Economics AS questions

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  • Created by: Megan
  • Created on: 01-02-14 14:55
What are the injections into circular flow?
Investment, Govenment spending, Exports
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What are the leakages from circular flow?
Savings, Taxation, Imports
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What are the components of aggreate demand (AD)?
C+I+G+X-M Consumption, investment, government spending, net exports
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What are the factors of production?
Land, Labour, Capital, Entreprise
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What is the difference between GDP and GNP?
GDP is the total value of goods produced in a cauntrry's boders, but GNP calculates the total value of goods produced by a nation regardless of the firms' laocations.
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What are the advantages of calculating GDP?
Government can asses their success, it is a consistent measurement year-on-year, shows any changes in economic activity
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What are the disadvantages of calcualting GDP?
GDP does not inculde intellectual property, it mainly shows past activity and is always revised
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What are the factors affecting Consumption?
Interest rates, income, percieved wealth, confidence, supply of credit, animal spirits
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What is Keynesian economics?
The belief that the government should intervene in recessions, since expenditure becomes income for others and multiplier effect will occur.
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What factors influence investment?
Interest rates, supply of credit, business attitude to risk, confidence in future, technology
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Why is investment important to an economy?
Increase in resourses in the economy, enables economic growth, increases productivity, allows firms to be more competetive in a global economy, creates jobs for workers, often needed to lead country from a recession.
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What is the purpose of investment?
Firms hope that their decision will be benificial in the future and will improve productivity or replace existing capital.
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Why does the AD curve slope down to the right?
Law of demand, substitution effect so people chose foreign goods, income effect reduces abilty to buy goods
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Why is the LRAS a curve shape?
Output can expand without a rise in price level because of spare capacity, but then costs of production increase so price level must rise too.
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What are the causes of shift in the LRAS curve?
Training, technology, more raw materials, legislation, immigration, tax
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What are common causes of cost-push inflation?
Oil price shocks, exchange rate affecting price of imports, indirect taxes, energy prices.
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What are the macroeconomic objectives of the government?
Stable low inflation, Sustainable growth, Employment, Reduces deficit, Trade balance,Redistribution of wealth
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What is Monetary Policy?
Changes to interest rates, supply of credit and exchange rate.
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What is Fiscal Policy?
Changes to taxation, government spending and borrowing.
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What is Supply-side Policy?
Promote growth and make factor and product markets more effective.
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What are the main confilcts between government objectives?
Inflation vs Employment, Growth vs Inflation, Growth vs Trade balance, Growth vs Environmental Impact.
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What are the factors influencing level of inflation?
Consumer spending, oil prices, exchange rate, employment, GDP, growth of wages, house/share prices.
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Why is it difficult for the MPC to make decisions?
Variables can contradict ech other, there are regional differences, it takes time to see the affect, changes overseas have impact on our open economy
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What are common causes of demand-pull inflation?
Rising retail sales, higher employment, rising asset prices, falling exchange rate
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What are the limitations of Monetary Policy?
Policy works best in times of growth, banks are risk averse to lending, depends on size and duration of change, there are time lags to change attitudes
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What is the basic economic problem?
Resources are scare but wants and needs are infinite.
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What are free goods?
Goods that are available to everyone due to their unlimited supply. Eg Wind, Solar Energy
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What are the functions of an economy?
To allocate resources effectively and decide what to produce, how to produce it and whom to produce it for.
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What is an economic agent?
Someone who influences the economy by producing, buying or selling. They will all have different economic objectives.
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What is Opportuntity Cost?
The next best alternative foregone when making a choice.
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Why does the law of diminishing returns exist?
Factors of production are not perfectly mobile, and it takes time to adapt because of the substititability of production methods.
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What are the resons for economic growth?
More demand, more raw materials, more labour, investment, technolgival advances, innovation, privatisation of an industry
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Why are renewable resources important?
They reduce problems of scarcity
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What is specialisation?
When an individual focuses on producing one type of product, rather than several.
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What are the advantages of specialiastion?
Quality of produce is better, more cost-effective, labour becomes more skilled and efficient, more variety due to trading, surplus of goods.
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What are the disadvantages of specialisation?
Work is repetetive, demotivated staff, poorly paid factory work, reliant on other workers, minimal training can lead to structural unemployment
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What is the theory of comparative advantage?
Nations should specialise in producing the goods they can produce best and trade to get any other goods.
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What is an absolute advantage?
It doesn't consider opportunity cost, because you can produce two or more goods most efficiently.
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What is gains from trading?
Countries have access to a variety of resources and both economies can produce beyone their PPF.
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What are the causes of economic decline?
War, Legislation changes, Unemployment, Natural disasters, Global warming
