Y13 macroeconomics Flashcards

Question

Details on illiquid assets and profitability...

Answer 1

- Return rate on illiquid assets generally higher than liquid assets - So banks don't want too many liquid assets. - Banks need to have a certain amount of liquid assets as banks lend money over a long-term (they're paid back over a long timeframe) + But depositors who give their money to banks expect to be able to withdraw their savings immediately.

Answer 2

- To repay depositors when asked, but not too much as this may make them unprofitable. - Banks rely on depositors not all wanting to withdraw their savings at the same time -> This is due to how the bank may not be liquid enough, and the bank may not be able to repay them back.

Answer 3

- When lots of people withdraw their savings if they thought it was at risk

Answer 4

- When lots of people withdraw their savings if they thought it was at risk

Answer 5

- More secure an investment is, lower interest rate will be received and vice versa. - Ceteris paribus, risky investments will usually generate higher returns than less risky ones.

Answer 6

- Lending between banks (a money market) - These lending with loans are short-term (usually less than a week) - Rate charged called the inter-bank lending rate or the 'overnight' rate

Answer 7

- Bond's yield will roughly match the interest rates -> With similar risk levels - As I.R rates rise, bond prices fall and vice versa. - In equations/questions, the yield could be the I.R rate

Answer 8

- The risk that a problem in one part e.g. a bank can lead to the breakdown of a whole market or perhaps even the whole financial system. - This could spread internationally | (A finnacial crisis often seem to happen a long period of prosperity)

Answer 9

- Aiming to profit from buying cheap assets and selling them at a higher price. - Excessively future asset prices can lead to market bubbles...

Answer 10

1. A market bubble occurs when investors expect assets' price to continue rising -> This could lead to overpay and could lead to a 'market bubble'. 2. The market bubble 'bursts' when investors lose confidence and they rush to sell their assets to avoid large assets. -> (Value slowly diminishes to perhaps profit turn into losses). 3. A credit crunch is when the market bubble bursts, and banks reduce their lending from them having lower capital.

Answer 11

- Negative externalities involve mismanagement or risk. -

Answer 12

- This can lead to adverse selection and moral hazard. - Adverse selection is when the seller may not be able to tell the diffrence between a 'good buyer' and a 'bad one' at the time of the sale. - Moral hazard is when someone is more willing to take risks as they know someone else will have to pay the consequences if anything goes wrong. -> e.g. a bank may provide risky loans for high profits if it knows that taxpayers will bail it out should anything go wrong.

Answer 13

- A 'lender of last resort' or a 'banker to the bank'. - Banks can face a shortage of liquidity as they borrow short-term and lend long-term. - They can act as a 'banker to the government' by helping the government to manage its national debt and could offer them advice - A central bank could impose rules to prevent financial market failure and instability

Answer 14

Pros: - Prevent panic and a run on the banks. - Helps to reduce the impact of financial stability. Cons: - Can lead to a moral hazard + Could encourage a bank to take excessive risks - Could lead to insufficient liquidity for banks - May seem unfair that the central bank will try to save financial institutions, but not non-financial firms.

Answer 15

- This regulation usually focuses on competition, structure of firms and risk management and more - A 'capital ratio' measures the ratio of a bank's capital to loans, which helps to measure the risks affiliated with bank's lending. - A 'liquidity ratio' measures the ratio of highly liquid assets to the expected short-term need for cash. -> Gives an idea of the bank's stability and its ability to meet its short-term liabilites. - These 'ratios' gives a better understanding of a bank's overall stability ## Footnote (In the past, financial markets were less regulated, but led to other problems such as illegal activity, market bubbles, excessive risk-taking etc)

Answer 16

Microprudential regulation - To ensure that individual firms act fairly towards their customers and don't take excessive risk or break the law. Macroprudential regulation - To tackle systemic risks and avoid large-scale financial crises. - FCA is a microprudential regulator. | (BoE regulates through the PRA and FPC) ## Footnote (FPC is a macroprudential regulator, and PRA is a microprudential regulator).

Answer 17

Globalisation is the increasing integration of economies internationally. The main characteristics of globalisation

Answer 18

- MNCs are firm which function in at least one other country aside from their country or origin e.g. Nissan or KFC - MNCs being est. depend on transport links, pro-investment govt. policies, access to cheap labour and raw materials , access to different markets and more.

