages, taxes, labourproductivity - The cost of other inputs e.g. raw materials, commodity prices, theexchange rate if products are imported - Government regulation or intervention, such as environmental laws and taxes, and business regulation. Business regulation is sometimes called ‘red tape’.

Answer 153

The costs of production/ supply side shocks for all firms, for example: The cost of employment The cost of raw materials, commodity prices. Oil prices The exchange rate - Government regulation or intervention, such as environmental laws or green taxes and business regulation. Business regulation is sometimes called ‘red tape’. - There could be a net outward migration of workers, which causes a ‘brain drain’ on the domestic economy, as skilled workers move elsewhere.

Answer 154

e.g. wages, taxes, and labour productivity. An increase in wages and taxes increases the cost of production, whereas labour productivity decreases it

Answer 155

An increase in the price of raw materials and commodities shifts aggregate supply to the left

Answer 156

It's important in all products e.g. transportation, access to goods, being an actual input in production, etc. The high importance of oil makes the prices of it it's own separate factor, and not included in the price of raw materials, etc. An increase in oil prices negatively affects all firms in the economy

Answer 157

Many firms in the UK import materials to help with their production. A stronger currency reduces the price of imports, so imported products will be cheaper. This would shift the AS curve outwards

Answer 158

The short run aggregate supply curve (SRAS) only covers the period immediately after a change in the price level. It shows the planned output of an economy when prices change, whilst the cost of production and productivity of the factor inputs are kept constant. These could be wage rates or how technologically advanced capital is, for example.

Answer 159

The LRAS curve is influenced by changes which affect the quantity or quality of the factors of production. This is equivalent to shifting the PPF curve i.e. when the economy is operating at full capacity. Technological advances:If more money is spent on improving technology, the economy can produce goods in larger volumes or improve the quality of goods and services produced. Changes in relative productivity:A more productive labour and capital input will produce a larger quantity of output with the same quantity of input. Changes in education and skills:This improves the quality of human capital, so it is more productive and more able to produce a wider variety of goods and services. Changes in government regulations:Government regulation could limit how productive and efficient a firm can be if it is excessive. This is sometimes referred to as ‘red-tape’. Demographic changes and migration:If there is net inward migration and the majority of the population is of working age, the size of the labour force is going to be significant, which means the economy can increase its output. Competition policy:A more competitive market encourages firms to be more efficient and more productive, so they are not competed out of business. Governments can use effective competition policy to stimulate this in the economy.

Answer 160

When the rate of withdrawals = the rate of injections. This is equivalent to where AD=AS

Answer 161

Short Run Supply (SRAS) Long Run Supply (LRAS)

Answer 162

Upwards Sloping Factors that Determine SRAS = Cost of Production Defined where Wages are Fixed

Answer 163

Vertical Line It represents one level of output the economy will always work at in the long run. It will be at the output YFE. Defined where Wages are Variable

Answer 164

Short Run Equilibrium Long Run Equilibrium

Answer 165

No Government Intervention: The economy will heal itself It will always be working on LRAS, working at Full Employment

Answer 166

The model Focuses on Wages: ``` Recession = Wages Fall Inflation = Wages Increase ```

Answer 167

The Full Employment level of output It represents the maximum level of output an economy can produce using all factors of production at sustainable levels

Answer 168

1. The Quantity of the Factors of Production* 2. The Quality of the Factors of Production* 3. Productive Efficiency * examples include - TIGER -- Technology, Investments, Gov Spending, Education, Resources. - labour productivity, - size of labour force (immigration, or incentives - unemployed, economically active people are still in the labour force, so them being employed won't change it) - infrastructure, - competition, - new resource discoveries

