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189 Cards in this Set
- Front
- Back
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What are the 4 main macroeconomic indiators |
The rate of economic growth. The rate of Inflation. The level of Unemployment. The state of the balance of payments. |
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What does GDP measure |
Growth Domestic Product, economic growth |
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How can economic growth be measured |
The change in national output over a period of time, national output = all goods & services produced by a country, speed at which national output increases over time Change in gdp/original gdp x100 = % change |
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What are the 2 ways national output can be measured and which one is often used |
Volume; adding up all the quantity of goods & services produced in one year. Value; calculating the value (£Billiions) of all goods & services produced in one year. Value is usually used, known as GDP |
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How long does economic growth have to be negative for us to be in a recession and depression |
2 consequative quaters, a few years |
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What is Nominal GDP and why is it used |
Nominal GDP takes prices rising as a factor of it, making it misleading. Real GDP takes inflation out of it's equation, so if there was 4% inflation and 5% GDP, nominal = 5% real = 1% |
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What is GDP per capita and how is it measured |
The standard of living in a country, higher the GDP per capita, higher the standard of living (iin theory) Total GDP/Population size = GDP per capita |
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What is GNI, Gross National Income. |
GDP plus net income from abroad, eg investments and assest abroad minus any income earned by foreigners on investments domestically,, used like GDP per capita, divide total GNP by population |
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What is GNP, Gross National Product |
Total output of citizens of a country, wherther or not they're a resident in that country, used like GDP per capita, divide total GNP by population |
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Index numbers, give me sum gud sh |
100 = Base year, Everything else measured from BASE YEAR 3% rise = 103 |
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What are the 2 ways of defining money |
The sustained rise in the average price of goods and services over a period of time, some goods rise faster then av, some price slower, others fall Can be seen as a fall in the value of money, fixed amount buys less than before, purchasing power of money has fallen |
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What are the 4 measures of inflations |
Inflation (positive) Deflation (negative) Hyperinflation(Extremely positive) Disinflation(Slowing) |
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What are the 2 main measurements for inflation? |
The Retail Price Index (RPI) and Consumer Price Index(CPI) |
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Explain how the Retail Price Index (RPI) works |
Two surveys: 6,000 households, called Living Costs and Food Survey. Finds out what people spend their money on and the proportion, finds out the weighting %. Prices change, items chosen based on the Living Costs and Food Survey. The basket changes over time because of technology, trends and tastes. This ensures its the average household. PRICE CHANGES X WEIGHTING = INDEX |
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Explain how the Consumer Price Index (CPI) works |
Its similar to RPI but some items are excluded, mortage interest payments, council tax. A slightly different formula is used as well with a larger sample. CPI lower than RPI but both have same long term trend. CPI is officially used for Inflation rates, used in comparisons. |
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Name some CPI and RPI limitations |
RPI excludes top 4%, CPI covers a wider range but doesn't consider mortgage or council tax. The information given by households can be innacurate. Basket of goods only changes one a year, might miss short term stuff. RPI and CPI give inaccurate representations of non-typical households. Regional price difference isnt taken into account. |
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Why are RPI and CPI important for government policy |
They help determine wages + state benefits. Employers + trade unions use for starting point in wage negotiations, gov use to decide state pensions and other welfare benefits, some benefits index linked, rise by same % each year. Also measure competitiveness, if CPI higher in UK, UK goods less competitive, exports fall, imports rise due to being relatively cheaper by domestic inflation. |
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What are the two ways of defining unemployment |
The level of unemployment is the number of people who are looking for a job but cannot find one. The rate of unemployment is the number of people out of work as a percentage of the labour force. rate is used for comparison |
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What are the two ways of measuring unemployment |
The Claimant Count and The Labour Force Survey |
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What is the Claimant Count (unemployment) |
# of people claiming unemployment-related benefits from the government. Data is easy to obtain with no cost and is always current, updated monthly. It can be manipulated, changing school's leaver age up makes it look like employment is falling, excludes people who are looking for work but are not eligable for benefits |
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What is the Labour Force Survey (unemployment) |
The ILO (International Labour Organisation) uses a sample of pop, asks people out of work if they're actively seeking work. people who say yes added to ILO unemployment count. Thought to be more accurate, internationally agreed measure for unemployment. Less up to date than the claimant count, expensive to collect and sample may be unrepresentative of the population as a whole, making it innacurate. Figure higher because noone's excluded. |
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Why does the government want a low unemployment rate
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A high rate suggests an economy is doing badly. Unemployment = unused labour = less goods produced. Unemployment leads to less spending and lower incomes, companies sell fewer goods and make less profit. |
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What does the balance of payments record |
The flow of money out of an economy to pay for imported goods, the fllow of money into a country from exports. Using value. |
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What are the 4 sections of the current account. |
Trade in goods, visible trade. Trade in services, invisible trade. International flows of income earned as salaries, interests, profit and dividents. Transfers of money from one person or government to another. |
