Government economic policy objectives and indicators of national economic performances

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What does economically inactive mean?
·people who are aged between 16 and 65 who are not in the labour force (e.g. they are homemakers, disabled or have retired early) ·they are not regarded as unemployed
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What indicators do economists examine to assess how well an economy is performing?
·economic growth ·unemployment levels ·inflation/ deflation ·balance of payments ·how evenly income is distributed ·changes in productivity
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If a government is concerned that income is too unevenly distributed what might they do?
·redistribute some income from rich households to poor households ·tax the rich & provide state benefits for the poor
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Why have governments recently been increasingly concerned with promoting economic stability?
·prevent significant fluctuations in output- can create uncertainty & make it difficult for households, firms & the gov to plan ahead ·this can discourage workers from improving their skills, firms from investing & the gov from undertaking major reforms
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What are some reasons why the inflation are has fallen and stayed relatively low?
·reduction in inflationary expectations resulting from the success of the government's monetary policy ·high value of the pound ·increase global competition putting pressure on firms to keep their costs low & prices high
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How can economic growth that is maintained year after year achieved?
·if increases in aggregate supply match increases in aggregate demand
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How can you sustain economic growth from one generation to another?
·avoid depleting non-renewable resources ·avoid damaging the environment ·reduce pollution ·cleaner sources of energy ·conserve non-renewable resources
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What does full employment mean?
·3% unemployment
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What does price stability mean?
·low and consistent rate of inflation
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Why do government's not aim for zero inflation?
·measures of inflation tend to overstate price rises ·a low level of inflation can bring advantages e.g. it may enable firms to reduce their costs by not raising wages in line with inflation rather than by making some workers redundant
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How do you calculate the rise in the volume of output?
(GDP figure x base year price index) ÷ (current year price index)
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How can the real GDP be calculated?
·output method ·income method ·expenditure method
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How can economic growth be calculated?
·by changes in the output, income or expenditure of the country
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What can be the issues with using the 'output method'?
·avoid double counting (counting the same output twice)
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When can be the the issues with using the 'income method'?
·only include incomes that have been earned in return for providing goods and services are included ·transfer payments are not included
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What can be the issue with using the expenditure method?
·include exports ·exclude imports
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What happens if productivity rises by more than wages?
·labour costs will fall ·a country can become more price competitive
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What is the informal economy and what problems does it bring?
·unrecorded economic activity ·means that the country's output is higher than than official real GDP figures suggest ·distorts a range of economic data ·tax revenue is lower than would be possible if all economic activity were taxed
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How is the unemployment rate calculated?
(the unemployed x 100%) ÷ labour force
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In the UK what are the two main measures used to calculate unemployment?
·Labour Force Survey (LFS) ·Claimant Count
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What is the LFS?
·Labour Force Survey ·survey of 60,000 households (of the labour force) ·based on the International Labour Organisation’s definition of unemployment ·collects information about type of employment, earnings and educational qualifications
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What is the ILO?
·International Labour Organisation ·agency of the United Nations
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How does the ILO define someone as unemployed?
“out of work, want a job, have actively sought work in the last four weeks & are available to start work in the next two weeks or are out of work, have found a job and are waiting to start it in the next two weeks”
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Who carries out the LFS to find out how many people are unemployed according to the ILO definition?
·the ONS ·Office for National Statistics
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What does the ONS publish in the middle of each month?
·Using an average for the latest three-month period, they publish the number of people unemployed on the LFS measure ·unemployment figures based on the claimant count
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What is the claimant count?
·a monthly count of those claiming unemployment-related benefits like the job seeker’s allowance (JBS)
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What are the advantages of the LFS measure?
·thought to capture more of those who are unemployed ·very suitable for international comparisons as it is widely used internationally (e.g. it is used by the Statistical Office of the European Union & by the OECD and most countries)
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What are the disadvantages of the LFS measure?
·more expensive than the claimant count ·more subject to sampling errors
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What are the advantages of the claimant count?
·relatively cheap ·quick to compile ·available earlier than the LFS-based unemployment data
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What are the disadvantages of the claimant count?
·not suitable for international comparisons because the categories of people entitled to benefits, varies over time and between countries
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What are the measures of inflation?
·CPI (consumer prices index) ·RPI (retail prices index)
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What is the RPI used for?
·adjusting pensions & other benefits to take account of changes in inflation ·frequently used in wage negotiations
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What does the CPI exclude?