Answer 169

``` Emigration Natural disasters Pandemics that lead to mass death Mass capital depreciation War, Conflicts Hysteresis - when workers are unemployed for a long time; discouraging them to find a job anymore ```

Answer 170

Aggregate supply Doesn't Differ in the Long and Short Run, aggregate supply is just aggregate supply. AS is determined by the Level of Scarce Capacity in the economy He did agree that there is a point in the economy where production Cannot Increase Sustainability

Answer 171

It is not Always Vertical, but can also be Horizontal

Answer 172

When there’s lots of spare capacity, and unemployment in LLCE: 1. Output can increase Without any Inflationary Pressure 2. There isn’t much Pressure put on Resources/Factors of Production. Therefore, the price of those resources don’t have to rise, and there may not be any Inflation as Output Increases

Answer 173

Workers do not like to lower their wages during a recession

Answer 174

He said that “during the time of the Great Depression, when politicians were very much following the Classical School of Thought, waiting for wages to fall and the economy to sub heal; there was No Evidence of that taking place” This is what fuelled Keynes to come up with a new AS Concept

Answer 175

Keynes said that waiting leads to more problems; and instead, “we need active demand side policies that leads AD shifting to the right, and employment levels increasing” The most direct ways of going back to Y is through Active Fiscal Policies, an Increase in Government Spending and a Reduction in Income/Corporation Tax to increase AD

Answer 176

Promotes a Greater Role of the Government The Government can Increase in Size If it worked, Politicians would Gain More Popularity Most Of All: It Increases AD without much Inflationary pressures, which Helps them to Achieve the Macroeconomic Objectives

Answer 177

Rent Wages Interest Profit

Answer 178

Land Labour Capital

Answer 179

Goods + Services

Answer 180

Expenditure on Goods + Services

Answer 181

Money the Government Gives to Households

Answer 182

Investments Government Spending Earning from Exports

Answer 183

Money the Government Takes from Households

Answer 184

Savings Taxes Expenditure on Imports

Answer 185

The connection between different economic agents, and how money flows through them

Answer 186

Income is a flow of money that goes to the factors of production. Wealth is a stock of assets, such as savings, shares, property, bonds and pension schemes.

Answer 187

When injections are greater than withdrawals the amount of money in the circular flow increases, representing economic growth. When injections are less than withdrawals the amount of money in the circular flow decreases, representing a fall in real GDP.

Answer 188

If income increases are going to have a direct impact on wealth then a decision must be made to forego current consumption in order to enjoy increased welfare in the future – that is, the opportunity cost of the increased future welfare is current consumption.

Answer 189

The money that is Injected / Spent in the Economy gets Multiplied

Answer 190

1. When there is an increase in demand of a product, the producers need to spend money to meet that demand. 2. As a result of the increased supply, the business needs more workers 3. These workers all get disposable income, which they spend on products 4. There is now an increase in demand for that product.

Answer 191

MPW: Marginal Propensity to Withraw The Proportion of Additional Income that is Saved/ Withdrawn from the Circular Flow

Answer 192

MPW = MPS + MPT + MPM | It's basically all the types of 'withdrawals' in the circular flow of income

Answer 193

Marginal Propensity to Tax

Answer 194

Marginal Propensity to Save The Proportion of Additional Income that is Saved

Answer 195

Marginal Propensity to Import The Proportion of Additional Income that is Spent on Imports

Answer 196

1 / (1-MPC) = 1 / MPW

Answer 197

Marginal Propensity to Consume The Proportion of Additional Income that is Spent

Answer 198

/> in Consumption (/> C) _______________ /> in Income (/> Y)

Answer 199

Average Propensity to Consume The Proportion of Disposable Income that People Spend

Answer 200

Average Propensity to Save The Proportion of Disposable Income that People Save