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The balance of payments isn't always balanced, explain |
If too much flows in, surplus If too much flows out, deficit Deficit isnt always a bad thing, just might mean uncompetitive. Govs want to avoid long term deficit. |
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What is the circular flow of income? |
Income flowing between firms and housholds. Firms produce goods, these make up national output, households provide labour,land,capital that firms use to produce, firms pa them its calle dthe national income. Households spend money on goods, called national expenditure. On diagram straigh tlines = physical curved = money |
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What are withdrawls and injections and why do they exist |
In reality households do not spend all of their income. Withdrawls = imports, savings and taxes injection = exports and investment and gov spending. if inj = with , eqilibrium if injec > withdrawl, increase output if with > iinject, reduce output |
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Explain the multiplier effect |
One person buys something, that person buys something blah blah with withdrawls along the way, bigger withdrawls = less multiplier |
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Why is wealth different to income |
Wealth - Total value of all the assets owned. Eg money, savings or physical items. Income - flow of money Wealth is a stock concept. aren't being used but could be, correlation between the two. |
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What is Aggregate demand and what is it's formula, consumption = 65% of AD in uk |
Aggregate demand is the total demand, or total spending on goods and services, so it's made up of the components that contribute to spending/demand in an economy. AD = C + I + G + (X-M) Aggregate Demand = Consumption + Investment + Government spending + (Exports - Imports) |
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What are some of the factors that consumption and saving are effected by |
Income ^ consumption ^ Interest rates ^ consumption down Consumer confidence ^ consumption ^ Wealth effects ^ eg house prices consumption ^ Taxes ^ consumption down Unemployment ^ consumption down |
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What is the difference between saving and investment |
Savings are made by households whereas investments are made by firms |
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what is investment and the different kinds |
investment is money spent by firms on assets they'll use to produce goods. invest to make profit, makes up 15% of AD Gross investments - all investment spending. Net investment - only investment that imporvves productive capacity. 3 old trucks, 5 new gross = 5 net = 2 |
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What are the factors that affect investment |
Risk - level of risk, high economic instability = less investment Government incentives and regulation - subsidies = more, less tax = more Interest rates and access to credit - higher = less Technical advances - When significant advances are made = more Business confidence and 'animal spirits?' - More confident a business is more likely they are to invest, some arent rational |
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What is transfers of money and why isnt it included in government spending in aggregate demand |
transfers of money = benefits or pensions, they do not contribute directly to the output of an economy and therefore are not included. Gov spending is stuff like healthcare and education ect |
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Gov spending doesn't always have to be equal to revenue, if it's over or under what is t |
If spending > revenue = budget deficit If revenue > spending = budget surplus The government use the fiscal policy to alter theiir sending + tax to change ad. This imbalance effects the circular flow of income, surplus = withdrawl budget deficit = injection. Surplus = no spending, taxes too high |
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What is net exports |
exports minus imports, if imports are higher it is a negative nuber, minor % of AD |
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What are some factors that will affect imports and exports |
The exchange rate - short run, not much as inelastic in the short run, long run i>m Changes in the world economy - more real income, more imports Degree of protectionism - tariffs and quotas reducing imports. retaliation Non price factors - quality, advancements in technology for a country means it |
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What are the axis of the AD curve |
Price level and Real National Output |
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Why does RNO Real National Output fall as Price Level rises |
Domestic consumption will be reduced, things are more expensive The demand for exports will be reduced The demands for imports will rise ( if they havent changed price) |
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What causes a shift in the AD curve to the right |
A reduction in income tax , increases disposable income Changes fiscal policy and increases spending, more injections = more economic growth |
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What causes a shif in the AD curve to the left |
A rise in interest rates A stronger currency |
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What is the formula for the multiplier |
Change in national income/initial injection |
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Which way does the multiplier shift the AD curve |
Right |
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What are the 2 types of AS curve |
Long run and short run |
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Whats the difference between SRAS and LRAS, what causes each to shift |
LRAS is full capacity, changes in price do not effect it. Price changes can cause SRAS to move, eg changes in oil prices. Supply side shocks like wars also move it. So just changes in costs of production. Changes in factors of production causes shifts in the LRAS, eg more tech more efficiency, more education, demographic changes eg workers from abroad, supply of new resources and improvements in health care |
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.What causes the SRAS to shift |
Changes in cost of production -Oil prices -Supply side shocks like war |
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What causes the LRAS to shift |
Changes in factors of production -Efficiency -Tech -New resources -Demographic improvement, workers from abroad -Improvements in healthcare -Changes in gov regulations -Increase in competition -Promoting enterprise -Increasing factor mobility -Deteriation in the factors of production reduces capacity, moves lras left |
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What is an accelerated increase in investment and what causes it |
A rise in demand causes it, if national income is increasing loads, they will invest, so if its rapid then investment will be rapid. This usually happens during a recovery or at the start of a boom. Goes hand in hand with multiplier as AD goes up, increases investment, AD multiplied;growth in national income rapid;even more accelerated investment. |