·all housing costs including mortgages, interest payments & council tax ·the road fund licence ·the television license
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What does the CPI include?
·university accommodation fees ·foreign students' university tuition fees ·stockbrokers' chargers
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What are the CPI weights based on?
·spending by all private households, foreign visitors to the UK & residents of institutional households
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What are the RPI weights based on?
·expenditure by private households only (excluding the highest income households & pensioner households mainly dependent on state benefits
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What is constructed from the RPI?
·RPIX (RPI minus mortgage interest payments) ·RPIY (RPI minus mortgage interest payments & indirect taxes)
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What are the difficulties of measuring inflation?
·they tend to overstate inflation ·they do not take into account peoples' ability to alter what they buy during the year
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What are the main elements of the balance of payments?
·the current account ·the capital and financial account ·the net errors and omissions
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What does the current account include?
·trade in goods, trade in services, income & transfers ·income part covers largely investment income ·transfers covers transfer of money made & received by gov & individuals ·trade in services includes insurance, financial(invisible balance)
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What does the capital and financial accounts of the balance of payments show?
·the movement of direct investment
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Why are net errors and omissions added to the balance of payments?
·to ensure that the balance of payments does balance
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What are the short term causes of economic growth?
·increase in aggregate demand (in an economy with spare capacity) ·consumption-led growth (e.g. caused by cut in income tax)
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What are the causes of long term economic growth?
·increase in productive capacity- increases in the quantity and/or quality of resources ·rising size of labour force= increased economy's resources
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What are the three types of unemployment?
·frictional unemployment ·structural unemployment ·cyclical unemployment
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What causes cyclical unemployment?
·also called demand deficient unemployment ·arises due to a lack of aggregate demand ·in this case demand for most products will be low and unemployment will be high
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What is regional unemployment?
·the name for structural unemployment that is concentrated in a particular area
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What is structural unemployment?
·problems of occupational & geographical immobility (problems with supply of labour e.g. employers may be unwilling to employ people who lack certain skills or the unemployed may live in a different part of country to job vacancies)
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What usually causes structural unemployment?
·decline of certain industries and occupations due to changes in demand and supply
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What are other forms of structural unemployment?
·technological unemployment (arises when workers lose their job because of advances in technology) ·international unemployment (occurs when jobs are lost because firms decide to outsource or because households buy imports)
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What contributes to frictional unemployment?
·immobility of labour
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What is frictional unemployment and what categories can it be broken down into?
·occurs when workers are in-between jobs ·search unemployment (search for good job) ·seasonally unemployed (labour only demanded at specific times of year) ·casual unemployment (out of work in-between irrregualr periods of unemployment)
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What are the consequences of unemployment?
·lost output ·lost tax revenue ·government spending on unemployment benefits ·costs to the unemployed ·hysteresis ·costs for other economies
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How is 'lost output' a consequence of unemployment?
·having people who are willing and able to work without jobs is a waste of resources
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How is 'lost tax revenue' a consequence of unemployment?
·unemployment results in tax revenue being lower than possible ·if more people were in work, incomes, sending & possibly profits would be higher ·government could collect more revenue from income tax
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How is 'government spending on unemployment benefits' a consequence of unemployment?
·if unemployment rises the gov may have to spend more on unemployment related benefits e.g. JSB ·may mean they have to reduce its spending on other areas or raise its borrowing or tax rates ·money spent on unemployment benefits has opportunity cost
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How is 'pressure on other forms of government spending' a consequence of unemployment?
·when people are unemployed they are more likely to suffer health problems e.g. mental health problems, marital difficulties & some may even turn to crime ·more health problems= higher waiting lists for health care unless gov spends more on sector
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How are 'costs to the unemployed' a consequence of unemployment?
·the unemployed may suffer from poor health & family break-ups & experience a loss of income ·some people may experience loss of status or purpose & worth
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How is 'hysteresis' a consequence of unemployment? (demand of side)
·the longer people are out of work, the more difficult it can be to gain another job ·problems arise in demand for labour ·employers may be reluctant to employ someone who's been out of work for a long time
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What is hysteresis?
·a cost of unemployment can be unemployment itself
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How is 'hysteresis' a consequence of unemployment? (supply of side)
·the longer people are out of work, the more difficult it can be to gain another job ·problems arise in supply of labour ·the long-term unemployed may tend to seek work less actively over time (lose work habit & get discouraged by rejection)
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How are the 'costs for other economies' a consequence of unemployment?
·unemployment in a country's trading partners is likely to reduce demands for exports ·in turn will reduce country's AD & may cause some unemployment ·country may experience immigration from countries with high unemployment (beneficial or burden)
