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1
Q

What is Macroeconomics?

A

The performance of an economy as a whole

2
Q

How many Macroeconomic Objectives are there?

A

Seven

3
Q

What are the Macroeconomic Objectives?

A
  • Economic Growth
  • Low Unemployment
  • Low + Stable Inflation
  • Balance of Payments Equilibrium on Current Account
  • Balanced government budget
  • Protection of the Environment
  • Greater Income Equality
4
Q

What are the 4 Main Macroeconomic Objectives, and what do these aim to provide?

A

Economic Growth
Low + Stable Inflation
Low Unemployment
Balance of Payments Equilibrium on Current Account

These aim to provide macro-stability.

5
Q

What is Economic Growth as an objective?

A

In the UK, the long run trend of economic growth is about 2.5%.

Governments aim to have sustainable economic growth for the long run.

In emerging markets/ developing economies, governments might aim to increase economic development before economic growth.

6
Q

What is Low Unemployment as an objective?

A

Governments aim to have as near to full employment as possible. They account for frictional unemployment by aiming for an unemployment rate of around 3%. The labour force should also be employed in productive work.

7
Q

What is Low and Stable Inflation as an objective?

A

In the UK, the government inflation target is 2%, measured with CPI.

This aims to provide price stability for firms and consumers, and will help them make decisions for the long run. If the inflation rate falls 1% outside this target, the Governor of the Bank of England has to write a letter to the Chancellor of the Exchequer to explain why this happened and what the Bank intends to do about it.

8
Q

What is BoP Equilibrium as an objective?

A

Governments aim for the current account to be satisfactory, so there is not a large deficit. This is usually near to equilibrium.

A balance of payments equilibrium on the current account means the country can sustainably finance the current account, which is important for long term growth.

9
Q

What is Balanced Government Budget as an objective?

A

This ensures the government keeps control of state borrowing, so the national debt does not escalate. This allows governments to borrow cheaply in the future should they need to, and makes repayment easier.

10
Q

What is Protection of the Environment as an objective?

A

This aims to provide long run environmental stability. It ensures resources used are not exploited, such as oil and natural gas, and that they are used sustainably, so future generations can access them too. Moreover, it means there is not excessive pollution.

11
Q

What is Greater Income Inequality as an objective?

A

Income and wealth should be distributed equitably, so the gap between the rich and poor is not extreme. It is generally associated with a fairer society.

12
Q

What is GDP?

A

Gross Domestic Product

GDP is the total market value of all goods + services produced in the country in a given year.

GDP does not include earnings by its residents while outside of the country

For example, the Toyota company is in the UK- that will be included in GDP.

13
Q

What is GNP?

A

Gross National Product

(In reference to the UK)
Everything that is produced by UK businesses + workers, regardless of where they are in the world.

  • For example, the Toyota company runs in the UK, but is part of Japan’s GNP, and not the UK’s.
14
Q

What is GNI?

A

Gross National Income

GDP, plus Income paid into the Country by Other Countries, for such things as Interest + Dividends, Overseas Profits, etc.

15
Q

How do you Calculate Real GDP?

A

Quantity of Product x Price of Product in Base Year

16
Q

What is the More Useful GDP to measure Standard of Living, and Why?

A

Real GDP

  • Nominal GDP is always exaggerated, and it’s not a true reflection of the country’s GDP.
  • You need to consider Real GDP in order to have a reflection of the country’s living standards.
17
Q

What is the GDP Deflator Formula?

A

( Nominal GDP / Real GDP ) x 100%

18
Q

What is Nominal GDP?

A

The value of Goods + Services measured using Current Prices

Aka, it includes Inflation/ doesn’t adjust inflation

19
Q

What is Real GDP?

A

The Value of Goods + Services at Constant Prices

It is adjusted for inflation

20
Q

What is Meant by GDP Per Capita?

A

Income per Person

Usually measured as an average of the Whole Population

21
Q

How do you Measure GDP Per Capita?

A

Country’s GDP / Country’s Population

22
Q

What are the Advantages of GDP?

A
  • Frequent: GDP is usually provided on a Quarterly basis
  • Used Widely: Practically every country in the world uses some sort of GDP
  • Consistent: Measured consistently
  • Easy to Calculate + Interpret
23
Q

Why is National Income Measured?