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What is Macroeconomic equlibrium and where does it occur |
When SRAS = AD |
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Why can an increase in AD only increase output in the Short Run |
Because the SRAS slopes, the LRAS is vertical |
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What happens on a SRAS curve as AD increases |
Output ^ leads to an increase in derived demand so more jobs are created prices ^ because of demand pull inflation |
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What happens on a LRAS curve as AD increases |
Output and unemployment cant rise/fall because the economy is already working at full capacity, only effect is price ^ In general to get an increase in all 4 macroeconomic factors, increase LRAS |
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The amount of spare capacity (the elasticity of SRAS) can limit the effect of the multiplier, explain why |
If it's unelastic, when the multiplier occurs and AD shifts, the price will barely rise making there no point to inject to multiply, if it is elastic then you get huge output increases at tiny price increases |
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Does an increase in the SRAS worsen or benefit the 4 macroeconomic indicators |
Benefit, increases eco capacity = morejobs = price falls = more competitive. |
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Does an increase in the LRAS worsen or benefit the 4 macroeconomic indicators |
In the long run, output increased, price level falls, remains at full employment. |
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What are the four main onjectives of government macroeconomic policy |
Strong economic growth - improves standard of living Keeping inflation low - 2% Reducing unemployment - more productive Equilibrium in the balance of payments - more desirable than long term surplus or deficit 3 more - balance the budget, protect the environement, achieve greater income equality |
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What's the difference between long run Growth and short run Growth |
Short run - percentage change, known as real or actual growth, doesn't consider inflation. Usually changes with AD or AS. Long run - increase in the capacity or productive potential of the economy, usually happens due to a rise in the quality or quantity of inputs eg more tech. causes by changes in AS. |
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A production possibility frontier can show economic growth, how does it differ showing short run growth and long run growth |
short run goes from any point inside to the boundary, long run is the boundary moving |
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On a boom/recession cycle what is short run growth and what is long term |
short run = the alternating line long run = trend growth |
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why aren't recessions always bad for everyone |
good for discount retailers, encourage incentive to innovate new more efficient ways of producing cheaper |
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What are demand side shocks and how are they caused |
Sudden rise/falls in aggregate demand, can be domestic or global, examples: If consumer confidence is boosted, houses rising, increase consumer spending If countrys major trading partners go into recession, significantly reduces demand for exports |
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What are supply side shocks and how are they caused |
Sudden rise/fall in aggregate supply A poor harvest reduces economies capacity The discovery or a new major source of a raw material will reduce it's price |
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Explain what output gaps are |
Output gaps occur when the actual trend of growth is not along the trend line, aka the short run economic growth line. The positive output gap occurs during booms and the negative during recessions. Negative is usually when the economy is under performing. positive is when the economy is overheating. |
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How can you show output gaps in a graph |
If SRAS and AD both increase then it leads to a positive output gap but if SRAS only increases then it leads to a negative output gap as only supply is increasing, not demand. |
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Short run economic growth can be created by increasing aggregate demand |
demand-side factors can effect the short run economic growth, for example lowering interest rates encouirages investment and increases consumption increasing welfare beneefits increases spending and consumption. This all depends on people's MPC's and how big the multiplier effect is.
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Short run economic growth can also be caused by short run aggregate supply rising, explain why |
Reducing production costs, falls in the price of oil and walls in wages will reduce production costs and increase SRAS. |
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What are ways of creating long run economic growth ( supply side factors), moving LRAS to the right |
The productive potential of a country increased by raising the quantity or quality of the factors of production eg: Innovation - new tech Investing - in modern tech Raising agricultural output - GMO's Increasing spending on education and training Increasing the population size |
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Explain the 2000-2008 and what happened in 2008-2014 |
from 2000 until 2008 UK had steady economic growth just under 3%, in 2008 recession that lasted months followed by a slow recovery. During recovery short bursts of browth followed by slowdowns, near recession in 2012 but in 2014 GDP returned to lvl before, recovery complete. |
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What has inflation been between 2000 and 2015 |
2000 to early 2015 inflation has stayed between 0.5 and 3%
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Name two exceptions when inflation rose to 5%, way above target of 2% |
2008 at the start of recession and in 2011, inflation fell to 0-3% after that |
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What did unemployment stay between in the UK between 2000 and 2008? |
1.4-1.7m |
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between 2008 and 2011 unemployment rapidy rose, what did it reach, when was it the higher than 2008 recently? |
2.7m #& jan 2015 |
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Has the UK had a surplus or deficit between 1984 and 2014 and when was it largest? |
deficit, 2014 |
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what sector dominates the uk economy and what is at 10%? |
services, 77% manufacturing 10% |
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why do govs want full employment |
maximise production and raise the standards of living in a country |
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what is full employment and under employment |
full employment = where everybody of working age excluding retired & students who wawnts to work, can find employment at the current wage rates, doesn't mean everyone has a job. also means working at full capacity. Under employment would also mean an economy is not operating at full capacity. and will be a point inside the PPF curve, when someone with good qualifications working part time or serving pints. |