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What are the benefits of unemployment?
·May give people time to search for more rewarding job ·makes it easier for firms, wishing to expand, to recruit workers ·can reduce demand pull & cost push inflation ·High levels of unemployment may discourage workers from seeking wage rises
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What is the significance of unemployment?
•DEPENDS ON THE LEVEL OF UNEMPLOMYENT AND LONG ON AVERAGE PEOPLE ARE UNENMPLOYED
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What is the significance of 3% unemployment?
•A 3% rate of unemployment is not seen as being a problem. There will always be some people in between jobs.
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What is the significance of 10% unemployment?
•A 10% rate of unemployment would lead to a loss of output, higher government spending on benefits and a greater loss of tax revenue
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What is the significance of 6% average over 2 years unemployment?
•A 10% rate of unemployment would lead to a loss of output, higher government spending on benefits and a greater loss of tax revenue
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What are the consequences of inflation?
•fall in the value of money •shoeleather costs •administrative costs •inflationary noise •random redistribution of income •fiscal drag •uncertainty •inflation causing inflation •loss of international competitiveness
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What is the only way an economy can increase its output if it currently using all of its resources, and thus producing on its production possibility curve and what are the effects of this action?
•switch resources from making consumer goods to making capital goods •opportunity costs of producing capital goods= consumer goods •in the long run extra capital goods will enable more consumer goods to be made
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What are the potential negative impacts of economic growth?
•reduce quality of some people's lives (e.g. adopting new skills/ changing jobs/ pace of work may increase/ stressful changes) •depletion of non-renewable resources •damage to the environment •
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What is the main benefit of economic growth likely to be? But what is this influenced by?
•a rise in people's material standard of living- increase in real GDP per head means people can enjoy more goods and services •influenced by the distribution of income
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What is another benefit of economic growth?
•it enables poverty within a country to be reduced without having to redistribute income (higher output can be used to finances schemes to help the poor)
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How can higher output help the poor?
Higher output raises tax revenue without having to increase tax rates •can be used to finance schemes to help the poor •higher tax revenues can be used to improve public services e.g. education, health care & improve the environment
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What is an additional way higher output may reduce poverty?
•by increasing employment
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What is the risk of aggregate demand not increasing in line with production?
•higher output may be accompanied by higher unemployment
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What does actual economic growth raise the level of?
•a country's real output and can thereby increase its status and power in international organisations and in international negotiations
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What is the USA a member of?
•the UN (United Nations) •the IMF (International Monetary Fund) •WTO (World Trade Organisation)
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When is economic growth beneficial?
•when it is sustainable
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What is nominal GDP and how is it calculated?
•output measured in current prices and so not adjusted for inflation •??
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What is the 'output method' of calculating real GDP?
·total up the output, income or expenditure of the country
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When an economy is expanding will production always rise?
·it tends to rise but if less skilled workers have to be recruited to make the extra output, productivity may fall
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What are some general issues with measuring economic growth?
·the informal economy ·consider the composition of real GDP (extra output consisting of capital goods will not make people feel better off immediately) ·calculate GDP per head to ensure it is a true rise in GDP rather than rise in population
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What are the RPI and CPI?
·weighted price indices
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What is the CPI?
·the main measure used in the rest of the European Union and in most other countries in the world
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What is the Family Expenditure Survey?
·involves sampling 6,000 households, which are asked to keep a record of their expenditure
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What are the CPI and RPI both measures of?
The average change from month to month in the prices of consumer goods and services bought in the UK.
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What does the income part of the current account cover?
·investment income (the UK usually has a surplus on income)
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What does the transfers part of the current account cover?
·the transfer of money made and received by the government and officials
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Where can inflation arise from?
·demand side ·supply side
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When analysing its causes, which two categories can inflation be put into?
·demand-pull inflation ·cost-push inflation
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Where does demand-pull inflation arise from?
·aggregate demand increasing at a faster rate than aggregate supply
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When may there be an excessive growth in aggregate demand?
·when money is growing faster than real output (AD increases more rapidly than AS)
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When are increases in aggregate demand likely to push up the price level?
·When the economy is producing at or near its productive capacity.
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When does cost-push inflation arise?
·when the price level is pushed up by increases in the costs of production (e.g. a rise in wage rates above increases in the costs of production) ·a rise in the costs of raw materials (e.g. rise in price of oil will push up cost of fuel etc)