A
  • The government + economists use the figures to Forecast Changes in the Economy
  • Helps the government to make decisions about Taxes + Government Spending
  • Helps make Comparisons Over Time
  • Helps make Comparisons Between Countries
  • Helps make judgements about Economic Welfare + Standard of Living
24
Q

What are the Limits to GDP as a measure of Economic Growth?

A
  • Inaccurate: Methods of Recording GDP are Imprecise
  • Unpaid Work: Doesn’t take into account charity work/ volunteering
  • Subsistence: Farmers may Consume what they Produce, which isn’t included in GDP
  • Black Market: Doesn’t take into Account the Black Market
25
Q

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

A

Quality of Life

Pollution Levels (Externalities)

Income Distribution

Population Size + Age Distribution

Quality of goods (esp technological goods)

26
Q

What is Purchasing Power Parity?

A

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.

27
Q

What is meant by Total GDP?

A

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

28
Q

What is the UK’s National Wellbeing?

A

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.

29
Q

What is the Relationship between Real Incomes, and Subjective Happiness?

A

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.

30
Q

What is Happiness Economics?

A

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

31
Q

How can Happiness be measured?

A

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

32
Q

What is the National Well-Being programme?

A

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.

33
Q

What is the Easterlin Paradox?

A

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

34
Q

What did the 2016 Happiness Ratings show?

A

Anxiety increased slightly

Happiness stayed unchanged

35
Q

What is the Difference between Volume and Value?

A

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

36
Q

What is Inflation?

A

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

37
Q

What is Disinflation?

A

A reduction in the increasing rate of Inflation

38
Q

What is Deflation?

A

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

39
Q

Who are Debtors?

A

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

40
Q

Who are Creditors?

A

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

41
Q

What is the RPI?

A

Retail Price Index

Includes mortgage repayments, (which can have distorting effects)

42
Q

What are the ways that inflation can be measured?

A

CPI (main way)

RPI (alternative)

43
Q

What is CPI?

A

Consumer Price Index

Like RPI, but Excludes:
o House Prices
o Council Tax
o Mortgage Interest Payments

The Government tends to use CPI

44
Q

What is meant by the Rate of Inflation?

A

The Change in Average Prices over a given period of time

45
Q

What is meant by the Cost of Living?

A

The quantity of goods + services that a Given Amount of Money will Buy for a typical household

(e.g £1000 a month)

46
Q

What is RPIX?

A
  • This is RPI, but with mortgage payments removed
47
Q

How is CPI Calculated?

A
  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
48
Q

What are the Limitations of RPI/CPI as a measure of price level/ inflation?

A
  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
49
Q

What are the Consequences of Inflation?

A
  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
50
Q

What is the ‘Deflationary Spiral’?

A

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

51
Q

What does the CPI do?

A

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.

52
Q

What are the Consequences of Inflation on Firms?

A

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.

53
Q

What are the Consequences of Inflation on the Government?

A

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

54
Q

What are the Consequences of Inflation on Workers?

A

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.

55
Q

What are the Consequences of Inflation on Consumers?

A

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.

56
Q

What are the 3 Causes of Inflation?

A

Demand Pull
Cost Push
Growth of the Money Supply

57
Q

What is Demand Pull Inflation?

A

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)

58
Q

What is Cost Push Inflation?

A

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)

59
Q

How does the Growth of Money Supply cause Inflation?

A

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)

60
Q

Who are Unemployed people?

A

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.

61
Q

Who are Economically Active people?

A

These of working age who are looking for work

62
Q

Who are Discouraged Workers?

A

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

63
Q

What is meant by the Workforce?

A

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

64
Q

What is Underemployment?

A

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

65
Q

What are the ways of Measuring Unemployment?

A

Full Employment
Claimant Count
Labour Force Survey

66
Q

What is Full Employment?

A

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

67
Q

How does the Claimant Count measure unemployment?

A

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

Monthly Count of the Unemployed

68
Q

What is the Current Claimant Count?

A

1.57 million

69
Q

How does the Labour Force Survey measure unmployment?