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What is cyclical unemployment |
Demand deficient unemployment, when economy is in a recession, when AD falls unemployment falls too, a country suffering from a negative output gap is likely to have cyclical unemployment too. cyclical unemployment = can effect anyone |
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What is seasonal unemployment |
Because demand for labour in certain industries won't be the same all yuear round,. For examply, the tourism and farming industries. Retailing also affected eg christmas shopping. Seasonal = predictable and only effects certain industries |
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What is structural unemployment |
caused by a decline in a certain industry or occupation - usually due to consumer preferences or technological advances or cheaper alternatives. it often affects regions when there's a decline in traditional manufacturing and it's made worse by labour immobility. |
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What is occupational immobility |
When workers aren't able to move fro one occupation to another with ease, occupations declining but workers don't have the skills to move onto new job.s |
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What is geographical immobility |
Workers aren't able to move to different locations to find the best jobs for themselves, because they cant afford to or they have family ties. Unable to leave a region which has high unemployment to go to another region where there are jobs availabe. |
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What is the negative multiplier effect in unemployment ( immobility) |
When theres structural unemployment and the labour is immobile then people will be more unemployed so there will be less spending and this will just cause more unemployment in the region. This will increase as cheaper alternatives are born abroad and consumers spending is more likely to change as they become better informed. |
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What is frictional unemployment |
The unemployment workers experience leaving one job and starting another. Even at full employment people are going to be some employees changing jobs. |
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What are the factors that change the seriousness of frictional unemployment |
If in a boom its only short term frictional unemployment as lots of vacancies If in a slump frictional unemployment more serious as less jobs Generous walfare will give people less incentive to look for new jobs or they can afford to take their time between jobs |
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What is real wage unemployment and how is it caused |
If wage is increased above equilibrium, by trade unions or minimum wage, quantity of labour supplied is higher than demanded so there's unemployment. wages more inflexible with NMW and performance related pay is an example of flexible wages. |
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What are cost push factors of inflation |
Rising costs of inputs of production cause inflation, pass on the higher costs to consumers, in the form of higher prices. Which causes the aggregate supply curve to shift to the left |
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Give some examples of cost push factors |
A rise in wages above any significant increase in productivity, price rises lead to further wage demands, wage-price cycle A rise in the cost of imported raw materials, if world prices of inputs rise then in the short run producers will pay the higher costs and set higher prices, pay more for same imports A rise in indirect taxes - increase costs and in turn prices, price inelastic then more of the cost of the tax will be put on the consumer |
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What is demand pull inflation |
Excessive growth in aggregate demand compared to supply, this growth in demand shifts the aggregate demand curve to the right which allows sellers to raise prices |
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Name causes of demand pull inflation |
High consumer spending or high demands for exports, high levels of confidence in consumers future employment prospects The money supply is growing faster than output, amount of money not matched by the oytput of goods and services Bottleneck shortages, if demand grows quickly at a time when labour fully used then prices rise with shortages |
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Why isn't deflation always good |
People may not buy, wait for prices to fall lower, falling Aggregate demand and increased unemployment. |
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What inflation rate is acceptable and how do the government achieve it |
2% is the acceptable rate, they use a combination of the Monetary policy, fiscal policy and supply-side policies to try and keep the rate of inflation at 2% |
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What does the BOP record |
All financial transactions of a country with other countries, all flows of money into and out of a country |
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What is the UK BOP made up of? |
The current account, the capital account and the financial account |
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What are the four sections of the current account |
Trade in goods, imports exports of visible goods Trade in services, imports exports of services Investment and employment income, covers flows of money in and out of a country resulting from employment or earlier investment Transfers, movements of money between countries which isnt paying for goods |
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What are the UK's biggest good exports and imports |
exports: machinery, mechanical appliances and pharmaceuticals imports: machinery and mechanical appliances, mineral fuels and oils |
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What are the UK's biggest services imports and exports |
exports: banking and insurance imports: holidays and tourism |
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Name some investment and employment incomes.. |
Deposits in foreign banks receiving interest payments Businesses set up overseas will earn profits for the UK parent company Shares in foreign firms will bring dividend payments to the UK shareholder Salaries paid to UK residents working abroad |
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Name some transfers of money outside buying/selling |
Foreign aid, payments to family members abroad |
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How to find the current account balance? |
Add up all the individual balances, taking away imports from exports and debit from credit |
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Deficit or Surpluis on the balance of visible trade |
Large deficit, imports a lot more than it exports |
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Deficit or Surplus on the balance of invisible trade |
Small surplus, exports slightly more services than it imports |
