Unit 7

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What is macroeconomics?

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106 Terms

1

What is macroeconomics?

A branch of economics concerned with the behaviour and performance of an economy as a whole

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2

What are government macroeconomic objectives?

Quantifiable targets that the government wishes to achieve through the implementation of macroeconomic policy

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3

What are the four main objectives for the macroeconomy?

Balance of payments equilibrium
E
conomic growth at trend rate
E
mployment
P
rice stability

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4

What are the other 5 important objectives?

Fiscal balance
L
iving standards
I
ncome and wealth equality
P
roductivity
S
ocial indicators

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5

What is GDP?

The total value of goods and services produced within an economy over a given period of time

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6

What is aggregate demand?

The value of the demand for all the goods produced in the UK economy

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7

What is aggregate demand made up of?

AD = C + I + G + N

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8

What are the influences on consumption?

  • Interest rate

  • Rate of direct taxation (IT)

  • Incomes

  • Consumer confidence

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9

What are the influences on investment?

  • Interest rates

  • Rates of direct taxation (Corp Taxes)

  • Income levels

  • Profit expectations

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10

What are the influences on government spending?

  • Economic activity

  • Market failure

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11

What are the influences on government net exports?

  • Income abroad

  • Income at home

  • Domestic price level

  • Exchange rates

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12

What is the exchange rate?

The value of one currency in terms of another currency

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13

What is appreciation?

When one currency increases in value against another so can buy more of that currency.

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14

What happens to the price of UK exports following an exchange rate appreciation?

Price of UK exports rises as pound is worth more.

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15

What happens to the price of imports following an exchange rate appreciation?

Price of imports coming into the UK falls as the pound is worth more

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16

What is depreciation?

When one currency decreases in value against another so can buy less of that currency

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17

What is a balanced budget?

When government spending = taxation receipts.

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18

What is a budget deficit (fiscal deficit)?

When government spending exceeds taxation receipts.

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19

What is a budget surplus (fiscal surplus)?

When government spending is less than taxation receipts

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20

What is national debt?

The accumulation of previous borrowing that has not been paid back

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21

Who lends the government money?

Banks/building societies, pension funds, investors

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22

What are the 5 main objectives of the UK taxation system?

  • Fund Government spending

  • Managing the economy as a whole

  • Redistribution of income

  • Correcting market failure

  • Repay national debt

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23

What are direct taxes?

Taxes directly levied on an individual or firm

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24

What are indirect taxes?

Taxes on consumption

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25

What are tax thresholds?

The level of income that has to be reached before tax is paid or before the tax payer moves into a higher rate of taxation

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26

What’s hypothecation?

The principle that taxes are raised for a specific purpose. Taxes should be linked to the benefits taxpayers receive.

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27

What is progressive taxation?

When the proportion of a person’s income paid in taxes increases as incomes increases

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28

What is proportional taxation?

The same proportion of a tax payer’s income is taken regardless of the income earned

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29

What is regressive taxation?

The proportion of a person’s income paid in taxes decreases as incomes increase

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30

What are the benefits of income tax?

  • Direct taxes can be progressive

  • Can improve distribution of income

  • Simple to pay

  • Revenue can be forecast

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31

What are the problems with income tax?

  • Can only be changed in the budget

  • Disincentive effects on work

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32

What are the benefits of VAT and indirect taxes?

  • Influence spending patterns

  • Correcting externalities (internalising)

  • Can be changed easily

  • People have a choice whether to buy products

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33

What are the problems of VAT and indirect taxes?

  • Regressive distributional effects

  • Can trigger cost-push inflation

  • Many people are unaware of how much indirect tax they pay

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34

What are the benefits of corporation tax?

Profitable firms contribute to the economy

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35

What are the problems of corporation tax?

  • If too high can be a disincentive for FDI

  • Large MNC’s have avoided paying it

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36

What are the benefits of wealth taxes?

Equitable – those with more wealth should contribute more to society

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37

What are the problems with wealth taxes?

  • Danger of taxing twice

  • Wealthy people may not have much income

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38

What is an interest rate?

The cost of borrowing and the reward for saving. It is a percentage charge on the capital sum.

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39

What is a real interest rate?

The nominal interest rate minus the rate of inflation

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40

What is the Annual Equivalent Rate (AER)?

The interest rate on savings with annual compound interest added on.

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41

Why are there different rates of interest?

Risk
A
mount
T
ime
E
xpectations of future interest rates and inflation
S
ecurity

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42

What is economic growth?

An increase in the economic activity of an economy over a period of time

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43

What is GDP?

The value of all goods and services (output) produced within an economy over a given period of time.

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44

What is real GDP?

The country’s output measured in constant prices with inflation accounted for

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45

What is demand-led growth?

When an increase in aggregate demand is due to consumer-led spending or government spending

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46

What is the economic cycle?

The regular fluctuations in economic activity over time. The stages to the cycle consist of boom, recession, slump/depression and recovery.

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47

What happens in a boom?

GDP rises faster than the trend rate of growth. The economy may be producing beyond full capacity.

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48

What happens in a recession?

Economic activity slows down

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49

What happens in a slump/depression?

There’s negative economic growth where the economy is producing at below is the previous peak level of output.

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50

What happens in a recovery?

Economic activity begins to increase and output begins to rise at a faster pace

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51

What is supply led growth?

When increases in aggregate supply are due to the costs of production falling.