A

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

70
Q

What is the Current Labour Force Survey Count?

A

2.53 million

71
Q

What is Structural Unemployment?

A

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)

72
Q

What is Frictional Unemployment?

A

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

73
Q

What is Cyclical Unemployment?

A

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

74
Q

What is Seasonal Unemployment?

A

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

75
Q

What is Real Wage Inflexibility?

A

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

76
Q

What are the Benefits of Unemployment to the Individual and Businesses?

A

Individual:
More Leisure Time
Redundancy Pay

Businesses:
Bigger Pool of Surplus Labour
Less Pressure to Pay High Wages
Less risk of Industrial/Strike Action

77
Q

What are the Benefits of Unemployment to the Economy and Society?

A

Economy:
Less Income = Less Spending = Less Demand = Lower Inflation

Society
Increased chance of Volunteer Work

78
Q

What are the Costs of Unemployment to the Individual and Businesses?

A
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

79
Q

What are the Costs of Unemployment to the Government, the Economy and Society?

A
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

80
Q

What ways can Unemployment be Reduced?

A
  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
81
Q

What is the Significance of Changes in Employment + Unemployment (for consumets, firms, workers, the government + society)?

A

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.

82
Q

What is the Significance of Changes in Inactivity?

A

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.

83
Q

What is the Significance of Migration + Skills for Unemployment?

A

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.

84
Q

What is the Real Wage Inflexibility Diagram?

A

It’s kinda like the minimum wage diagram

85
Q

What are the Issues of using GDP per Capita as a measure of economic growth?

A

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.

86
Q

How do you Calculate GNI?

A

GNI = GDP + Net factor income*

(* income earned by domestic workers/firms - income earned by foreign workers/firms earning incomes at the domestic country)

87
Q

What can cause Demand Pull Inflation?

A

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)

88
Q

What can Cause Cost Push Inflation?

A

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)

89
Q

Which cause of Inflation is the Most Severe/ harms the economy the most?

A

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.

90
Q

What are the Supply side causes of Deflation?

A

Lower costs of production
Better productivity
Improvement in productive capacity

It is considered okay, and can even be beneficial in the short run

91
Q

What are the Causes of a Deflationary Spiral?

A

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

92
Q

How do you work out Real Interest Rate?

A

Nominal Interest Rate - Inflation Rate

93
Q

What is the Criteria of the Labour Force Survey?

A
  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.)

94
Q

What is the Criteria of the Claimant Count?

A

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
95
Q

What are the Advantages + Disadvantages of the LFS Survey?

A

+ It is used worldwide, which allows for cross country comparison

  • It’s a survey, which can lead to a sampling error
96
Q

What are the Advantages + Disadvantages of the Claimant Count?

A

+ 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)
97
Q

What are some Problems with Both Measures of Unemployment?

A

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

98
Q

What is Cyclical Unemployment also known as?

A

Demand Deficiency

99
Q

What is meant by a Balance of Payments?

A

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

100
Q

What are the Components of Balance of Payments?

A

Current Account
Capital Account
Financial Account

101
Q

What does the Current Account consist of?

A

Trade in Goods
Trade in Services
Investment Income (e.g. remittances)
International transfers (e.g. aid)

(always looks at the VALUE, not volume)

102
Q

What does the UK Current Account look like?

A

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)

103
Q

What is a Trade Deficit?

A

Value of Imports > Exports

104
Q

Why is there a current account deficit in the UK?

A

-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

105
Q

What are the Demand-Side explanations of a trade deficit in Goods?

A

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

106
Q

What are the Supply-Side Explanations of a trade deficit in Goods?

A
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)

107
Q

What are the benefits of a trade deficit?

A

Higher Standard of Living

Better Quality Goods

108
Q

What are the costs of a trade deficit?

A

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)

109
Q

What are the Evaluation Points to do with a Trade Deficit?

A
  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
110
Q

What is a Trade Surplus?

A

When the Value of a Country’s Exports > Imports

111
Q

What causes a Trade Surplus in Goods?

A

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

112
Q

What are the Benefits of a trade Surplus?