Answer 19

- Better communications technology - Rise in no. of MNCs - Trade liberalisation (removing tariffs, other restrictions etc) - Increasing investment by sovereign states - Firms expanding overseas to exploit economies of scale

Answer 20

- Trade encourages countries to specialise in the goods and services they're best at producing/providing, boosting output. - Boosted employment and economic growth - Lower production costs form economies of scale can be passed onto consumers in the form of lower prices - World GDP has risen from this

Answer 21

- Can cause inflation as demand for goods and services may rise, and a bottleneck shortage may occur as supply will outstrip demand. - Can cause overdependence on other countries which can be risky - Rising world trade has led to global imbalances in BoP accounts, with some countires having large surpluses, and other countries having large deficits...

Answer 22

Pros: - FDI by MNCs can create jobs - MNCs can benefit from economies of scale + Some people beleive MNCs can raise living standards from lower unemployment Cons: - MNCs may exploit workers in developing countries - MNCs may force local firms out of business as e.g. other firms may fail to achieve things like economies of scale - MNCs can relocate quickly and cause mass unemployment - Environmental implications, e.g. deforestation, carbon emissions etc

Answer 23

- Health and safety laws are less stringent in these countries - MNCs may offer low wages for workers + MNC workers may move to developed countries, reducing economic growth HOWEVER, globalisation can boost employment - Gaps between poor and rich can drastically widen (income inequality) - The tax receipts the govt. receives will need regulation to ensure the govt. dies not lose out on this revenue, and imposing this regulation can be costly

Answer 24

- Higher imports can lead to a current account deficit - Cheap overseas production of goods has led to a sharp reduction in some industries in developed countries, causing unemployment. - This can lead to a rise in world trade which can lead top a rise in BoP deficit.

Answer 25

Pros: - A country can enjoy a larger variety of goods and services - Additional markets allow firms to exploit economies of scale - International trade can expose firms ti new ideas and skills e.g an MNC can bring new manufacturing skills to a country... Cons: - High transport costs - Currency exchanges can lead to financial loss - Can lead to globalisation problems

Answer 26

Pros: - Better quality of goods and services - Economies of scale can be exploited Cons: - Domestic industries may be forced to shut down as foreign firms may outcompete them - Countires may be prone to cuts in goods' supply if they don't produce it themselves - Over reliance can lead to issues + Other indistries may decline

Answer 27

- When a country can produce a good or service using fewer FoPs than another nation | (Trade)

Answer 28

- When a coutnry's opportunity cost of producing a good is lower than the opportunity cost for other countries.

Answer 29

- The relative price of its exports compared to its imports - If the exports' price rise but imports' price stays the same -> it's terms of trade index will rise - If a country's terms of trade index rises it'll be 'better off', and if it falls, its 'worse off'.

Answer 30

For developed countries... - Imports would aid maintaing high living standards - Products would often be cheaper from developing countries' higher competition and cheaper labour For developing countries... - Developing countries can import goods which they don't have the tech for -> Higher living standards - Trade gives developing countries access to new raw materials which could result in new industries -> Boosting the economy of the developing countries

Answer 31

- All countries should treat their trading partners equally - WTO wants to encourage competitiveness and discourage trade barriers e.g. subsidies

Answer 32

- Firms being outcompeted could lead to job losses - Infant industries struggling may mean domestic consumers pay high prices for low quality goods - Demerit goods may be produced -

Answer 33

- Tariffs (from developed countries' paying) - Quotas (towards developed countries) - Embargoes - Reducing currency value of developed countries' - Subsidies

Answer 34

Pros: - Can limit consumption of a demerit good - Can correct a BoP deficit Cons: - Allocative efficiency and productive efficiency reduced + Specialisation reduced - Higher prices from lower specialisation, squandaring chances of economies of scale - High demand for imports may be due to poor domestic efficiency - Trade barriers can lead to discord between countries

Answer 35

- The idea that a country should specialise in producing the goods or services it can at the lowest opp. cost.