Answer 201

Consumption __________ Income

Answer 202

Savings ______ Income

Answer 203

This is the ratio of the rise national income to the initial rise in AD. In other words, it is the number of times a rise in national income is larger than the rise in the initial injection of AD, which led to the rise in national income.

Answer 204

If an economy has a lot of spare capacity, extra output can be produced quickly and at little extra cost. This makes SRAS elastic and it means the size of the multiplier will be larger. A small increase in AD will lead to a large increase in national income. If SRAS is inelastic, the multiplier effect is likely to be smaller than its potential. This is because if AD increases, prices will increase rather than a full increase in national income. This higher rate of inflation will lead to higher interest rates. This will discourage spending and borrowing, and it will encourage saving, since the reward for saving is higher. It is also possible to have a ‘reverse’ multiplier. This means that a withdrawal of income form the circular flow of income could lead to an even larger decrease in income for the economy. This could decrease economic growth and potentially lead to a decline in the economy.

Answer 205

If GDP growth is high, firms can expect more demand and more consumption. Therefore, they increase their investment. This increases AD, which further increases investments, etc. Vice versa will happen for falling GDP (it's like a multiplier effect, but for firms)

Answer 206

In the short run, AD=SRAS≠LRAS The AD/SRAS equilibrium output (Y1) is at a lower or higher output than YFE

Answer 207

AD=SRASLRAS (deflationary gap/positive output gap): In the long run, this output will not persist, due to the high productivity. It is unsustainable production; and eventually, the LLCS will wear out or not produce as much https://patrickmcgrath7.files.wordpress.com/2013/03/screen-shot-2013-03-10-at-11-18-07-am.png

Answer 208

In the long run, AD=SRAS=LRAS https://husainomics.files.wordpress.com/2013/02/d2-recess-gap.jpg

Answer 209

https://patrickmcgrath7.files.wordpress.com/2013/03/screen-shot-2013-03-10-at-11-54-42-am.png Any point where AD is shows macroeconomic equilibrium in the long run

Answer 210

Growth increases Unemployment Decreases Inflation increases Trade balance worsens Eval: Size of the multiplier, extent of the change, initial level of economic activity

Answer 211

Firms will react to this increase in AD by producing more goods + services to meet demand. This increases output, increasing real GDP

Answer 212

Labour is a derived demand for goods + services. Therefore increased growth means increased demand for G+S meaning more demand for labour to produce those G+S

Answer 213

As there is more demand in the economy, there is more pressure put on existing factors of production. Therefore, the price of those will increase. (e.g. more pressures on labour leads to higher demand for higher wages)

Answer 214

An increase in inflation leads to higher cost G+S, making them less internationally competitive and reducing exports. Plus, higher incomes (due to unemployment reason) means that people demand more/ can spend more, which they may spend on imports

Answer 215

Growth Increases Unemployment Decreases Inflation Decreases Trade Balance Improves Eval: depends on initial level of economic activity

Answer 216

There is more demand for goods + services, and firms respond for that by increasing their output, shifting supply to the right.

Answer 217

There is more demand for goods + services, and firms respond for that by increasing their supply, shifting supply to the right. The demand for labour is derived from the demand of goods + services. If the demand for the G+S increases, the demand for labour increases, which in turn decreases unemployment

Answer 218

There is less competition or pressure on LLCE. This leads to less cost push inflationary pressures.

Answer 219

The low price level means exports are more internationally competitive, increasing exports. Also, people can't afford to buy as many imports.

Answer 220

An increase in the amount of goods and services produced per head of the population over a period of time.

Answer 221