A

Increase in International Competitiveness

Greater Confidence in UK Economy

Greater FDI:
Foreign Direct investment
(Businesses Opening Factories Abroad)

113
Q

What are the Costs of a current account Surplus?

A

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

114
Q

What is the Relationship between Current Account imbalances, and other macroeconomic Objectives?

A

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.

115
Q

What is the Interconnectedness of Economies through International Trade?

A

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.

116
Q

What is Aggregate Demand?

A

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)

117
Q

What is the AD Formula?

A

C + I + G + (X-M)

Consumer Spending + Investments + Government Spending + (Exports - Imports)

118
Q

What Percentage of each Component takes up AD?

A

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

119
Q

Which way does the AD Curve Slope?

A

Downwards

120
Q

What causes a Shift in the AD Curve?

A

Economic Growth / AD

121
Q

What causes Movement along the AD Curve?

A

Changes in price level cause movement along the demand curve

122
Q

What are the 3 Reasons why the AD curve slopes Downwards?

A

Wealth Effect/Real Balance Effect
International Competitiveness Argument
Interest Effect

(They look at how the price level can affect some component of AD)

123
Q

What is the Wealth Effect/Real Balance Effect?

A

As the price level decreases, real incomes/the purchasing power are increasing.

This increases consumption, increasing AD.

124
Q

What is the International Competitiveness Argument?

A

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.

125
Q

What is the Interest Effect?

A

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.

126
Q

What is the Cetirus Paribus within the AD Curve?

A

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

127
Q

What is Consumption?

A
  • The amount Households Spend on Goods + Services to Satisfy their Current Wants
  • Consumption can be for Both Durable + Non-Durable Goods
128
Q

What are the Factors of Consumption?

A
  • 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
129
Q

How do House Prices Affect Consumption?

A
  • 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
130
Q

How does Confidence in the Economy Affect Consumption?

A

In a boom, people have higher confidence; which will make them spend more

The opposite occurs during a recession

131
Q

How does Disposable Income Affect Consumption?

A

More disposable income means more spending

More income tax means less spending

132
Q

How do Interest Rates Affect Consumption?

A

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

133
Q

How does the Ease of Obtaining Loans / Credit Cards Affect Consumption?

A

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

134
Q

How does an ageing population affect Consumption?

A

Longer Lives = More Spending

135
Q

What is the Link between Interest Rate and Consumption?

A
  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
136
Q

What is the Relationship between Savings and Consumption?

A

Consumer income which is not spent is saved.

137
Q

What is the Wealth Effect, and its influence on Consumption?

A

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.

138
Q

What can Affect Consumer Confidence?

A

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

139
Q

What are Investments?

A

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)

140
Q

What is meant by Investment in Human + Physical Capital?

A

Human Capital: Investment in Education + Training of Workers

Physical Capital: Investment in Factories, Materials, etc.

141
Q

What are the 2 ways of Financing Investment?

A

Borrowing Money

Using Retained Profits

142
Q

What are Net + Gross Investments?

A

Gross Investments: Investments Before Depreciation

Net Investments: Investments After Deprectiation

143
Q

In terms of Investments, what is Depreciation?

A

When Something Wears Out / is Used Up

144
Q

What Affects Investments?

A
  • Changes in the Cost of Capital
  • Changes in Technology
  • Expectations + Business Confidence
  • Access to Credit
  • Level of Spare Capacity
  • Interest Rates
  • Corporation Tax
145
Q

What is meant by Animal Spirit?

A

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.

146
Q

What affects Business Confidence?

A

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

147
Q

How will Expectations and Business Confidence influence Investment?

A

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.

148
Q

How will the Rate of Economic Growth influence Investment?

A

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.

149
Q

How will Demand for Exports influence Investment?

A

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.

150
Q

How will Interest Rates influence Investment?

A

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.

151
Q

How will Access to Credit influence Investment?

A

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.

152
Q

How will Corporation Tax influence Investment?

A

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

153
Q

How will the Level of Spare Capacity influence Investment?

A

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

154
Q

What is Meant by Government Spending?

A

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

155
Q

What are the 4 Types of Government Spending?

A
  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)

156
Q

Where does Government Revenue Come From?

A

Taxes

157
Q

What are the Factors of Government Spending?