Answer 36

- They'll be able to purchase cheaper goods/services from developing countries - They'll benefit from importing goods/services which they don't have the tech to produce themselves

Answer 37

- Reduced imports may reduce specialisation + Reduced allocative + productive efficiency - Higher prices due to lack of competition and specialisation - Rise in inequality + fall in living standards -> due to poor being most impacted by price rises of daily goods - Reduced choice for consumers - 'Trade war' from trade barriers e.g. a retaliatory embargo

Answer 38

- Free trade areas -> no trade barriers whatsoever HOWEVER, individual members can still impose barriers on outside countries e.g. USMCA - Customs unions -> Free trade areas with standard tarrifs on non-members - Common markets -> Custom unions with the additional free movement of FoPs between members - Economic unions -> Trading blocs with members having similar economic integration - Monetary unions -> Members with the same single currency (could also be an economic union) | (USMCA - United States-Mexico-Canada Agreement)

Answer 39

- Trade patterns change after barriers are removed -> As products are bought from cheapest source - Removal of trade barriers allow countries in the trading bloc to specialise where they have a comparative advantage -> This could boost efficiency and competition + trade

Answer 40

- Trading blocs can limit development of developing countries as they are non-members that cannot trade on equal terms. - Trading blocs can aid reducing protectionism by reducing no. of parties that need to negotiate a trade agreement - WTO has aided the reduction of level of subsidies on the EUs agricultural goods + HOWEVER, WTO policies may have prevented developing nations from diversifying as they were prevented from protecting infant industries

Answer 41

The process by which the economies of different countires become more closely linked

Answer 42

Pros: - Trade creation occurs -> Due to removal of tariffs from trading blocs + Consumers may choose lower-cost trading partners - More efficiency, economies of scale etc Cons: - Trade diversion could result in more expnesive products as specialisation or efficiency could fall

Answer 43

Pros: - Same currency means no extra currency needs to be bought - No exchange rate risks - Monetary union policies could help economies in long-run e.g. fiscal policies could stop long-run budget deficits Cons: - Policies to suit whole union may not aid individual countries' economies e.g. if one member state in recession, recession may worsen IF central bank boosts I.R rates in other member states (as saving is incentivised, reduce borrowing etc) - Countries may lose own control of their own economies (as the monetary policy control may be lost) + They may not be able to change I.R rates or exchange rates

Answer 44

Pros: - Higher economies of scale, higher efficiency etc - Migration could bring skilled workers to existing members - Migration from from new to old mem states will boost agg supp -> This would boost econ growth Cons: - Overcrowing from high migration + rise in inequality if new membs poorer than existing membs - Increased competition from new members may drive domestic firms out of business

Answer 45

Pros: - New membs will benefit from higher comp, higher efficiency etc - New memb states have freedon to live and work wherever they choose in other memb states - Joining e.g. EU has allowed new members to trade more easily with EU membs Cons: - New membs need to comply with EU laws - Higher costs by govt. e.g. to boost safety - Migration could lead to labour shortage - Unemployment risk e.g. structural unemployment (if firms struggle to compete with existing memb states)

Answer 46

Pros: - Less job losses etc - Less export revenue etc Cons: - Control over migration could be impacted - Free trade area | (Same or similar pros and cons of EU enlargement)

Answer 47

- A common monetary policy usually dealt with by the ECB - Memb states coordinating fiscal and economic policies - Memb states using a common currency - the euro

Answer 48

Pros: - Higher FDI - Increased trade + Reduced transaction costs Cons: - Low price stability (big aim of ECB) - Falls in real GDP + low consumer spending - High structural unemployment (from overcrowding?)

Answer 49

Pros: -> Allocative efficiency as consumers’ wants and needs satisfied -> No cost required to operate price mechanism -> Consumers decide what is/isn’t produced by consumers -> prices kept to minimum due to allocative efficiency of resources Cons: -> inequality in wealth and income likely -> market failure from over/underprovision -> people with low skills will be subject to low wages or unemployment -> public goods not provided

Answer 50

-> It can reduce supply…

Answer 51

- Signalling device e.g. high prices signal high demand -> producers will boost production - Ration scarce resources -> e.g high demand = low supply and high price - incentive to firms -> higher prices allow firms to produce more and higher production from higher profits

Answer 52

- short-term finance is provided for companies and govts.