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Deficit or Surplus on the flow of investment income |
Uk receives more payments from investment than it pays out |
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Deficit or Surplus on transfers |
the UK pays money to the EU and also makes foreign aid payments |
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Does the UK have a deficit or surplus on it's current account |
It has a large deficit and has done since 1984, this means that the macroeconomic policy has to deal with the balance of payments deficit. |
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Name some causes of a BOP deficit |
High levels of consumer spending: imports^ if income elasticity of imports is high then ^ Struggling to compete internationally: cant compete with new countries with reduced costs, currency rising so foreigners cant afford exports. Dealing with external shocks: rise in raw materials country end up paying more in short run, economic downturn in countries that you export to can cause reduction in your exports too. trade barriers in place can also aid. |
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Name some causes of a BOP surplus |
If it has been experiencing a recession producers will solely focus on competing in international markets, people will also be spending less so a reduction of imports. It's currency has a low value, making exports cheaper and imports more expensive. High interest rates causing less spending and more saving. |
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Government make trade offs between their objectives, why |
They make the decisions that are best for the short run as the public will normally view these as better as they're combatting sudden relevant problems |
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Governments are more likely to use supply side policies to achieve their four main macroeconomic objectives in the long run, why |
They help achieve all 4 macroeconomic targets, instead of just 2 which is what you would achieve with demand side policies, increasing AD increases output and decreases unemployment but decreases competitiveness due to prices, meaning a worsened BoP. |
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Why are inflation and unemployment conflicting macroeconomic objectives |
When employment is reduced and eco begins to get full capacity there are fewer spare workers, so demand for workers increases, this leads to an increase in wages and the extra cost of this may be passed on to consumers as higher prices, cost push inflation. Low unemployment may cause consumers to spend more because they feel more confident in the long-term job prospects so demand pull causes prices to rise even more. reducing unemployment makes it more difficult to keep inflation at the preffered low rate. |
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Why is economic growth and environmental protection conflicting |
Economic growth puts strain on the environment as: new factories raise levels of air and water pollution, as well as increasing amount of waste eco growth uses natural resources, non renewable factories built so eco systems damaged |
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Why is economic growth and inflation conflicting objectives |
rapidly growing economy can cause large increases in prices, due to an increase in demand, cause a higher than 2% level of inflation. To keep inflation low can restrict growth, interest rates kept high to reduce inflation by discouraging spending, can restrict economic growth. |
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Why is inflation and equilibrium (in the balance of payments) conflicting objectives |
inflation low = prices slow, exports increase imports decrease, make a surplus low inflation is often maintained by high interest rates, encourage foreign investment, £ risesm exports decrease imports increase reduce surplus. |
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Why is economic growth and a reduction in wealth equality conflicting objectives |
Economic growth causes more skilled workers to be in demand, low skill demand may fall. Govs can use the increased tax revenue to help by: Increasing welfare payments, using progressive taxes, increasing the minimum wage. However increasing taxes or welfare payments may damage future economic growth, high tax = disincentive for buisinesses to grow. extra welfare may not encourage people to work, aside from help with childcare. Supply side policies that help people back to work would encourage growth while reducing teh welfare budget and unemployment. |
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Give an example of what a supply side policy will help a government achieve in terms of their economic objectives |
Reduce unemployment, increasing economic growth, tackling cost push inflation. Improves a BoP deficit, domestically produced goods become cheaper, imports will fall and exports will rise. |
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What policies may reduce frictional unemployment |
Reducing benefits will give workers a greater incentive to find a job. Income tax cuts will increase the incentive for workers to find a job, or encourage them to work longer hours. Increased information about jobs will help workers find the right job for themselves more quickly. |
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What policies may reduce structural employment |
Ones that tackle geographical and occupational immobility. Investing in training. Giving workers subsidies to move to different areas or by supplying affordable housing Bringing jobs to areas with high unemployment by providing benefits to firms that locate in certain areas. |
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Give some reasons as to why countries trade internationally |
Countries can't produce all the wants and needs as resources are unevenly distributed... Imports & exports give countries access to resources and products they otherwise wouldn't be able to use. Increased competition, lower prices, more product innovation - standards of living are raised by having more choice, quality and cheaper. Additional markets allow EOS. |
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International trade allows countries to specialise, elaborate. |
Specialise in what they're best at producing. Countries specialise bc they have the resources and/or they're better than other countries at producing the good/service. Specialisation reduces costs, which leads to lower prices and it also means the world's resources are used more efficiently, global output is increased and standards are raised. |
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What does the fiscal policy involve and what is it's main objective |
Gov spending and taxation, used in macroeconomics traditionally. The aim of managing demand in this way is to smooth out the economic cycle. Boosting demand in slumps using the reflationary policy, reducing demand when booming using the deflationary policy. |
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What is the reflationary policy (loose or expansionary policy) |
