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list the different roles of the government
provider, consumer, law maker and regulator as well as tax setter and collector
how to calculate gdp per capita?
gross domestic product per capita measures a country's economic output per person and is calculated by dividing the GDP of a country by its population.
compare direct and indirect taxes
direct taxes → taken from the incomes of individuals and firms
eg) income tax, death duty (charged on assets received upon a death) and capital gains tax
indirect taxes → the purchase on the goods and services or are the taxes on the product itself
eg) stamp duty, value added tax, excise duties (tax imposed on goods when they are transported across international borders) as well as betting duties (tax charged on gambling)
list the macroeconomic aims of a government
gconomic growth, full employment/low unemployment, stable prices/low inflation rate, balance of payments stability, redistribution of income.
possible conflicts between macroeconomic aims
i) conflict between low inflation and economic growth: aiming for low inflation may require tight monetary policy, such as increasing interest rates, which can reduce consumer spending and investment, potentially slowing down economic growth.
ii) conflict between low unemployment and low inflation: policies aimed at reducing unemployment, such as expansionary fiscal or monetary measures, can increase aggregate demand and potentially lead to inflationary pressures.
definition of the government budget
it includes all planned revenues and items of expenditure for the public sector. (In general, taxes are the main source of government revenue)
moreover, the government budget (fiscal policy) is presented each year as a balanced budget, a budget deficit, or a budget surplus
a) a balanced budget means that government revenue = government expenditure
b) a budget deficit means that government revenue < government expenditure
c) a budget surplus means that government revenue > government expenditure
what happens during a recession?
definition: when GDP (the total output of a country in a given period of time) starts to fall due of high prices, as demand and spending falls in the economy
failing demand results in slower and negative economic growth, rising cyclical unemployment (when demand falls, firms will cut their production and workers will lose their jobs) and disinflation as the rate at which prices are rising slows down.
additionally, if a recession is particularly deep and prolonged, economic activity may continue to shrink and result in falling prices and deflation.
what happens when aggregate demand rises
it can boost employment and growth but if it increases faster than output is able to expand, demand pull price inflation (overheat economy with excessive money, but same amount of goods) is likely to accelerate.
wages are also likely to increase near full employment in the economy creating additional cost push inflation (when the cost of production rises lead to an increase in price on products → to maintain profit margin) pressures.
what does expansionary fiscal policy does?
it may be used to boost total demand during an economic recession to help create jobs and boost economic growth. it invovles increasing public expenditures and/ or cutting taxes.
what is contractionary fiscal policy?
a deflationary or contractionary fiscal policy aims to reduce pressure on prices in the economy by cutting aggregate demand throughout a reduction in public expenditure, and or by raising total taxation.
how can fiscal policy affect the distribution of income?
fiscal policy instruments may also be used to redistribute income is between rich and poor families in the economy. for example, income taxes may be increase on those with the highest incomes and the money raised can me used to finance more public services and increase welfare for people who are on the lowest incomes or those who are unable to work due to aging.
what are the drawbacks for fiscal policy?
a) it is cumbersome/complicated to use
→ it is difficult for a government to know, precisely when, and by how much to expand public spending, or cut taxes by during an economic downturn
b) when public expenditure increases private spending decreases
→ this is called the crowding out effect. to finance and increasing public spending, and or a cut taxation, a government may need to borrow extra money from the private sector, and the more money the private sector lends to the government, the less and has available to spend itself.
c) increasing taxes on incomes and profits can reduce incentives to work and enterprise
→ reduces labour productivity and therefore cost of production in many firms will increase and they will be less able to compete in product price and qualities overseas. as a result, demand for their foods and services will decrease and unemployment rate rises.
what is monetary policy?
it involves changes in the money supply and/or interest rates in an economy to influence the level of total demand and economic activity. it is also used by a government to influence their exchange rates of its national currency against foreign currencies and in doing so, to affect the level of international trade and transactions.
how economies grow
a) though the discovery of more natural resources (increases economy’s output)
b) investment in new capital and infrastructure (private sector firms can further expand of their scale of production and produce more goods and services for households)
c) technical progress (increase productivity of existing resources and produce new products)
slump vs recession
economic recession: involving a relatively short period of negative growth in which the economy with recover soon and continues to grow once again
economic depression/ slump: last for several years and can be continuous depending on the substantial fall in real GDP
potential drawbacks with fiscal policy
fiscal policy can be relatively slow to have an impact
expansionary fiscal policy may increase national debt and cause inflation
Investment maybe crowd cut by government borrowing and spending
why ami to control employment?