A
  • National Income
  • Level of Economic Activity
  • Age of the Population
  • Tax Revenue
  • Demographic Changes
  • Demand for Merit and Demerit Goods
158
Q

What Affects the Level of Government Spending?

A
  • The Trade Cycle

- Fiscal Policies

159
Q

How can the Trade Cycle affect Government Spending?

A

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.

160
Q

How can Fiscal Policies affect Government Spending?

A

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

161
Q

What are Exports?

A

Goods + Services Produced in the Home Country that are Sold to Overseas.

(discusses revenue/value, not volume)

162
Q

What are Imports?

A

Goods + services a Home Country buys from Overseas

discusses expenditure/value, not volume

163
Q

What are Net Exports?

A

Revenue from Exports - Expenditure on Imports

164
Q

What is meant by Exchange Rates?

A

The relationship of one Currency to Another

165
Q

What does a Strong Pound Mean?

A

Strong Pound, Imports Cheap, Exports Dear

166
Q

What does Hot Money Flow mean?

A

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 £

167
Q

What are the Main Influences on the (net) Trade Balance?

A
Real Income
Exchange Rates
State of the World Economy
Degree of Protectionism
International Competitiveness/Trade Deals
168
Q

How does Real Income influence Trade Balance?

A

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

169
Q

How do Exchange Rates influence Trade Balance?

A

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

Weak Pound means Exports are Cheap and Imports are Dear

170
Q

What are the Evaluation Points surrounding how the Exchange Rate affects Net Exports?

A

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.)

171
Q

How does the State of the Economy influence Trade Balance?

A

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.

172
Q

How does the Degree of Protectionism influence Trade Balance?

A

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.

173
Q

How does International Competitiveness/Trade Deals influence Trade Balance?

A

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.

174
Q

What is Aggregate Supply?

A

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

175
Q

What does the AS curve look like, and why?

A

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

176
Q

What affects a Movement along the AS curve?

A

Price Level

177
Q

What is an Expansion and Contraction of AS?

A

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.

178
Q

What causes a Shift in the AS Curve?

A

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’.
179
Q

What are the Factors of SRAS?

A

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.
180
Q

How does the Cost of Employment affect SRAS?

A

e.g. wages, taxes, and labour productivity.

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

181
Q

How does the Cost of Raw Materials affect SRAS?

A

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

182
Q

How does the Cost of Oil Prices affect SRAS?

A

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

183
Q

How does the Exchange Rate affect SRAS?

A

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

184
Q

What is the Relationship between SRAS and LRAS?

A

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.

185
Q

What are the Factors of LRAS?

A

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.

186
Q

What is Equilibrium Real national output?

A

When the rate of withdrawals = the rate of injections.

This is equivalent to where AD=AS

187
Q

What are the 2 types of AS according to the Classical Model?

A

Short Run Supply (SRAS)

Long Run Supply (LRAS)

188
Q

What does an SRAS curve look like on a Classical graph, what factors determine it, and how is it defined?

A

Upwards Sloping

Factors that Determine SRAS = Cost of Production

Defined where Wages are Fixed

189
Q

What does an LRAS curve look like on a Classical graph, what factors determine it, and how is it defined?

A

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

190
Q

What are the two types of equilibrium according to the Classical Model?

A

Short Run Equilibrium

Long Run Equilibrium

191
Q

How much Government Intervention should be present according to the Classical Model?

A

No Government Intervention:

The economy will heal itself
It will always be working on LRAS, working at Full Employment

192
Q

What does the Classical Model focus on?

A

The model Focuses on Wages:

Recession = Wages Fall
Inflation = Wages Increase
193
Q

What is meant by the output YFE?

A

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

194
Q

What shifts LRAS to the Right?

A
  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
195
Q

What shifts LRAS to the Left?

A
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
196
Q

What does the Keynesian Model argue about Aggregate Supply?

A

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

197
Q

What did the Keynesian Model argue about the LRAS Curve?

A

It is not Always Vertical, but can also be Horizontal

198
Q

Why can the LRAS Curve be Horizontal (according to the Keynesian Model)?

A

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
199
Q

What did the Keynesian Model argue about Wages?