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What could cause a PPF curve to pivot?
Improved technology, education, greater investment (all will only affect the production of one product)
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What is a PPF curve?
A boundry to show all combinations of two goods that can be produced with current resources
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What is the purpose of the Primary sector?
Extraction of resources eg Mining
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What is the purpose of the Secondary sector?
Manufacturing of product eg Factory assembly
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What is the purpose of the Tertiary sector?
Transportation, selling and storage if necessary eg Advertising product
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What is the purpose of the Quatemary sector?
Technology and consulting eg Customer services
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Why is scarcity important in Economics?
Production is restricted by scarcity, so resources must be allocated between competing users. People must make choices, which involves sacrifice.
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What are the advantages of economic growth?
Improve unemployment, larger range of products, lifts the poor from poverty, better confidence for future, population gain new skills.
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What are the disadvantages of economic growth?
Puts pressure on certain resources, potentially longer working hours, environmental impact, increase in waste, potential increase in prices, less natural land.
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Who developed the law of comparative advantage?
David Ricardo and Adam Smith
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What is a cartel?
A group used to protect companies by controlling prices, although illegal in the UK.
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What is joint demand?
When two or more products are usually bought together, such as a complements.
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What is derived demand?
When a product is dependent on another product to function, such as a car and petrol.
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What is the income effect?
Consumers change their buying habits to maintain living standards, since income is normally fixed.
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What is the subsitition effect?
Consumers change their buying habits to maximise the enjoyment, since alternative products are available.
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What factors affect demand?
Income, advertising, fashion, weather, legislation, price of other goods.
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What is the profit motive?
The motivation to create more profit, usually by increasing output to satisfy demand.
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What factors affect supply?
Production costs, technology, legislation, weather, expectations of future events, cartels, change in supplier objectives.
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What are the exceptions to the law of demand?
Speculative demand and Ostentatious consumption
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What is Speculative demand?
When a buyer hopes for a rise in price, resulting in a profit.
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What is Ostentatious consumption?
When buyers seek a higher price, because it is seen as a reflection in quality or social status.
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What is competitive demand?
Demand when goods are replacements for each other, such as subsitutes.
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What factors influence the price of labour/wage of worker?
Hours of worker, age, minimum wage, industry, risk, scarcity of skills, training, trade union activity
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What is labour supply?
The total numbre of hours that labour is willing and able to give at a given wage rate.
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What factors influence the supply of labour?
Wage levels, benefit levels, working condtions, population size, income tax levels, health care, education, retirement age.
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Why is elasticity important?
It is market intelligence, which enables producers, suppliers and governments to plan and either maximise profit or influence consumption.
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What does elasticity measure?
Responsiveness to a change.
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What factors influence PED?
Availability of substitutes, degree of necessity, advertising, brand loyalty, habit/additiction, time period, proportion of income
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What is the XED of a complement good?
Negative
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What is the XED of a substitute good?
Positive
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What is the YED of a normal good?
Positive
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What is the YED of an inferior good?
Negative
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What factors influence PES?
Availability of stocks, spare capacity, time, ease of switching production
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How does Quantitative Easing work?
New electronic money is created, in the hope that it will act as an incentive for banks to lend to firms and individuals.
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What are the problems of Quantitative Easing?
It's a controversial polciy. The value of the pound may fall, and banks may simply keep the extra money rather than lending it as hoped. Long-term economic effects are still unknown.
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What are government justifications for taxation?
Taxes are revenue raising, allowing government spending on public and merit goods. Governemnts can manage AD to meet objectives. Taxes can redistribute wealth, but can also influence consumption of de-merit goods.
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What is the difference between direct and indirect taxation?
The burden of direct tax cannot be shifted since it is levied on income or profit. Indirect tax is on spending, such as excise duties or VAT, and is the same for the whole population.
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What are the possible effects of changes to taxation?
Different levels of consumption or investment, change in level of migration, amount of entrepreneurship in th country, changed incentives to work, amount of research and development.
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What does the Laffer Curve show?
The amount of tax revenue recieved at each rate of tax from 0% to 100%. The revenue maximising point is unknown.
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What is the difference between progressive and regressive tax?
The rate of tax rises as income rises for progressive tax, but rate of tax falls for regressive tax.
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What are the types of government spending?
Current spending consists of transfer payments and recurring spending, but Capital spending is investment.
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What is the economics role of Fiscal policy?
To finance government spending, change distribution of wealth, improve country's competitiveness and solve market failure through intervention.
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What are the benefits of Supply-side policies?