as employment increases, total output will expand and therefore consumer spending will rise. More business opportunities are created in government spending on welfare can be reduced as living standards improve.
why is high unemployment bad for businesses and economy?
as an unemployment rises, fewer people will work and so if you’re a good and services will be produce, the total output of the economy will fall. thus the government may have to spend more on welfare and Social Security payments to support the unemployed and their families. moreover taxes on firm and working people may be increased to pay for additional government spending.this will reduce their disposable incomes and cause demand to fall.
what are demand side polices
they influence the level of total demand in an economy using a number of different policy instruments, which are
a) total public expenditure
b) overall level of taxation
c) the rate of interest
what are supply side polices
it increases production/supply it also boosts factor productivity and total output in the economy. prices are more likely to rise if the total supply of goods and services are able to expand at the same rate as total demand is increasing.
basically increases economic growth, employment rate as well as reducing inflationary pressures
why aim to control inflation?
it makes it easier for firms to manage their costs for exporters to sell their products overseas, and for consumers, especially those on low incomes to continue buying the goods and services they wanted snd need.
types of taxes
government must decide whether they want progressive, progressive or proportional tax system. each system will affect people and firms differently.
definition of unemployment
people without work, but who are actively looking for employment are considered to be unemployed.
how do you calculate and unemployment rate of an economy?
types of unemployment:
cyclic unemployment: caused by a recession (or slump) thus affecting aggregate demand and causing less need for labor
frictional unemployment: the time spent between jobs for a short period of time due to immobility of labor
structural unemployment: changes in industry causing permanent decline in demand due to:
i) lack of export demand
ii) competition increase
iii) substitutes discovered
iv) lack of skill to keep up with newly-created jobs
why government spending increases demand?
government spending often involves hiring workers or contracting with private firms to carry out various projects. this leads to job creation and increased employment opportunities. when people have jobs and earn income, their purchasing power rises, enabling them to spend more on goods and services. this higher consumer spending drives up demand and stimulates economic growth.
what are the three possible budgets?
what is national debt?
this is the total debt buildup, overtime that the government owes to its creditors.
a) government typically borrow by selling government bonds
b) when they mature than money borrowed has to be repaired whilst the government has to pay interest to the bond holder
(debt that is owed to entities within the economy/country is much less of a problem, whereas debt being owned a board is viewed as being more problematic)
what are the three main causes of inflation?
a) government prints too much money
b) demand, pull inflation. this is when demand for the prices too many money chasing too few good.
c) cost push inflation. this is one production cost rises due to a loss of revenue and increases price as we produce large/negative supply this increases the cost of production as well
what are they characteristics of taxes
look at spider diagram
what does expansionary monetary policy do?
further generates economic growth
moreover, loose (expansionary) monetary policy involves the central bank lowering interest rates or expanding the money supply. therefore, boosting economic activity/stimulate aggregate demand spending. if interest rates are low, more individuals and households will borrow (demand) money.
supply side policy and mp (monetary policy)
quick recap
what does appreciate mean?
the rise in the value of an asset, such as currency or real estate.
the consequences of labour unemployment
personal cost: read passage from textbook
fiscal cost: unemployment benefits are paid from direct and indirect taxes revenues. therefore, as unemployment rises public expenditure on an unemployment benefit tends to rises but tax revenues tends to fall as income and spending fall. this means that people remaining in work have to pay higher taxes to support those in unemployment. other public expenditure may also have to be cut back such as on roads and health cares. which is NOT GOOD → living standards of people fall as a result
cost to the economy: leaving labour unemployed is a waste of resources.
what is an example of cost push inflation
oil and natural gas prices.
cost-push inflation vs. demand-pull Inflation
cost-push inflation occurs when production costs increase, leading to higher prices. in contrast, demand-pull inflation occurs when demand exceeds the economy's supply, causing prices to rise. cost-push inflation often results in decreased output or economic growth, while demand-pull inflation typically leads to increased economic activity and employment.
what is imported inflation?