boosting aggregate demand by increasing gov spending or lowering taxes, its likely to involve a government having a budget deficit. used in recession during a negative output gap, it'll increase economic growth and reduce employment but increase inflation and worsen the BOP, incomes increase more spent on imports. |
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What is the deflationary policy (tight or contractionary policy) |
reducing aggregate demand by reducing government spending or increasing taxes. It's likely to involve a government having a budget surplus. used during a boom or when there's a positive output gap. it'll reduce economic growth and increase unemployment, but itll reduce price levels and improve the balance of payments, |
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what does a govs fiscal stance or budget position describe |
whether their poluicy is reflationionary (expansionary stance) deflationary(contractionary stance) or neither (neutral stance). if a government has a neutral fiscal stance then gov spending and taxation has no net effect on AD |
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What is the discretionary policy and how does it affect its fiscal stance |
where governments deliberately change their level of spending and tax, at any given point a government might increase taxes to pay for improving a countries infrastructure or services, other occasions govs do it because of the economic situation. |
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What are characteristics of a 'good tax' |
Cheap to collect, easy to pay and hard to avoid and they shouldn't create any undesirable disincentives. |
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What is horizontal equity and why do governments want taxes to achieve it. |
Means that people who have similar incomes and ability to pay taxes should pay the same amount of tax |
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What is vertical equity and why do governments want taxes to achieve it. |
People who have higher nicomes and greater ability to pay taxes should pay more than those on lower incomes with lessa bility to pay taxes |
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How else can govs achieve equality with taxes |
Income taxing the rich, reducing major differences in people's disposable income, or to raise revenue to pay for benefits and teh state provision of services. direct taxing = income indirect = VAT |
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What's indirect and direct tax |
Direct = on people or firms Indirect = VAT as such |
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What are the 3 types of tax system |
Progressive Regressive and proportional |
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What is progressive taxation |
Where an individual's taxes rise as their income rises, used to redistribute income and reduce poverty. also use it on state provided merit goods - increasing equality. Progressive taxation follows the 'ability to pay' principle. |
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What is regressive taxation |
Where an individual's taxes fall as their incomes rise, and ther're used by govs to encourage supply-side growth. By reducing the taxes of the rich the government will hope the economy will benefit by the rich spending more. increases incentive to work hard but also increases inequality, |
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What is proportional taxation |
aka a flat tax, where everyone pays the same proportion of a tax regardless of their income level. this tax system can achieve horizontal equity, but setting a fair tax rate to apply to all members of society is difficult. For eg a 25% tax on income may be too high for those on lower income to afford. might not raise enough revenue from those on higher incomes for the gov to pay for all the public goods and services. some argue flat tax is simple, reduce the incentive to avoid and increase the incentive to earn more. may bring in less tax amd dpmt jave vertoca; equity but also can be made to have a free tax allowance ( you only pay at a certain income_ |
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What are the taxes the UK gov use |
They use VAT, proportional tax, can be regressive as it hits those on poorer incomes more , could be progressive if it taxed luxury at a higher rate, also have a free tax allowance on income £10,600 low to middle have 20% tax, high 40% highest 45%. can be argued that its regressive bc lowest earners in the economy have to pay a higher proportion of their income as tax as the highest do |
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What are some factors that can affect the size of government spending |
size and structure of a country's population, large population may require greater levels of gov spending. ageing pop = more healthcare. policies on inequality poverty and redistribution of income will alter the amount of gov spending. depends on political views. during recessions the fiscal policy increase spending to encourage growth and employment but may cause debt and introduce severe cuts to spending later. |
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How are defecit and debt different! |
a budget deficit is what a government borrows in a single year - govs borrow when they want to spend more money than they receive in revenue, a budget deficit also known as public sector net borrowing PSNB national debt = total gov debt over time - public sector net debt, gov may deliberately make deficit or surplus to influence AD, long term deficit will increase the national debt but short term will probably be balanced out by a surplus later, wont increase national debt |
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What are the taxes the government gets most of its tax revenue from |
Income tax (30%) VAT (20%) National Insurance payments (20%) Excise duties (10%) Corporation tax (8%) Council tax and business rates (to local govs) |
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What are the main areas of government expenditure |
Social support, pension (40%) National Health Service (20%) Education (15%) Debt interest (7%) Police, law courts and prisons (5%) Defence (5%) |
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what is the monetary policy and what does it do |
It is about controlling money, makes effects on demand, demand-side policy |
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What are the 3 things that the monetary policy normally changes to effect aggregate demand |
interest rates, money supply and exchange rates |
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What is the most important tool of the monetary policy and what does it effect |
Setting interest rates, makes changes to borrowing, spending, saving and investment, can also effect other factors of monetary policy, eg high ir can restrict money supply as less demand for loans |
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What are the 2 types of monetary policy |
Contractionary (tight) monetary policy - reducing AD Expansionary (loose) monetary policy - increasing AD |
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Explain the contractionary monetary policy and how it achieves it |
reducing ad, high interest rates, restricting the money supply and a strong exchange rate. |