``` Increased Standard of Living Greater Choice of Goods Better Quality Goods Increase in Wealth - possible wealth effect Increased Job Prospects Increased Confidence ```

Answer 222

Increased Profit + Revenue Increased supply of labour Promotes investment- accelerator effect Greater Investment Innovation (They can take More Risks; more confidence)

Answer 223

Increased Tax Revenue Reduced Unemployment Benefits Improvement in government budget balance Reduced Absolute Poverty (good for the country)

Answer 224

A Large Pool of Migrant Workers Wander from Job to Job Crime Rates soar Divorce Rates rise (due to work rates + longer hours) Stress-Related Illnesses become common

Answer 225

Opportunity Cost: in order to produce more capital goods today, we have to forego the production of consumer goods Worse trade balance Increase in relative poverty Increase in income inequality Increased inflation Macroeconomic instability Growth is unsustainable (more pollution, resources become more scarce) Social Effects: More stress, less leisure time

Answer 226

An increase in the size of physical capital stock

Answer 227

The long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed.

Answer 228

The % increase in a country’s real GDP and it is usually measured annually. It it the rate of growth the economy is acutally experiencing It is caused by increases in AD.

Answer 229

+ Countries can specialise where they have a comparative advantage, which increases world output and lowers average costs. - Export led growth means the economy is unbalanced, since there is a surplus on the current account on the balance of payments. Whilst this means there are net injections into the economy, it is not necessarily sustainable - It means the country relies on the economic state of other countries, since these are the consumers of their goods and services. If there is a recession in a major export market, exports will fall and so will economic growth.

Answer 230

Inequality could increase. Higher demand-pull inflation Consumers could face more shoe leather costs (which means they have to spend more time and effort finding the best deal while prices are rising.) The benefits of more consumption might not last after the first few units, due to the law of diminishing returns

Answer 231

Firms could face more menu costs as a result of higher inflation. This means they have to keep changing their prices to meet inflation.

Answer 232

Governments might increase their spending on healthcare if the consumption of demerit goods increases.

Answer 233

As consumer incomes increase, some people might show more concern about the environment. Also, economic growth could lead to the development of technology to produce goods and services more greenly. Higher average wages mean consumers can enjoy more goods and services of a higher quality. Public services improve, since governments have higher tax revenues, so they can afford to spend on improving services. This could increase life expectancy and education levels.

Answer 234

High levels of growth could lead to damage to the environment in the long run, due to increase negative externalities from the consumption and production of some goods and services.

Answer 235

http://www.harpercollege.edu/mhealy/ecogif/ppc/ppcgrow2.gif Capital goods and consumer goods are the only goods within the economy Point D would be actual growth, point C,B+A would be potential growth