Answer 53

- Life expectancy at birth - Mean yrs of schooling and unexpected years of schooling - GNI per capita (at PPP)

Answer 54

- Rise in material living standards - Reduces poverty - Lower unemployment - Improves people's welfare - Increased power on the international stage

Answer 55

- health - living standards (by GNI per capita, adjusted for PPP) - education (schooling years)

Answer 56

- Used to measure living standards - GDP + net income from overseas investment plus remittances - GNI per capita = GNI / population

Answer 57

Pros: - Focuses on 3 core aspects, not just economic growth - Allows comparisons between countries - Developed countries can send aid to countires with low HDI scores Cons: - Ignores income distribution - Arbitrary weighting -> All indicators given equal weighting - Doesn't mention health/quality of education - Doesn't mention non-economic measures e.g. human rights

Answer 58

- Corruption - Institutional factors including property rights - Poor infrastructure

Answer 59

- Monetary policy - Fiscal policy - Supply-side policies - Subsidies - Indirect taxes - Improve institutional factors

Answer 60

Pros: - Better quality of life -> Better employment -> Right shift LRAS - Better quality/qty of goods/services - Can assist debt relief Cons: - Countries may become over-reliant - Some countries provide aid on certain conditions - Can be used as a political tool - Corruption could lead to aid not going to where its meant to go ## Footnote (High living standards doesn't always mean better quality of life, e.g. high living stards but low health)

Answer 61

Pros: - If a country is on a BoP surplus -> More employment -> More tax revenue -> Right shift in AD and right shift in LRAS - PPP rises due to lower prices from higher competition Cons: - BoP deficit possible - Political reasons may lead to protectionist measures -> hindering trade - It's argued that its bad for developing countries -> They are asked to reduce trade barriers -> But at the same time developed countries put up trade barriers - WTO members perhaps constrained by regulations - Negative externalties ignored

Answer 62

- Investment in physical infrastructure - Human capital - Access to credit

Answer 63

- When people hold their savings abroad -> Perhaps due to high tax rates - This may cause issues

Answer 64

- Economy's growth directly linked to an economy's saving lvls + How efficiently the economy's capital can be used -

Answer 65

- A fuller picture of GDP effects - Takes into account negative effects of growth e.g. pollution - However, could be difficult putting a cost on pollution -> Figures could be subjective | (Uses GDP)

Answer 66

Bilateral aid - When a donor country directly sends aid to the recipient country Mulitlateral aid - When a donor country passes aid to an intermediate agency e.g. the World Bank and gives aid to country Tied aid - Aid sent on a condition that money is spent in a particular way

Answer 67

- Wage and tax lvls - Unemployment lvls - Education lvls - Lvl of govt. subsidies

Answer 68

Pros: - Frees up money for the public sector - Money saved can be invested into capital goods to grow economy Cons: - Moral hazard possible - Cancelling debt of corrupt govts. could mean more money is misused - Debt cancellation could benefit donor country as they would receive influence - Perhaps 'favours' could be set

Answer 69

- Excess labour in agricultural sector -> So, no opp. cost if agricultural workers go to industry to take higher wages - Profits can be reinvested -> Higher productivity gains - Point will be reached where everyone will be better off - However, labour to industry may be difficult + Profits may go abroad or used for consumption + Capital intensive production with little human labour -> Will lead to not many additional jobs

Answer 70

- Protect domestic industires until they can compete worldwide - Main policy is import subsidisation -> Prev. imported goos replaced by domestically made goods -> Achieved by quotas and tariffs - Currency may be artificially highly maintained for cheap imports | (Short-term aim is to create jobs, lower poverty and improve BoP).

Answer 71

- They emphasise free trade, deregulation and foreign investment - Firms encouraged to invest and seek new export markets - Same pros and cons from free trade...

Answer 72

- Making small loans to businesses and individuals -> to boost financial independence -> Not clear that it can lower poverty on a large-scale - Fairtrade aims to offer individual farmers a guaranteed min. fair price -> Long-term planning made easier - However, market price distored could lead to overproduction -> Low prices may mean farmers flood the market -> Drive price down further

Answer 73

IMF: - Imposes quotas on members to maintain financial stability - Fights poverty IBRD: - Aims to reducew poverty in middle- low- income countries IDA: - Aims to reduce poverty in poorest countries HOWEVER, these organisations help on conditions that countries follow certain economic policies + Perhaps developments limited + All developing countries different so different help would be needed ## Footnote (NGOs offer help e.g. training or advice on environmental sustainability)

Answer 74

- Money,goods or services and 'soft-loans given by the government of one country or mulitlateral instituion to help another country.

Answer 75

- Average cost of production is constant - No trade barriers - No transport costs

Y13 macroeconomics Flashcards

(101 cards)