Economics Exam - IB

fiscal policy on shifting AD

Government spending increases, G ↑ and vise versa

Transfer payments ↑, disposable household income ↑, C ↑

Income tax ↑, disposable income for households ↓, C ↓

Subsidies ↑, disposable income for firms ↑, I ↑  

Corporate tax ↓, disposable income for firms ↑ , I ↑

expansionary fiscal policy

Ad shifts right

boosts inflation

reduces unemployment

contractionary fiscla policy

ad shifts left

weakens inflation

goals of fiscal policy

low and stable inflation

reduce business cycle fluctuations

promote stable economic enviroment

equitable distribution of income → gini coefficent decreases

extneral balance

strengths of fiscal policy

can target specfic sectors of economy

effectivness in deep recession

constratints of fiscal policy

political pressure

time lags

debt

supply side policies

Shifting LRAS right to increase potential output of the economy and long term growth

inverentionist supply side policies

Governments intervene with direct policies to increase potential output

Increase LRAS, SRAS, AD

education/human capital

health care

new tech

infastruture

buisness support

inverentionist supply side policies constraints

short term inflation - shifts SRAS, AD, LRAS

time lags

costly

market based supply side policies

Getting out of the way of competitive markets, letting competition occur

privitisation - shifts LRAS, SRAS

deregulation - shifts LRAS, SRAS

trade liberlistaion - shifts LRAS, SRAS, AD

restricting monopoly power - shifts LRAS, SRAS to increase competion and promote productivity

minimum wage reform - shifts LRAS, SRAS to decrease business costs, increase investement, reduce natural unemployment

reduce unemployment benefits - shifts LRAS, SRAS to incentivse pepole to find work

reducing labour unoin power - shifts LRAS, SRAS to increase competitvenss

lowering income tax - shifts LRAS, SRAS to incetivise productivity

lowerin business tax - shifts LRAS, SRAS to incetives investment

market based supply side policies constraints

equity issues, impacts of deregulation, vested intrest, unemployment, time lags,

privitisation

selling of government enterprises to the private sector

demand side policies

involved with minimising harmful fluctuations

deregulation

removal of government rules and requirements to increase efficiency

trade liberlisation

makes international trade more free by elimination or reducing trade protection

labour union

association of workers w/ goal to improve working conditions and defend worker rightss

substitue goods

goods that replace each other e.g coke and pepsi

Complement goods

goods that are used/bought together e.g. pen and paper

normal goods

goods for which demand increases in response to increases in consumer income

Inferior goods

goods for which demand falls in response to increases in consumer income

luxury goods

luxurious items e.g. sports cars, luxury watches

independent goods

goods that aren't complementary

shortage

when quantity demanded exceeds quantity supplied; below equilibrium point

surplus

when quantity demanded is less than quantity supplied; above the equilibrium point

demand and its shifters

the quantity of a good that consumers are willing and able to buy at different price

shifters: tastes and prefrence, related goods, income, future price expectation, no of consumers

supply and its shifter

The quantity of something that producers have willing and able to sell at differnet prices

shifters: FoPs, relates goods, taxes/subsidies, future price expectations, no of firms, tech, shocks

price elasticity of demand (PED)

measure of the responsivness of the quantity demanded for a good to changes in its price

inelastic (not repsonsive to price) when less than one, elastic (responsive to price) when more than 1

PED formula

PED = % ∆ QD/ % ∆ Price
Answer is writtern (-) x

Perecentage change formula

change in price/ original price

factors of PED

Substitues
Portion of income
Luxury or neccesity
Addictivness
Time period to make the decision

income elasticity of demand (YED)

A measure of the responsiveness of quantity demand to changes in income

YED forumla

YED = % ∆ QD/ % ∆ Y

YED for normal goods

inelastic, YED < 1

YED for luxury goods

Quantiy demanded changes drastically depending on a increase/decrease in income as they are not neccesities
Elastic, YED > 1

YED for inferior goods

YED < 0

price elasticity of supply (PES) and factors

A measure of the responsiveness of quantity supplied to changes in price

factors: time period, ability to store shock, mobility of FoPs

PES formula

PES = % ∆ QS/ % ∆ Price

Elastic supply and its causes

PES > 1
Company can produce more easily as they have ability to change due to having extra space, captial, workers etc,