Answer 236

``` Reduction in interest rates Increase in Investment Increase in Government spending Reduction in tax Fall in exchange rate/ Weaker currency ```

Answer 237

S.R: Increase in actual growth L.R: Increase in potential growth

Answer 238

Increase in the Quality and/or Quantity of the Factors of Production: ``` Increase in productivity Increase in investment Advancement of technology Improvement in infrastructure Increase in net immigration ```

Answer 239

Economic growth is only good when it's Sustainable: There is both short run/actual/demand-sided growth, and potential/long run/supply-sided growth; and everything is Balanced

Answer 240

- A period of temporary economic decline

Answer 241

An improvement or upward trend

Answer 242

A period of rapid economic expansion

Answer 243

A period of poor performance or inactivity in an economy

Answer 244

The difference (deviation) between Actual Output, and Estimates of Long Run Potential Output

Answer 245

It may be possible for Actual GDP to be Greater than Potential Real GDP The Economy will be Working at Over-Capacity, and Inflationary Pressures are Likely to Increase

Answer 246

1. High Rates of Economic Growth 2. Low Unemployment Rate 3. Demand-Pull Inflation Pressures 4. High consumer and Business Confidence 5. Improving Government Budget Balance (Tax Rev. increases, Expenditure on Benefits Fall)

Answer 247

Actual Growth: the % increase in a country’s real GDP and it is usually measured annually. It is caused by increases in AD. Long-Term Trend in Growth Rates: the long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed.

Answer 248

When the actual level of output is less than the potential level of output. (Y1 < YFE) This puts downward pressure on inflation. It usually means there is the unemployment of resources in an economy, so LLCE is not used to their full productive potential. This means there is a lot of spare capacity in the economy.

Answer 249

When the actual level of output is greater than the potential level of output. It could be due to resources being used beyond the normal capacity, such as if labour works overtime. If productivity is growing, the output gap becomes positive. It puts upwards pressure on inflation. Countries, such as China and India, which have high rates of inflation due to fast and increasing demand, are associated with positive output gaps.

Answer 250

It is difficult to estimate the trend in a series of data. The structure of the economy often changes, which means estimates may not always be accurate. For example, immediately after a recession, the level of spare capacity might fall below the level anticipated, since some workers might become economically inactive, firms might close and some banks might be unwilling to lend. Changes in the exchange rate might offset some inflationary effects of a positive output gap. Data is not always reliable, especially from emerging markets, and extrapolating data from past trends might lead to uncertainties.

Answer 251

Classical economists believe markets clear in the long run, so there is full employment. They believe there are output gaps in the short run. A negative output gap Y1

Answer 252

There is a negative output gap between Y1 and Y2. Keynesians believe that output gaps exist in both the short and long run.

Answer 253

Classical: https://www.ezyeducation.co.uk/images/Lexicon_Images/negative_output_gap.jpg Keynesian: http://mrshearingeconomics.weebly.com/uploads/1/0/3/0/10303678/5975553.png?345

Answer 254

Classical: https://www.ezyeducation.co.uk/images/Lexicon_Images/positive_output_gap.jpg It's best do show it on a classical graph, as the keynesian graph goes horizontal so you can''t really show it

Answer 255

The economically inactive are those who are not actively looking for jobs. These could include carers for the elderly, disabled or children, or those who have retired. Some workers are discouraged from the labour market, since they have been out of work for so long that they have stopped looking for work.

Answer 256

Retained profit is the profit kept in the company, rather than paid out to shareholders as a dividend. Retained profit is widely regarded as the mos important long-term source of finance for a business.

Answer 257

1. Take the profit out of the business - either personal income or via payment to shareholders 2. Effectively reinvest the profit by leaving it in the business

Answer 258

http://financeandcareer.com/wp-content/uploads/2014/03/business-cycle-graph.jpeg

Answer 259

A growing economy is likely to experience inflationary pressures on the average price level. This is especially true when there is a positive output gap and AD increases faster than AS.

Answer 260

During periods of economic growth, consumers have high levels of spending. In the UK, consumers have a high marginal propensity to import, so there is likely to be more spending on imports. This leads to a worsening of the current account deficit. However, export-led growth, such as that of China and Germany, means a country can run a current account surplus and have high levels of economic growth.

Answer 261

Reducing a budget deficit requires less expenditure and more tax revenue. This would lead to a fall in AD, however, and as a result there will be less economic growth.

Answer 262