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Explain the expansionary monetary policy and how it achieves it |
increasing AD using low interest rates, few restrictions on money supply and a weak exchange rate |
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Why can't the Monetary policy achieve all macroeconomic policies simulataneously and what is it's main goal |
Trade offs, increase economic growth and decrease unemployment causes inflation and worsens the current account, main aim is always price stability though - low inflation but also tries to reduce unemployment and increase growht |
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What does MPC stand for and who are they |
The Monetary Policy Committee, responsible for setting interest rates in order to meet inflation target set by government |
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What is the inflation target set by the government |
2+-1% |
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What do the MPC have to do if they go over or under 1 or 3% inflation |
Write a letter to the chancellor explaining why, what actions theyre going to take to deal with it adn when they expect inflation to be back within 2+-1% |
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What would MPC do if they thought inflation was about to go above 3% and why |
They would raise interest rates to reduce aggregate demand and keep inflation close to 2% |
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What attributes does a low rate of inflation give the government |
stable and creditible (trustworthy and accurate), helps government achieve macroeconomic stability, which encourages investment, reduces uncertainty and makes it easy to pplan for the future |
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To achieve stability and credibility the bank of england is what and waht |
Independent and accountable |
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What does the bank of england being independent entail |
Interest rates cant be set by the government at a level that will win votes, but which might not be right for the economic circumstances at the time. |
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What does the bank of england being accountable entail |
If inflation rate is more than 1% off then they mail |
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Which is the main objective of the monetary policy and what are the others |
Price stability and economic growth and low unemployment |
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What economic data will the MPC look at when making a decision on interest rates |
House prices. The size of output gaps. The pound's exchange rate. The rate of any increases or decreases in average earnings. Have to be VERY careful as changes make huge differences |
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What is a ripple effect in the economy due to a rise in interest rates and what does the effect effect |
Less borrowing. More saving. Less investment by firms. Less consumer spending. A decrease in exports. Less confidence. An increase in imports. |
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Whats the difference between the bank rate and the normal rate of interest |
The bank rate is the lowest rate wat which the bank of england will lend to financial institutions, rate of interest is the rate you'd pay if you applied for a high street mortgage. Both linked though, if bank rate rises then the normal rate of interest rises. |
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How can markets affect the rate of interest |
Banks need to borrow the money they lend out, if all banks trying to borrow at once they will pay a higher rate of interest themselves which will effect the cost of mortgages and loans. |
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How can exchange rates be effected by interest rates |
When ir is high in UK financial institutions want to buy the pound, put money into UK banks and take advantage of the high rewards, short-term movement of money and is called 'hot money'. Increased demand for the pound means its price goes up - pounds exchange rate rises. |
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What happens with a high exchange rate and what does it mean |
Pound is expensive, exports go down worsening the current count, more leakages and more imports. Overall reduction in AD. If the UK interest rates fall: Exchange rate of pound falls, exports increase and imports decrease and the BoP improves. |
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How many years into the future does the monetary policy need to look and why |
About 2 years, because the effect of changing ir is not felt straight away, reducing ir wont cause a sudden surge in investment or house buying. Firms plan investment very carefully, takes months. House buying also takes a long time, find a home and buying. People on a fixed rate of mortgage also won't notice the effect until after it's paid off. |
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What is the typical time lag between changes in the bank rate and firms feeling the maximum effect? |
One year typically |
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What is the typical time lag between changes in the bank rate and consumers felling the maximum effect? |
Typically 2 years |
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During January of 2010 and March of 2012 the economy's inflation was above 3% but the Bank of England kept the rate of inflation at 0.5% and kept up with their Quantitive Easing, how can you justify this |
They didn't want a 'double dip' recession after the one in 2008, didn't want more 'economic shocks', rasing ir was unnessasary as inflation would fall naturally even wwithout ir rise, and with a raise a double dip was more likely. Continued with very loose monetary policy as the bank has a duty to support the governments economic objectives. |
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What is the aim of supply side policies |
Increase the economy's trend growth rate, expand the productive potential (lras) |
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What are supply side policies |
The government creating the right conditions to allow market forces to create growth, as opposed to the government creating growth directly by example, increasing its spending, can make an economy more robust and flexible. |
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How do u make a supply side policy |
make a structural change to the economy to allow its parts to work ore efficicently and more productively. do this by helping markets functioon more efficiently or create incentive for firms or individuals to become more productive. |
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What are the two types of supply side policies |
Free market and interventionist supply-side policies |
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What are free market supply side policies |
Aim to increase efficiciency by removing things which interfere with the free market, tax cuts, privatisation, deregulation and policies to increase labour market flexibility. |
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What are interventionist supply side policies |