A

Workers do not like to lower their wages during a recession

200
Q

What fuelled Keynes to come up with his Model?

A

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

202
Q

What did the Keynesian Model argue about Government Intervention?

A

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

202
Q

Why do Politicians Like the Keynesian Model?

A

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

203
Q

What do Households give to Firms (in terms of work)?

A

Rent
Wages
Interest
Profit

204
Q

What do Firms give to Households (in terms of work)?

A

Land
Labour
Capital

205
Q

What do Firms give to Households (in terms of products)?

A

Goods + Services

206
Q

What do Households give to Firms (in terms of products)?

A

Expenditure on Goods + Services

207
Q

What are Injections?

A

Money the Government Gives to Households

208
Q

What are the 3 Injections?

A

Investments
Government Spending
Earning from Exports

209
Q

What are Leakages/Withdrawals?

A

Money the Government Takes from Households

210
Q

What are the 3 Leakages/Withdrawals?

A

Savings
Taxes
Expenditure on Imports

211
Q

What is The Circular Flow of Income?

A

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

212
Q

What is the difference between Income and Wealth?

A

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.

213
Q

How does the Circular Flow of Income measure economic growth?

A

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.

214
Q

What happens if Income has a direct impact on wealth?

A

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.

215
Q

What is meant by the Multiplier?

A

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

216
Q

What is the Knock on Effect of the Multiplier?

A
  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.
217
Q

What is meant by the MPW?

A

MPW: Marginal Propensity to Withraw

The Proportion of Additional Income that is Saved/ Withdrawn from the Circular Flow

218
Q

What is the Formula for MPW?

A

MPW = MPS + MPT + MPM

It’s basically all the types of ‘withdrawals’ in the circular flow of income

219
Q

What is meant by MPT?

A

Marginal Propensity to Tax

220
Q

What is meant by MPS?

A

Marginal Propensity to Save

The Proportion of Additional Income that is Saved

221
Q

What is meant by MPM?

A

Marginal Propensity to Import

The Proportion of Additional Income that is Spent on Imports

222
Q

What is the Multiplier Formula?

A

1 / (1-MPC) = 1 / MPW

223
Q

What is MPC?

A

Marginal Propensity to Consume

The Proportion of Additional Income that is Spent

224
Q

What is the Formula for MPC?

A

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

225
Q

What is meant by APC?

A

Average Propensity to Consume

The Proportion of Disposable Income that People Spend

226
Q

What is meant by APS?

A

Average Propensity to Save

The Proportion of Disposable Income that People Save

227
Q

What is the Formula for APC?

A

Consumption
__________
Income

228
Q

What is the Formula for APS?

A

Savings
______
Income

229
Q

What is the Multiplier Ratio?

A

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.

230
Q

What is the Significance of the Multiplier to Shifts in AD?

A

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.

231
Q

What is the Accelerator Effect?

A

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)

232
Q

What does the Classical Graph look like in the Short Run?

A

In the short run, AD=SRAS≠LRAS

The AD/SRAS equilibrium output (Y1) is at a lower or higher output than YFE

233
Q

How does the output in the Classical Graph go from Y1 to YFE?

A

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

234
Q

What does the Classical Graph look like in the Long Run?

A

In the long run, AD=SRAS=LRAS

https://husainomics.files.wordpress.com/2013/02/d2-recess-gap.jpg

235
Q

What does the Keynesian Graph look like?

A

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

236
Q

What happens to the 4 main objectives when AD shifts to the Right?

A

Growth increases
Unemployment Decreases
Inflation increases
Trade balance worsens

Eval: Size of the multiplier, extent of the change, initial level of economic activity

237
Q

Why does an Increase in AD lead to an Increase in Economic Growth?

A

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

238
Q

Why does an Increase in AD lead to a Decrease in Unemployment?

A

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

239
Q

Why does an Increase in AD lead to an Increase in Inflation?

A

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)

240
Q

Why does an Increase in AD lead to a worse Trade Balance?

A

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

241
Q

What happens to the 4 main objectives when LRAS shifts to the Right?

A

Growth Increases
Unemployment Decreases
Inflation Decreases
Trade Balance Improves

Eval: depends on initial level of economic activity

242
Q

Why does an Increase in LRAS lead to an Increase in Economic Growth?