High rates of economic growth are likely to result in high levels of negative externalities, such as pollution and the usage of non-renewable resources. This is because of more manufacturing, which is associated with higher levels of carbon dioxide emissions.

Answer 263

In the short run, there is a trade-off between the level of unemployment and the inflation rate. This is illustrated with a Phillips curve. As economic growth increases, unemployment falls due to more jobs being created. However, this causes wages to increase, which can lead to more consumer spending and an increase in the average price level. The extent of this trade off can be limited if supply side policies are used to reduce structural unemployment, which will not increase average wages.

Answer 264

A supposed inverse relationship between the level of unemployment and the rate of inflation. http://www.economicshelp.org/images/macro/monetarist-phillips-curve.jpg

Answer 265

If ‘green taxes’ are implemented, such as carbon taxes, or if there are minimum prices on pollution permits, the competitiveness of domestic firms could be compromised. This is because they are limited in their production.

Answer 266

Expansionary fiscal policies involve more government borrowing, which could cause interest rates and the inflation rate to rise.

Answer 267

The low interest rate could affect the distribution of income. Savers only receive a small return on their savings.

Answer 268

Taxes to reduce inequality could lead to higher rates of inflation. For example, a higher VAT rate increases the price of goods for firms and consumers.

Answer 269

Involves the use of short term Interest Rates + Other Instruments to Control: Growth of AD Demand and supply of Money + Credit (occasionally) The external value of the Exchange Rate o They predict and advance for future situations

Answer 270

Interest Rates | Quantitative Easing

Answer 271

1. Wages + Earnings 2. Unit Labour Costs 3. Labour Shortage 4. Import Prices 5. Commodity Prices (Raw Materials)

Answer 272

1. Real GDP Growth 2. Consumer Spending 3. House Prices 4. Unemployment 5. Business + Consumer Confidence

Answer 273

1. Sterling Exchange Rate | 2. Global Inflation Trade

Answer 274

Lower interest rates means: More spending, less saving -> more consumption More investment More exports = Higher AD

Answer 275

Lower Interest Rates = Less Saving, More Borrowing = More Consumption = Higher AD = Higher GDP = More Economic Growth

Answer 276

Lower Interest Rates = Less Saving, More Borrowing = More Consumption = Higher AD = Higher Price Level

Answer 277

Higher AD = More Spending on Transport = Worse Environment

Answer 278

Lower Interest Rates = Less Saving, More Borrowing = More Consumption = Higher AD = Higher RNO Employment Rates are Involved in RNO Therefore, Employment Increases

Answer 279

The ‘poorer’ have More Money to Spend Therefore, the Gap Decreases, and Money is Distributed More Fairly

Answer 280

Increasing Money Supply The Central Bank Does this by Buying Assets

Answer 281

A committee of the Bank of England, which meets eight times a year to decide the official interest rate in the UK

Answer 282

o Meet The Inflation Target = A CPI of 2% The MPC has a 2 Year Forecasting Horizon when Setting Rates (The Bank of England is now independent (1997), as the government was using it for their own benefit)

Answer 283

Banks might not pass the base rate onto consumers, which means that even if the central bank changes the interest rate, it might not have the intended effect. o Even if the cost of borrowing is low, consumers might be unable to borrow because banks are unwilling to lend. After the 2008 financial crisis, banks became more risk averse. o Interest rates will be more effective at stimulating spending and investment when consumer and firm confidence is high. If consumers think the economy is still risky, they are less likely to spend, even if interest rates are low.

Answer 284

Fiscal policy involves the use of Government Spending and Taxation to influence the pattern of the economy

Answer 285

Government Spending and Taxation

Answer 286

Public Expenditure > Income (Tax Revenue)

Answer 287

When tax revenue > government expenditure

Answer 288

This refers to the use of fiscal policy to Push AD Outwards. Used when the government wish to 'expand' growth Will usually mean Taxes are Decreased, and Government Spending is Increased- this worsens the budget deficit

Answer 289

This refers to the use of fiscal (or monetary) policy to Bring AD Inwards Used when the government wishes to 'deflate' growth Will usually mean Taxes are Increased, and Government Spending is Reduced- this improves a budget deficit

Answer 290

The government can boost demand by cutting tax and increasing government spending. (Expansionary)

Answer 291

The primary objective of fiscal policy is to maintain the price stability, economic growth and employment of the country. Hence an appropriate fiscal policy can help in combating rising inflation rates. (Deflationary)

Answer 292

1) Cut in personal Income Tax - Boost to disposable income - Consumption increases - AD Increases 2) Cut in Indirect Taxes - Lower prices, higher real incomes - Consumption Increases - AD Increases 3) Cut in Corporation Tax - Higher 'post tax' profits for businesses - Investment increases - AD Increases 4) Rise in Government Spending - Direct boost to aggregate demand (G increases) - Possible multiplier effects on national income - AD Increases