Inelastic supply and its causes

PES < 1
Company can't produce more easily as they don't have ability to change due lack of extra space, captial, workers etc,

a steeper demand or supply curve means

a more inelastic demand/supply

a flatter demand or supply curve means

a more elastic demand/supply

For businesses, what does a inelastic PED mean?

raising the price will increase total revenue
decreasing the price will decrease total revenue

For businesses, what does a elastic PED mean?

raising the price will decrease total revenue
decreasing prices will increase total revenue

unit elastic demand

demand in which any change in the price of a good leads to an equally proportional change in quantity demanded

what does a PES of 0 mean

There is no change in quantity supplied as it is perfectly inelastic. No more is able to be supplied.

price mechanisim

1. sigals price is too high/low
2, incetivies to change price
3. rations exceed demands
4. allocates scarce resources

soicety vs. consumer vs producer surplus

consumer = difference between what consumers are willing and able to pay and what they actually pay

produer = difference between what producers are willing and abl to supply and what they actually supply

soicety =consumer + producer

4 key economic assumptions

scarcity - society's wants are unlimited but resources are limited
trade-off - due to scracity choices must be made and each has a trade off
everyone makes chouce to maximize their own benefit
real life situation can be explained through graphs and models

invisible hand

concept that through competition and self-interest the market is regulate as those who can afford buy and those who cant dont so there is perfect equilibrium

types of economies

centrally planned - gov owns all resources, answers are 3 econ questions

free market - low gov involvment, indvidual resource ownership, profit incentive, self-regulating market

mixed economy

GDP

dollar value of all final goods and services produced within a country's borders in one year

C+I+aG+(X-M) = GDP

buisness cycle

represents short-term real GDP fluctuations around its long tterm trend/potential output

not predictable
strong correlation between emplyemnt and real GDP

common access reources and the tragedy of the commons

non-excludable and rivilarous goods not owned by private firms

the tragedy of the commons = as everyone acts in sefl-intrest they will use as much of the goods as possible and deplet the resources creating market failure

low unemployemnt

unemployment = when people of working age activley looking for work are without it

difficulties in measuring unemployment

hidden unemplyment - discourgaed workes, under employed, skilled but low skilled workers, redutant/retraining, undergournd economies

lack of specificity - riegion, gender, age, ethinicity, education level

types of unemployment

structural: demand decreases for a type of labour, strcuture of economy/tech changes, invetibale

Fricitional: jon seekers entering/retutning to the labour force and looking for a job, new job seekers, people between jobs, invetiable

sesonal: demand changes based on season

cyclical: when ecoenomy is in recessionary gap from low AD causinf low demand and low production and labour demand, goes w business cycle, demand deficit unemployemtn

full employment

means natural rate of unemployment when economy is prodicying at potential or full emplyemnt lvl of output equal to structural, frictional and seasonla unemployemnt (around 4%)

subsidies

grants providede by governments to firms aimed at lowering production costs and increasing output

taxes

direct tax: paid directly to gov

indriect: spending on goods and services by consumers collected by the supplier on behalf of gov

used to raise revenue and discourage undesirable behviours

price floors vs celiings

floor =gov imposed min price for sale of good or service

ceiling = gov imposed max price when below equilibrium (shortage)

impact of economic growth

increased standrd of living
gretaer tax revnue if gov spends on merit goods
decreased unemployemnt
created wants
increased envriomental standrad
sime envriomental degreadtion
decreased soical inequality

economic growth

increase in real/potential GDP

keysian model faults

wages rise faster than fall

prices raise faster than fall due to the high wages meaning that firms dont decrease price

stuck in short run faults if SRAS wont shift, recessionary gap stays

keysian model

3 sections: depression, normal, physical limit
3 equilibriums: depression, normal and physical limit equilibrium

recessionary gaps can persist: reject that economies tend to fall to full employment
increase AD doesn't push up prices

factors of LRAS

increase in quanity of resources
increase in quality of resources
tech advancements
increase in efficency and porductivity
institauional changes (privitastion, competition polices, regulation)

inflationary, ressionary and full SRAS Gap

inflationary = too much demand, increase employment, increase prices, output beyong full employment, behind eq.

ressionary = not enough demand, not worth to produce at capacity, unemployment hihger than natural rate, after eq.

full = at eq.

