CH17 IMC

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What are the major trends in the global economy
Growth in emerging markets, international trade, financial globalisation, technology change, increased demand for commodities.
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Leading indicators
stock market movements, consumer/business surveys, money supply and credit growth
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Lagging indicators
Move after the economy has changed, e.g. unemployment levels.
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Coincident indicators
such as industrial production and national output moving in step with the economy. In US there is a committee which considers this data.
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The Public Sector Net Cash Requirements
Measures level of borrowing. Difference between what the government receives and what it spends in a year. high PSNCR gives rise to concerns about inflation
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What problems does inflation cause?
A loss in the attractiveness of exported goods, uncertainty over the future value of savings and investments
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Retail Price Index (RPI)
Best known measure of inflation in the UK, represents average price of a basket of goods purchased by a typical household. Every so often gets rebased to 100.
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Consumer Price Index (CPI)
Another measure of inflation. MPC of the BoE is responsible for keeping UK Inflation within +/- 1% of 2% target. Took over RPI in 2003
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Bull Market

Bear Market
Bull: Rising price trend

Bear: Falling price trend
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Contrarian approach
Doing the opposite of the trend (e.g. buying when the trend is selling)
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UK Current Account
Trade position that the UK has with the rest of world. Calculated imports from Exports.

Split into visible and invisibles
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UK Capital account
Measures investment relationship uk has with ROW. Shows the net effect of UK citizens investing in foreign investment instruments
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Balance of payments
Has link to exchange rates. Balance of payments deficit (X<M)

Balance of payments surplus X>M
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Circular flow of money assumptions
Assumes two sectors in economy (households and firms), ignores gov sector, assumes individuals do not save any of their income
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Describe the circular flow of money
Households provide factors of production, firms reward households with rent wages and profits, firms use production to create goods/services, households purchase national output with national expenditure
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Leakages
Items that are subtracted from the circular flow of the economy. E.g. taxation and imports
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Injections
Items added to the circular flow of money e.g. government spendign, exports
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Real vs Nominal GDP
Whether effect of inflation is included, real includes this/
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How to calculate GDP
1) expenditure method (personal consumption, investment by firms in capital goods, gov spending, net of exports of goods and services
2) income method (add up all income)
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Gross National Product (GNP)
GDP plus net income from abroad
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Autonomous expenditure
Certain level of consumption that most households must spend in order to survive.
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Consumption function
C = a + b Yd

a= autonomous consumption
b = marginal propensity to consume
Yd = disposable income
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Crowding out
When large borrowing requirements of the government lead to the private sector finding it difficult to raise funds for their own expansion
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Classical school of thought
economy is self regulating, no intervention - economy will revert to its natural level on its own. Assumption that demand will always meet level of output in economy.
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Keynesian school of thought
Encourages government spending. Understands the economy will reach natural level in long run, but would take far too long without intervention
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Monetarist school of thought
Classical ideas but focus on inflation and money. Spending the way out of a recession could have counter effect 'crowding out'
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Austrian school of thought
Based on classical idea. Attached to concepts like diminishing returns, prices and property rights. Places emphasis on individual choices.
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Differences between Keynesian and Classical
Classical against intervention, classic believe in automatic correction, classical believe that best monetary policy in crisis is no monetary policy, Keynesian think savings beyond investments problem
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Simple Multiplier
1 / 1 - MPC
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Multiplier including the effect of taxes
1 / 1 - MPCt

MPCt is MPC x (1 - t)
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Multiplier in an open economy including effect of taxes
1 / 1 - MPCt + MPM

MPM is marginal propensity to import
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Balanced budget multiplier
If gov wishes to expand gov spending, but does not want to expand the economy, it will raise taxes by the same amount and run a balanced budget
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Stages of the economic cycle
Economic boom, economic slowdown, economic recession, economic recovery
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Quantitative Easing
As a supplement of dropping interest rates, banks set up QE to directly increase money amount in economy by purchasing gov and corp bonds from institutions.
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Narrow money
M0 and M1, include notes and coins in circulation, and assets that can be quickly converted to cash.
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Broad money
M2 (short term deposits) , M3 (longer term deposits), M4 broad money M4ex
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Money multiplier
1 / reserve requirement
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Basel
Committee of banking supervisory authorities. Enhances understanding of key supervisory issues and improve the quality of supervision. Outdated. Basel 2 created.
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Fisher Equation
MV = PT
M is money
V velocity of circulation of money
P is avg price transaction
T total number of transactions
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Real money supply
M / P = T / V
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Menu costs of inflation
Cost to industry of constantly having to reprice goods
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Shoe leather costs
In environment of high inflation, people tend to leave their money on deposit until it is needed
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Keynesian unemployment
Similar to structural but on national scale. Due to drop in AD brought about by a lack of flexability of wages and prices outside the control of workers or trade unions.
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Classical unemployment
Wages are priced too high resulting in few people being hired to produce required tasks
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Other cards in this set

Card 2

Front

stock market movements, consumer/business surveys, money supply and credit growth

Back

Leading indicators

Card 3

Front

Move after the economy has changed, e.g. unemployment levels.

Back

Preview of the back of card 3

Card 4

Front

such as industrial production and national output moving in step with the economy. In US there is a committee which considers this data.

Back

Preview of the back of card 4

Card 5

Front

Measures level of borrowing. Difference between what the government receives and what it spends in a year. high PSNCR gives rise to concerns about inflation

Back

Preview of the back of card 5
View more cards

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