Answer 293

Increase income tax to halt the amount of consumption on transport, etc. (Deflationary)

Answer 294

Increasing government spending on education + training

Answer 295

They can Change Gov Spending (some examples): Universal child benefits / unemployment assistance Public (state) pensions Education - reduces inequality of market incomes Social housing They can Change Taxes (some examples): Progressive income taxes Tax free allowances for lowest income households Consumption taxes focused on high-income consumers and luxury products

Answer 296

Capital Spending: Lower rates of corporation tax might stimulate a higher level of business investment from domestic + foreign firms Labour Market Incentives: Cuts in Income Tax might improve incentives for people to Seek Work, and boost labour productivity Entrepreneurship + New Business Creation: Government sending might be used to Fund New Small Business start-ups, Research + Development and Innovation: Tax credits could be used to Encourage an Increase in Business Research and Development Human Capital of the Workforce: Higher spending on Education + Training (boosts the human capital of the workforce) Increased Investment in Health and Transport (can also have very important Supply-Side Effects)

Answer 297

Lower rates of corporation tax means firms have more money to spend on raw materials/ workers This increases supply.

Answer 298

Recognition Lags, Time Lags (takes long to realise + implement an appropriate policy, and it takes time for it to work- could take months/years) Asymmetric / Imperfect Information leads to inefficient spending 'Crowding Out' - if the government borrows from the private sector, there are fewer funds available for the private sector Opportunity Cost Depends on Level of Spare Capacity/ Inflation (LRAS Curve) Depends on size of the multiplier and its effect on AD If interest rates are high, fiscal policy might not be effective for increasing demand.

Answer 299

Direct taxes are imposed on income and are paid directly to the government from the tax payer. Examples include income tax, corporation tax, NICs and inheritance tax. Consumers and firms are responsible for paying the whole tax to the government.

Answer 300

Indirect taxes are imposed on expenditure on goods and services, and they increase production costs for producers. This increases market price and demand contracts.

Answer 301

These are policies aimed at increasing the productive potential or capacity of an economy. The policy is intended to increase the amount that firms are willing to supply at any given price level. In other words, these policies seek to shift the LRAS Curve to the Right.

Answer 302

Interventionist policies focus on the need for the government to intervene in markets to achieve a goal.

Answer 303

Market-based policies focus on the power of the free market, or allowing the forces of supply and demand to eliminate equilibria imbalances. The role of the government in market-based policies is limited, since it tends to interfere with the market mechanism.

Answer 304

Increased gov spending on Education + Training: Improves the quality + quantity of the supply of labour, improving productivity Increased gov spending on Healthcare: Improves the quality + quantity of the supply of labour, improving productivity. Less time is taken off work due to illness Increased gov spending on Infrastructure: Improves services like transport + internet. Increases mobility of resources Stricter Gov Competition Policy: Prevents the creation of monopolies, allowing sufficient competition Policies to Remove Geographical Immobility of Labour: Improves the quantity of supply of labour. Reduces unemployment rate. Labour markets become more flexible

Answer 305

Long Term Policy (Time Lag) | Opportunity Cost to the Government

Answer 306

Reduction in Corporation Tax: Offers an incentive for firms to produce new innovative products. Reduction in Cost of production Reduce Income Tax: Provides an incentive to Work Harder. Encourages more people to get a job Reforming the Benefits System, to Encourage Workers to take Available Jobs: Unemployment benefits are no longer sufficient to live on, providing an incentive to find work Privatising: Designed to break up state monopolies and create competition. Makes firms operate more efficiently Deregulation: Creates more competition. Drives down prices of transports, postage, communication, etc; lowering AC Reducing/Abolishing Trade Union Power Decrease in Strikes, significant improvement in industrial relations in the UK. Improves productivity. Labour markets become more flexible Reducing/Abolishing the Minimum Wage: Lowers Cost of Production for firms. Greater incentive to use money for Investment Encouraging Free Trade: Higher exports, and Cheaper Imports (as tariffs are removed)

Answer 307

Persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

Answer 308

The use of the term ‘animal spirits’ by Keynes referred to a particular sort of confidence; ‘naive optimism’, where entrepreneurs, encouraged by a rising market, tended to take too many risks.

Answer 309

o Ad valorem taxes are percentages, such as VAT, which adds 20% of the unit price. This is the main indirect tax in the UK. o Specific taxes are a set tax per unit, such as the 58p per litre fuel duty on unleaded petrol.

Unit 2 Flashcards

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