Aimed at correcting market failure, include gov spending on education, subsidies for research and development, funding for improvements to infrastructure(ports helping exports) and industrial policy(developing a particular industry thru subsidies) |
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What can encoraging competition do to an economy and what are the 2 ways of doing it |
It can increase efficiency, privatisation, as private sector is more efficient and less wasteful than the public sector, and deregulation, removing red tape so more competition in the market so productivity and efficiency increases. |
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What can reforming taxes and benefits do to an economy |
creates incentives for people to work hard. For exmple, reducing the marginal income tax rate (the rate you pay on the last £1 you earn) might encourage people to earn more |
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What will bringing in a national minimum wage do for an economy |
NMW means greater reward for doing a job that pays the NMW, gives peple an incenive to get a job rather than stay unemployed NMW can be set at the living wage, wage thatll cover an individuals basic cost of living, govs pay out less in suppport. NMW can increase costs, cut jobs, more unemployment, decrease international competitiveness, pass on costs to consumers, inflations |
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What will improving education and training do to an economy |
Allow employees to be more productive |
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What will encouraging immigration do for an economy |
Expands the workforce, could be targeted at people with specific skills that are needed. |
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Improving labour market flexibility ( increasing labour mobility eg), what will it do or throught trade unions |
Major supply side policy in 1980's was reduce the power of trade unions Strong trade unions can reduce the ability of a firm to react to changing market conditions, making it harder to lay off workers Reducing power of trade unions has resulted in more flexible workforce, means in short term, flexible contracts are more common than they used to be, allowing firms to hire and fire aaccording to the current demand |
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Supply side policies tend to be macro or micro? |
Micro, encouraging firms to train its individual workforce differently, but usually supply side policies like privatisation and increasing the competitiveness within a market, will also have a macro effect |
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Improvign teh supply side of economy is not just down to gov,what can businesses do |
, businesses can take the initiative and improve things themselves by investing in new machinery or paying for extra staff training |
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In a free market its in a firms own interests to improve its productivity and competitiveness, when firms do this how is the countries economy helped too? |
Supply side improvements to a firm might increase its competitiveness and quality of products. This could increase the quantity of products that the firm sells as exports. This then improves the current account on the bBoP. |
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Which set of fiscal policies is currently more popular and why |
Supply, creating incentives for individual economic agents to act in a way that will be good for the economy. Income tax cuts used as an incentive to work harder, business taxes reduced so entrepreneurs take more risks, reduction in welfare benefits make people work. All result in gov tax recipts going up (if successfull) |
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Why does the gov tax reciept go up if the supply side fiscal policies work |
More people in work (less on welfare) People are working longer and harder (more income tax) Businesses are more successful (larger profits to tax) So... successful supply-side fiscal policies should reduce the size of a budget deficit |
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Supply side policies involve fewer trade off between objectives, explain how |
demand side fiscal and monetary cause AD to shift but at a cost of inflation rising with AD, supply side raises the productive potential of the economy causing an increase in jobs growth and output. Since supply side shifts the LRAS curve aswell the price level shouldn't change with the supply side policies. no demand pull inflation. |
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Why do supply side policies make an economy less dependant on imports |
If an economy can provide high-quality goods and services at low prices, people are less likely to buy imports Supply side policies that keep UK exports competitive are vital for future growth Foreign export markets are becoming more important, theyre growing and so is their demand for high quality |
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Why wont supply side policies work in all circumstances |
Without sufficient AD, they wont work. During recession demand is week, suppply side policies not appropriate. economy might need more immediate help, demand-side policies have more immediate effects than supply. However supply do make economy resiliant to shocks with flexible workforce ect. |
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Which is long and which is short term out of supply side and demand side |
demand short supply long |
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Why are supply side policies not perfect |
take a long timme, eg education can be unintended consequences, eg deregulation of markets in 1986 leading to excessive risk taking in financial markets, leading to the most recent recession Can be unpopular, benefits cut and greater flexibility and trade union reforms could lead to less job security. Difficult to introduce in the short term. |
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Keynesian fiscal policy was widely used in the mid 20th century, explain it |
Gov spending could boost an economy during a recession and get it back on track Keynesian demand management policicies of adjusting gov spending to control economic growth, gov focused on full employment and adjusted taxation and spending to influence demand and try and smooth out the economic cycle. Steady growth, near full employment and low and stable inflation. |
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How do the governments use fiscal policy differently to keynesian approach |
Supply side fiscal policy is used to increase aggregate supply. helps gov achieve all four of main economic objectives At microeconomic level to influence behaviour, taxed Gov spending can be directed at specific regions that need extra help, eg big employer loss redistributing wealth |
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why is the demand side fiscal policy less popular |
gov spending multiplier is small, paid for by taxes so increase in gov spending matched by taxes Continues gov spending, paid by borrowing will lead to inflation, a deficit and an increase in national debt Policies that only affet aggregate demand will lead to conflicts between macroeconomic objectives. |