rising prices in one country may be exported to other countries through international trade. rising import prices can cause imported inflation. similarly, a fall in the value of national currency against the currencies of other countries, where imports become more expensive in that country.
what are the conflicts that occur between the different aims of the government?
look at image
explain the difference between cyclical and structural unemployment
cyclical: linnks to low levels of AD (aggregated demand) in the economy and tends to involve a large number of workers
structural: links to low demand of a specific industry and tends to last for longer period (problematic) as skills are not transferable (lower mobility).
analyse the reasons why investment spending is important for an economy
discuss whether a reduction in unemployment should be the main aim of government policy
reducing unemployment is a crucial aim of government policy in macroeconomics due to its economic and social benefits. high unemployment levels can lead to economic costs such as lost production and reduced tax revenues, wasting valuable resources. implementing policies aimed at reducing unemployment can stimulate economic growth and increase productivity. however, it is essential to consider potential trade-offs and unintended consequences, such as inflationary pressures and structural factors like labor market regulations, education and training systems, and business environments. addressing these factors alongside direct employment policies ensures sustainable and long-term reductions in unemployment rates.
in conclusion, reducing unemployment is a priority for governments in macroeconomics, but policymakers must carefully consider trade-offs and structural factors to ensure the effectiveness and sustainability of their policies. a comprehensive approach combining job creation initiatives, labor market reforms, and macroeconomic stability can help promote economic well-being.
how to calculate economic growth?
economic growth refers to the change in real GDP relative to the previous quarter of a year.
what is inflation?
what is deflation?
inflation is a sustained increase in the general price level over a period of time.
deflation is a sustained decrease in the general price level over a period of time.
why is price stability so important?
the price stability in an economy is important because when the price is unstable, future uncertainty arises and leads to lower consumer and business confidence. this means less consumption and less investment.
how is income redistributed by the government?
income is redistributed by the government through…
progressive taxation
direct provision (education, healthcare)
subsidies and benefits
what is the ideal percentage of price level increase?
why is low inflation preferable?
governments typically aim for a 2% inflation.
inflation is important since it acts as an incentive for firms to produce more outputs. and therefore enhances spending and investments, as well as increased wages and profits.
however it should remain low to maintain consumer purchasing power.
why is price stability so important?
price stability in an economy is important because when the price is unstable, future uncertainty arises and leads to lower consumer and business confidence. this means less consumption and less investment.
what is meant by real GDP?
what is meant by nominal GDP?
real GDP: is the total value of goods and services produced in an economy over a given period of time, adjusted for inflation.
nominal GDP: is the value of all the products in an economy over a given period of time, measured at the current market price.
how do you calculate the percentage change in economic growth
economic growth refers to the change in real GDP relative to the previous quarter of a year
what are PPCs?
stands for the maximum possible output within an economy.
draw graph when SSP (supply side policy) is apllied
AS → AS’ results in:
drop in prices/ less inflation
more GDP
lower unemployment (of economy produces more, they are more likely to need labour)
what is tight monetary supply?
tight monetary policy involves the central bank either raising interest rates or reducing the money supply.
what does point 1 suggests?
what does point 3,4 suggests?
what does point 2 suggests?
the curve is inefficient because we produce more goods
as points are on the curve, curve is efficient
curve is outside means that it is not possible or attainable given our current resources
(therefore have more resources PPC will shift to the right if more resources are provided and investments occur)
what are the polices used to generate economic growth?
ignore spider diagram
how can you measure inflation rate?
the inflation rate is calculated via a consumer price index (C.P.I).
the rate of inflation (and cost of living for households) is a generalisation. to improve the accuracy of the measure, there are a number of things that are typically done:
i)to weight products by their importance
ii) regularly update the basket of commonly bought products (to reflect patters of consumer spending
what can a government do when there is deflation?
side note: sometimes deflation is regarded positively as it increases production in the economy (AS shifts to the right) and means that GDP is rising therefore economic activity also rises.
deflation occurs when there is a fall in general prive levels with the economy over a given period of time.
to counter negative inflation, governments typically adapt demand side policies:
a) reduce tax and interest rates
b) encourage imports and discourage exports
solutions to inflation
hyperinflation is way more sizeable and rapid compared to inflation
what are interest rates?
the interest rate is the amount lenders charge borrowers and is a percentage of the principal. it is also the amount earned from deposit accounts.
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