LRAS

Represents potential output and full-employment level of output

Independent of price level

Determined by the quantity and quality of factors of production

In long run, always produce for potentioal GDP

Always return to full emplyment as: high job seekers cause low wages causes increase SRAS and high demand for labour causes high wages and decrease SRAS

costs of unemployemtn

stress
increased debt
family breakdown
subsatnce abuse
incrase crime
homelessness

public goods and free rider problem

non-rivralours and non-excludable regardless of payment

free rider problem = anyone can use w/o paying so firms won't orivide as theres no profitincentive

externalities and responses to it

positve or negitve effects on a third party when a good or services is consumed and produced

responses: inofrmation campaigns, ads, legislation and regulation, indriect taxes, subsideis, government provision

GNI

= GDP + net income from abroad
total income of a country's FoPs regardless of location

real GDP and GNI

adjusted for inflation = real
not adjusted = nominal

real = nominal/deflator x 100

desribe the buisness cycle

peak = max real GDP, low resource unemployment, low PL

expansion = growing ecnoomy, high reource emplyemny, hihg PL

contraction = shrinking economy, high resource unemployment, PL increase very slowly or decreases

trough = min real GDP, PL rises very slowly or falls

AD

total demand for all goods and services produced in an economy by c, g, i and x-m at diff prices

AD factors

c: consumer confidence, interst rates, wealth, income tax, debt, inflation expectations

i: business confidence, interst rates, tech, corporate tax

g: policatl and econominc priorities

x-m: income of other countreis, exhcnage rates, trade policies

AS

total quanitity of goods/services produced in an economy (real GDP) over a particular time at diff prices

AS factors

wages
commodities price
oil prices
taxes/subsisds
import prices
shocks

expansionary vs contractionary monetary policiy

contractionary = increase intrest rates to weaken inflation, shifts AD down, reduces peaks on buisness cycle

expansionary = decrease interst rates to boost inflation to avoid deflation, reduces unemplyemnt as more labour needed for more consumption, shift AD up, reduces troughs on buisness cycle

strengths vs contrasints of monetray policiy

streghts: quick implementation, incremental, flexible, easily-reversible, apolitical

constraints : not effective for supply issues, limited cscope in reducing rates, low cosumer and business confidencede but spending is required for it to work

affects of monetary policy

c: increase intrest rates cause decrease c as dispsoable income decreases, cost of borrowing money increases and increased return on savings incentives it, and vise versa

i: increase intrest rate decrease i as cost of borrwoing money increases and vise versa

monetray policiy

chnaging of money supply and intrest rates by central banks to influence AD

intrest rates

cost of borrrowin/reward for saving money

central bank

exsists for every currency, regulator of banks, banker to gov

goals of monetray policy

low and stable inflatio (2-3%)
low unemployment
decrease buisness cycle fluctuations
promote stable economice enviroment
external balance

limitation of CPI

no typical household
consuemrs often buy at sale CPI doesnt
chages in consumption patterns
international comparisons are difficult

inflation

sustained increase in PL

deflation

sustained decrease in PL

disinflation

PL rises at decreasing rate

inflation rate

= current yr CPI - previous yr CPI/current yr CPI x 100

CPI

consumer price index, compares a basket of goods from yr to yt to relfect consumption habits of an avergae household

each good weighted on a frequency of purchaswe

progressive tax

as income increases, tax rate incrases

regressive tac

as income increases, tax rate decreases

proportional tax

as income increasesm tax rate is constant

downwards deflation cycle

AD decreases so PL decreases so incentive to consume decreases as they wait for PL to fall more so I decrease and Production decreases so unemplyemnt increase and c decreases and production decreases and so on

downwards deflation cycle w bankruptcies

bankrupticies so real value debt increases so its harder to pay off so AD decrease as your not earning as much as you lower price and real value of money increases

equality vs equity

equality = being fair or just
equity = being equal
economic inequality = unequal ditsribution of wealth or income (more wealth unequality)

lorenz curve

visually represents income iequality, larger lorenz curve = larger inequality

gini coefficenent

numeroical representation of lorenz curve between 0-1

0 = prefect equality
hihger no = hihger inequality

gini coeff. = area between perfect line and lorenz curve/entire areas under perfect line

causes of inequality

inequality o opportunity
diff human capitak
diff resource ownership
discrimination
government tax and benfits policies
unequal status/power
tech changes
globalistaoin
market based supply side policies

poverty

absoulte = ppl live below lvl of income neceassry to meeet basic needs (10% og global population0

relative = ppl earn income insufficent ot maintain a socially acceptable living standard, measured as % of ppl loving below 50% of median income