Cost-push inflation is reduced, there is less unemployment, improved GDP and output capacity and improved trade.
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What are the problems of Supply-side policies?
There is often a time lag to take effect, uncertainty of results, demand is needed for policies to be effective, governments may be subsidising what people would have done anyway and the opportuntiy cost for other ways to spend.
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Why are Supply-side policies important?
They allow long-term growth(without inflation), increased tax revenues from workers, more productive economy means a better standard of living.
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When does market failure occur?
The price mechanism is not reliable, and so freely-functioning markets do not allocate efficient or optimum levels of resources.
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When does a "missing market" exist?
When markets fail to provide any goods or services.
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What are the possible forms of market failure?
Public goods, information failure, inequaltiy, monopoly power, merit and demerit goods, property rights and externalities.
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What is the difference between public and private goods?
A private goods is excludable and has rivalry, but the opposite is true for public goods
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Why are "free-riders" a problem for the economy?
Companies are reluctant to offer goods or services if people can take advantage of the resource without contributing to the cost. As a result, there is a shortage because the campany cannot be competitive, and the governmeent funds these public goods
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What is a Quasi-public good?
A good or service with most qualities of a public good.
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Why is information failure a problem?
In reality, many markets have asymmetric information, so buyers cannot make an informed decision about their purchase. This is often inefficient.
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What are possible causes of income inequality?
Age, gender, tax, education, unemployment, occupation type, addiction, homelessness, inheritance and location.
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What are possible solutions to income inequality?
Raise awareness, legislation, more support for vulnerable, minimum wage, punish discrimination, more housing avaliable, childcare subsidies.
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Why are merit goods an example of market failure?
If provided soley by the private sector, these are usually under-consumed, so governments must intervene, which boosts positive externalities
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Why are demerit goods an example of market failure?
There is potential market failure through over-consumption. Governements must interven to reduce socail and economic risks. The hope is to deter the population from consumption.
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What are positive externalties?
Wider social benefits that extend beyond the private user. For example local jobs, increased investment, increased education.
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What are negative externalties?
Costs that third-parties have to bear when a good is produced or consumed. For example; air pollution, increased noise, more litter, higher crime rates.
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How can a goverment intervene in a market?
By implemeting taxes and subsidies or creating regulation and price interventions.
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Why is an absence of property rights a type of market failure?
There is no incentive to change consumption if all other users continue as before, because there is uncertainty of ownership.
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Why are monopoly companies a type of market failure?
Market prices are higher and monopolist firm does not produce at an efficient level
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What is government failure?
When the intentions of a government to correct market failure are ineffective/expensive, and create new problems or make existing failure worse.
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What are the main causes of market failure?
Political self-interest, policy myopia, imperfect infomation, unintended consequences, regulation policies, work incentives, evasion and cost to implement.
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Why are free market economists usually against government intervention?
They believe the price mechanism should be given more freedom to opertte, and would be successful without intervention
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What are the benefits of free trade?
Countries can specialise and use scarce resources efficiently, increased consumption at lower prices, better choice and quality available to consumers and create political bonds between countries.
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What are the disadvantages of free trade?
Countries can become over-reliant on others to provide basic necessities and a change to demand or supply could cause structural unemployment
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What is protectionism?
Restrictions on imports of foreign goods using tariifs, quotas or embargoes.
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What effect could the removal or reduction of a tariff have?
Country benefits from more export opportunities, cheaper products for firms and individuals, boost employment and GDP and restore a trade balance
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Why does the government benefit from protectionism?
They recieve a tax revenue from imports, they can meet macroeconomic objectives and reduce leakages from the circular flow.
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Why do domestic producers benefit from protectionism?
They gain producer surplus and potentially sell more products to boost profits.
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Why do domestic consumers suffer from protectionism?
They have to pay higher prices for the same product as before and there is a loss of consumer surplus
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What are the potential problems of protectionism?
There is the risk of retaliation from other countries, there is welfare loss and a risk of inflation due to higher prices.
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What are the reasons for protectionism?
It allows the givernment to protect specific industries, save domestic jobs, limit problems of over-specialisation and maybe on political grounds.
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What factors affect suppy and demand of pounds?
Interest rate (return on savings), speculation (security of currency) and demand for imports or exports
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Why is an absence of property rights a type of market failure?
There is no incentive to change consumption if all other users continue as before, because there is uncertainty of ownership.
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Card 3

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Card 4

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Card 5

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What is the difference between GDP and GNP?

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