A

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

243
Q

Why does an Increase in LRAS lead to a Increase in Economic Growth?

A

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

244
Q

Why does an Increase in LRAS lead to a Decrease in Inflation?

A

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

245
Q

Why does an Increase in LRAS lead to a Trade Balance Improvement?

A

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

246
Q

What is Economic Growth?

A

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

247
Q

How does economic growth benefit consumers?

A
Increased Standard of Living
Greater Choice of Goods
Better Quality Goods
Increase in Wealth - possible wealth effect
Increased Job Prospects
Increased Confidence
248
Q

How does economic growth benefit firms?

A

Increased Profit + Revenue
Increased supply of labour
Promotes investment- accelerator effect

Greater Investment
Innovation
(They can take More Risks; more confidence)

249
Q

How does economic growth benefit the government?

A

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

250
Q

What type of negative externalities does economic growth cause?

A

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

251
Q

What disadvantages other than negative externalities are caused by economic growth?

A

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

252
Q

What is Capital Deepening?

A

An increase in the size of physical capital stock

253
Q

What is Potential Growth?

A

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.

254
Q

What is Actual Growth?

A

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.

255
Q

What is the Importance of International trade for Export-led Economic Growth?

A

+ 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.
256
Q

How does economic growth hurt consumers?

A

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

257
Q

How does economic growth hurt firms?

A

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

258
Q

How does economic growth hurt the government?

A

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

259
Q

How does economic growth benefit current + future living standards?

A

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.

260
Q

How does economic growth hurt current + future living standards?

A

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.

261
Q

What is the Macroeconomics PPF Curve?

A

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

262
Q

What are the Causes of Short Run Economic Growth?

A
Reduction in interest rates
Increase in Investment
Increase in Government spending
Reduction in tax
Fall in exchange rate/ Weaker currency
263
Q

What is Economic Growth in the Short and Long Run?

A

S.R: Increase in actual growth

L.R: Increase in potential growth

264
Q

What are the Causes of Long Run Economic Growth?

A

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
265
Q

What is an Evaluation point of Economic Growth?

A

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

266
Q

What is a Recession?

A
  • A period of temporary economic decline
267
Q

What is an Upturn/ Recovery?

A

An improvement or upward trend

268
Q

What is a Boom?

A

A period of rapid economic expansion

269
Q

What is a Downturn/ Slump?

A

A period of poor performance or inactivity in an economy

270
Q

What is an ‘Output Gap’?

A

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

271
Q

What happens to the Business Cycle in the Short Run?

A

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

272
Q

What happens during a boom period?

A
  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)
273
Q

What is the differences between Actual and Long-Term Growth Rates?

A

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.

274
Q

What is a Negative Output Gap?

A

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.

275
Q

What is a Positive Output Gap?

A

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.

276
Q

What are the Difficulties of Measuring the Output Gap?

A

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.

277
Q

How do Classical Economists illustrate an Output Gap?

A

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

278
Q

How do Keynesian Economists illustrate an Output Gap?

A

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

279
Q

How is a Negative Output shown on a Graph?

A

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

280
Q

How is a Positve Output shown on a Graph?

A

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

281
Q

Who are Ecnomically Inactive people?

A

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.

282
Q

What are Retained Profits?

A

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.

283
Q

What are the 2 Choices a Business has when it makes profit?

A
  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
284
Q

What does the Business Cycle Diagram?

A

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

285
Q

What’s the Potential Conflict between Economic Growth + Inflation?

A

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.

286
Q

What’s the Potential Conflict between Economic Growth + the Current Account?

A

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.

287
Q

What’s the Potential Conflict between Economic Growth + Government Budget Deficit?

A

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.

288
Q

What’s the Potential Conflict between Economic Growth + the Environment?

A

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.

289
Q

What’s the Potential Conflict between Unemployment + Inflation?

A

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.

290
Q

What is the Phillips Curve?

A

A supposed inverse relationship between the level of unemployment and the rate of inflation.

http://www.economicshelp.org/images/macro/monetarist-phillips-curve.jpg

291
Q

What’s the Potential Conflict between Environment + Competitiveness?