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When does a deficit on the current account occur and what are the main situations why this situation can arise?
·when the country's expenditure abroad exceeds its revenue from abroad 1- the country's inhabitants have spent more on goods & services from abroad than overseas residents have spent on the country's products 2- net outflow of investment income
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What are the causes of a deficit on the trade in goods and services?
·changes in come at home & abroad ·changes in the exchange rate ·structural problems
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What may a rise in the exchange rate result in?
·a deficit as it will raise export prices and lower import prices
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When may a deficit be of less concern to a government?
·when it is caused by changes in income ·when it is caused by a change in the exchange rate
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When may a deficit persist?
·if it is caused by the country's firms charging too much for their products, producing poor quality products or not picking picking up on changes in demand
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When will an outflow of investment income occur?
·if the investments that foreign residents have made in the country earn more than investments the country;s inhabitants have made in other countries
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When is a surplus on the current account experienced?
·when a country's revenue from abroad is greater than its expenditure abroad
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Why does care have to be taken in interpreting a surplus on trade in goods and services?
·because it may arise from the strength of the economy, from a change in its exchange rate or from a weakness of the economy
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When is a country likely to have a surplus?
·If its products: ·are of high quality ·produced at a low cost ·reflect what households & firms at home & abroad want to buy ·a fall in the exchange rate ·a recession
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What are the effects that may arise as a result of inflation?
·fall in the value of money ·menu costs ·shoeleather costs ·administrative costs ·inflationary noise ·random distribution of income ·fiscal drag ·uncertainty ·inflation causing inflation ·loss of international competitiveness
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How is a 'fall in the value of money' consequence of inflation?
·rising price level- the purchasing power of money falls
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How are 'menu costs' a consequence of inflation?
·the costs of changing prices due to inflation ·the need for firms in general to alter their prices ·involves time, effort & possible increase in labour costs
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How are 'shoeleather costs' a consequence of inflation?
·during periods of inflation, households & firms cannot afford to have money lying idle·relates to the costs involved in reducing holdings of cash and money in current accounts & seeking the highest rate of interest
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How is 'inflationary noise' a consequence of inflation?
·inflation causes distortion effect therefore market prices do not signal the relative scarcity of products efficiently ·won't be sure if price rise is genuine or just in one with inflation
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How is 'random distribution of income' a consequence of inflation?
·the outcome for a household depends upon the relationship between the change in its income and price level ·borrowers will gain an lenders will lose if inflation reduces the real interest rate
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How is 'fiscal drag' a consequence of inflation?
·tax brackets need to be adjusted in line with inflation otherwise people's income will be pushed into the higher tax bands
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How is 'uncertainty' a consequence of inflation?
·inflation can create uncertainty ·firms will be more reluctant to invest
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How is 'inflation causing inflation' a consequence of inflation?
·households expecting prices to rise may buy more & therefore increase in AD ·workers may ask for pay rises ·firms may raise their prices in order to protect real profit levels
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How is a 'loss of international competitiveness' a consequence of inflation?
·high inflation rate= less price competitive goods & services —> fewer exports sold & more imports purchased
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How are 'administration costs' a consequence of inflation?
·administrative costs e.g. staff time ·adjusting accounts, assessing raw material costs, negotiating with unions about wage rises, estimating appropriate prices
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What are the benefits of inflation?
·demand-pull inflation: higher AD & rise in price level may encourage firms to increase output ·workers like rises in their pay (even if its matched by higher prices)- psychological benefit
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What is the benefit of inflation giving firms the ability to alter workers' real pay?
·can help labour markets operate more efficiently & reduce unemployment
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What does inflation enable firms to do with wages?
·they can reduce their real wages by keeping money wages the same or raising them by less than inflation
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How can deflation from the supply side be beneficial?
·a fall in the price level from cut in costs of production will enable consumers to enjoy more goods & services & will increase country's international awareness
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How can deflation caused by a fall in aggregate demand be harmful?
·Lower AD will cause firms to cut back production ·this will lead to higher unemployment ·households are likely to reduce their spending ·AD will be further reduced
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Which type of inflation tends to be more harmful and why?
·cost-push ·it is usually accompanied by a fall in real GDP & a rise in unemployment
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What does hyperinflation tend to lead to?
·significant menu, shoeleather and administrative costs & considerable inflationary noise (opportunity cost of time) ·risk that people will resort to barter
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How can fluctuating inflation be destabilising?
·it creates inflationary noise & makes it difficult for government, firms & households to plan ahead
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How can unanticipated inflation be harmful?
·causes uncertainty & can result in random distribution of income
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Can stable and correctly anticipated inflation still have a harmful effect on an economy?