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52

What are the benefits of economic growth?

Welfare increases
E
mployment increases
L
iving standards increase
L
ess poverty

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53

What are the costs of economic growth?

Well-being
O
ther objectives
R
elative incomes
S
ustainability
E
xternalities

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54

What is employment? Why is it important?

The employment of labour in the economy. It’s important as people rely on wages for most of their income.

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55

What is full employment?

When the economy uses all of its workforce - those who want a job have one

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56

What is the labour force/workforce?

People of working age who are willing and able to work

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57

What is unemployment?

When workers who are able and willing to work are unable to find employment at current wages.

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58

What is the unemployment rate?

The number of people willing and able to work but unable to secure employment expressed as a percentage of the workforce.

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59

What is the formula for the unemployment rate?

Unemployment Rate = (Number of Unemployed / Labour Force) x 100

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60

What is the claimant count?

A measure of unemployment according to the number of people claiming unemployment-related benefits

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61

What are the 4 main types of unemployment?

Structural, cyclical, frictional, seasonal

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62

What is structural unemployment?

When the industrial structure changes the types of jobs needed and, thus, the skills required

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63

What is cyclical unemployment?

When the economic cycle may be in recession so there’s less demand for goods and services so workers are laid off

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64

What are the problems for the economy that are caused by unemployment?

  • Wasted resources

  • Budget deficit

  • Regional problems

  • Excluded workers (the Hysteresis effect)

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65

What are the problems for the individual that are caused by unemployment?

  • Social problems

  • Lower living standards

  • Cost to taxpayers

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66

What is price stability?

When the general level of prices is kept constant or grows at an acceptably low rate over time without volatility

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67

What is inflation?

The sustained rise in the general price level over time (the rate figure is positive).

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68

What is the rate of inflation?

The sustained rise in the general price level over a period of time expressed as the percentage increase in the price level.

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69

What is deflation?

A sustained fall in the general price level over time (the rate figure is negative)

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70

What is disinflation?

Falling rates of inflation. This means that the general price level is increasing at a slower rate.

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71

How is inflation measured?

The CPI (consumer prices index) is published by the ONS monthly

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72

What is demand-pull inflation?

Inflation that arises from increases in aggregate demand

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73

What is cost-push inflation?

Arises when the costs of production increase, leading to higher prices goods and services

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74

What happens in a wage-price spiral?

If prices rise, the cost of living rises so wages rise. Then the cost of production rises so prices rise

<p>If prices rise, the cost of living rises so wages rise. Then the cost of production rises so prices rise</p>
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75

What are examples of cost-push inflation?

  • Higher wages

  • Imported inflation

  • Higher taxes

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76

What are examples of demand-pull inflation?

  • Lower interest rates

  • Rising real wages and incomes

  • Depreciation of exchange rate

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77

What are the costs of inflation to the economy?

  • Income redistribution problems

  • Business and consumer confidence decreases

  • Can affect Bank of England’s credibility as there’s a symmetric target

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78

What are the costs of inflation to an individual?

  • Income redistribution problems

  • Real wages are worth less

  • Fiscal drag (higher wages lead to higher tax brackets)

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79

What are the benefits of inflation to an economy?

  • Depreciates the real value of debt

  • Incentives to producers and consumers

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80

What are the benefits of inflation to an individual?

  • Real value of debt falls

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81

What is the balance of payments?

Records the money flows into and out of a country over time. Record of the financial transactions of one country with the rest of the world

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82

What is the current account?

The balance of payments which measures the inflow and outflow of goods, services, investment incomes and transfer payments

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83

What is the balance of trade?

The difference in value between a country's imports and exports.

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84

How is a deficit on the current account paid for?

By raising money on the financial account

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85

What is a current account deficit?

When a country sends more money abroad than it receives. Outflows > Inflows

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86

What is a current account surplus?

When a country sends less money abroad than it receives from abroad. Outflows < Inflows.

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87

What is a cyclical deficit?

A deficit caused by high rates of economic growth when the economy is in a boom

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88

What is a structural deficit?

A deficit throughout the economic cycle caused by a lack of international competitiveness.

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89

What are the reasons why a current account deficit is a problem?

  • Financed through the financial account

  • Shows lack of competitiveness

  • Too many imports may lead to decreased domestic demand and unemployment

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90

What are the reasons why a current account deficit is not a problem?

  • A small deficit as a percentage of GDP means it’s not important

  • Imports of capital good

  • Only short term so may cure itself

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91

What is income?

A flow of money to a factor of production.

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92

What is the distribution of income?

Describes how income is shared out between the factors of production, households or between regions

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93

What is the gini-coefficient?

A measure of inequality that condenses the income/wealth distribution for a country into a number between 0 and 1

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94

What are the reasons as to why inequality of income is not a problem?

  • Incentives

  • Revenue product of labour

  • Trickle-down effect

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95

What are the challenges as to why inequality of income is a problem?

  • Inequality of opportunity

  • Cause social problems

  • Living wage

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96

What is absolute poverty?

A condition characterised by severe deprivation of basic human needs

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97

What is relative poverty?

When a household’s financial resources fall below the average income level

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98

What is wealth?

A stock of assets owned by an individual or organisation

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99

What does the welfare state do?

  • Provides benefit payments

  • Provides vital social services

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100

How is the welfare state funded?

Through tax revenue and NI contributions

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