A

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.

292
Q

What’s the Potential Conflict between Fiscal + Monetary Policy?

A

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

293
Q

What’s the Potential Conflict between Interest Rate + Inequality?

A

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

294
Q

What’s the Potential Conflict between Progressive Taxes + Inflation?

A

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.

295
Q

What is Monetary Policy?

A

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

296
Q

What are the Monetary Policy Instruments?

A

Interest Rates

Quantitative Easing

297
Q

What Supply-Side Factors affect interest rates?

A
  1. Wages + Earnings
  2. Unit Labour Costs
  3. Labour Shortage
  4. Import Prices
  5. Commodity Prices (Raw Materials)
298
Q

What Demand-Side Factors Affect Interest Rates?

A
  1. Real GDP Growth
  2. Consumer Spending
  3. House Prices
  4. Unemployment
  5. Business + Consumer Confidence
299
Q

What International Factors affect interest rates?

A
  1. Sterling Exchange Rate

2. Global Inflation Trade

300
Q

How do interest rates control AD?

A

Lower interest rates means:

More spending, less saving -> more consumption
More investment
More exports
= Higher AD

301
Q

How do Falling Interest Rates affect Economic Growth?

A

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

302
Q

How do Falling Interest Rates affect Inflation Rates?

A

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

303
Q

How do Falling Interest Rates affect the Environment?

A

Higher AD = More Spending on Transport = Worse Environment

304
Q

How do Falling Interest Rates affect Unemployment?

A

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

Employment Rates are Involved in RNO

Therefore, Employment Increases

305
Q

How do Falling Interest Rates affect Income Distribution?

A

The ‘poorer’ have More Money to Spend

Therefore, the Gap Decreases, and Money is Distributed More Fairly

306
Q

What is Quantitative Easing?

A

Increasing Money Supply

The Central Bank Does this by Buying Assets

307
Q

What is the Monetary Policy Commitee?

A

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

308
Q

What do the Monetary Policy Commitee do?

A

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)

309
Q

What are the Limitations of Monetary Policy?

A

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.

310
Q

What is Fiscal Policy?

A

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

311
Q

What are the Fiscal Policy Instruments?

A

Government Spending and Taxation

312
Q

What is a Budget Deficit/ Fiscal Deficit?

A

Public Expenditure > Income (Tax Revenue)

313
Q

What is a Budget Surplus/ Fiscal Surplus?

A

When tax revenue > government expenditure

314
Q

What is Expansionary / Loosening Fiscal Policy?

A

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

315
Q

What is Deflationary / Tightening Fiscal Policy?

A

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

316
Q

How can Fiscal Policies achieve Economic Growth?

A

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

317
Q

How can Fiscal Policies achieve Low Inflation?

A

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)

318
Q

What is the Fiscal Policy Transmission Mechanism?

A

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

319
Q

How can Fiscal Policies achieve Concern for the Environment?

A

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

320
Q

How can Fiscal Policies achieve Full Employment?

A

Increasing government spending on education + training

321
Q

How can Fiscal Policies achieve Income Distribution?

A

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

322
Q

How can Fiscal Policy Affect LRAS?

A

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)

323
Q

How can Fiscal Policy affect SRAS?

A

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

324
Q

What are the Limitations in using Fiscal Policy?

A

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.

325
Q

What are Direct Taxes?

A

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.

326
Q

What are Indirect Taxes?

A

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

327
Q

What are the Aims of Supply Side Policies?

A

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.

328
Q

What is meant by Interventionist Supply Side Policies?

A

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

329
Q

What is Meant by Market-Based Supply Side Policies?

A

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.

330
Q

What are some exemplar Interventionist Supply Side Policies?

A

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

331
Q

What the main 2 Evaluation Points surrounding Interventionist Supply Side Policies?

A

Long Term Policy (Time Lag)

Opportunity Cost to the Government

332
Q

What are some exemplar Market-Based Supply Side Policies?

A

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)

333
Q

What is Stagflation?

A

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

334
Q

What is meant by Naive Optimism?

A

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.

335
Q

What are the 2 Types of Indirect Tax?

A

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.