·if a country has a higher inflation rate than the main countries it trades, its current account position is likely to deteriorate
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How does the significance of inflation vary between people?
·people have different spending patterns ·people experience different prices in different areas of the country
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What happens if a deficit increases?
·it will reduce AD ·this will lower the economy's output, be likely to raise unemployment & put downward pressure on the price level ·also likely to lead to a fall in the exchange rate & increase debt of the country
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What does a surplus rather than a deficit mean?
·a country is consuming less than it is producing & is experiencing a net inflow of money & income ·increase in money supply will mean banks have more money (may increase bank spending) ·rise in surplus means net exports are increasing, raise in AD
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What does the significance of a current account deficit depend upon?
·its size ·duration ·cause ·what is happening in the capital & financial account
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What are most countries exchange rates determined by and how does this work?
·the market forces of demand and supply ·increase demand for current= increased exchange rate ·increased supply of currency= falling exchange rate
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What factors influence the demand for and supply of a currency and so its exchange rate?
·international competitiveness of products ·changes in income abroad ·incomes at home ·UK interest rates ·FDI (foreign direct investment) ·speculation
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How does the 'international competitiveness of products' influence the demand for and supply of a currency and so its exchange rate?
·if UK products are internationally competitive demand for pounds is likely to be high and supply is likely to be low ·influences of international competitiveness are labour productivity, investment and relative inflation rates
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How do 'changes in income abroad' influence the demand for and supply of a currency and so its exchange rate?
·rising incomes abroad= foreigners are more likely to buy UK exports ·this will increase demand for pounds and cause a rise in value of the pound
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How do 'incomes at home' influence the demand for and supply of a currency and so its exchange rate?
·rising incomes at home may put downward pressure on value of the pound
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How do 'UK interest rates' influence the demand for and supply of a currency and so its exchange rate?
·rise in UK interest rates is likely to increase demand for pounds ·foreigners will want to buy pounds in order to open accounts in UK financial institutions to benefit from higher interest rates
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What is FDI and how does it influence the demand for and supply of a currency and so its exchange rate?
·foreign direct investment ·those wishing o undertake FDI will have to buy and sell pounds
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How does 'speculation' influence the demand for and supply of a currency and so its exchange rate?
·can have a stabilising or destabilising effect on exchange rates
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What do speculators do?
·speculators buy and sell currency hoping to make profit from movements in interest rates and exchange rates
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When considering the relationship between the exchange rate and the interest rate, what will happen if the UK's exchange rate rises?
·export prices expressed in terms of foreign currencies will rise ·demand for exports will fall & this will reduce AD ·lower AD means lower inflationary pressure
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When considering the relationship between the exchange rate and the interest rate, what does a reduction in the interest rate mean?
·tends to reduce the exchange rate because it will reduce return on money kept in UK financial institutions ·probably be outflow of funds from UK to other countries (hot money flows) ·outflow of funds means more of currency being sold
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What does an increase in the supply of currency do to the exchange rate?
·reduces the exchange rate
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What might a cut in the UK interest rate do to the value of the pound?
·might make foreigners more optimistic about prospects of economic growth in UK and buy pounds and so push up value of pound
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What is a depreciation and what will it do?
·fall in the exchange rate ·will reduce the price of exports in terms of foreign currencies
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While a fall in the exchange rat causes a fall in exports prices what will it do to the price of imports in terms of domestic currency?
·increase it
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What does a rise in the exchange rate do to export prices and import prices?
·increases export prices ·lowers import prices
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What effect does the exchange rate have on the current account position of the balance of payments?
·a reduction in the exchange rate is likely to improve the position
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When will a fall in the price of exports result in a rise in export revenue?
·when demand is elastic
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How will a lower exchange rate increase aggregate demand?
·by boosting exports and reducing imports
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What is a rise in the exchange rate likely to cause?
·an increase in current account deficit ·likely to be deflationary, reducing aggregate demand & therefore reduce real GDP and employment
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What is the risk of a lower exchange rate?
·it may put upward pressure on inflation because the price of imported are materials will rise and therefore increase the cost of production & price of imported finished goods
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Card 2

Front

What indicators do economists examine to assess how well an economy is performing?

Back

·economic growth ·unemployment levels ·inflation/ deflation ·balance of payments ·how evenly income is distributed ·changes in productivity

Card 3

Front

If a government is concerned that income is too unevenly distributed what might they do?

Back

Preview of the front of card 3

Card 4

Front

Why have governments recently been increasingly concerned with promoting economic stability?

Back

Preview of the front of card 4

Card 5

Front

What are some reasons why the inflation are has fallen and stayed relatively low?

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