Inflation, Redistribution of income and
wealth
wealth
Governments aim for low and _______ inflation.
Governments aim for low and stable inflation.
Governments usually aim for the total of the __________ items in the current account of the balance of payments to equal the total of the _______ items in the long run.
Governments usually aim for the total of the credit items in the current account of the balance of payments to equal the total of the debit items in the long run.
Governments seek to keep unemployment low and of ________ duration
Governments seek to keep unemployment low and of short duration
Governments may aim for economic growth, or an increase in the economic growth rate if the economy has been experiencing a _______________ gap.
Governments may aim for economic growth, or an increase in the economic growth rate if the economy has been experiencing a negative output gap/ deflationary gap
The relationship between the internal and external value of money
If the internal value of a country’s money falls as a result of a rise in its ____________ rate above that of rival countries, demand for its products will ________. As a result, demand for the country’s currency will_____.
If the internal value of a country’s money falls as a result of a rise in its inflation rate above that of rival countries, demand for its products will fall. As a result, demand for the country’s currency will fall
If a government raises its income tax rates and other countries do not, the country may lose some of its ___________________ and multinational companies may be discouraged from setting up in the country
If a government raises its income tax rates and other countries do not, the country may lose some of its skilled workers and multinational companies may be discouraged from setting up in the country
Current account deficit = ?
Import value more than export value of goods and services
The quicker the unemployed can return to work, the less __________ will be lost and the lower government spending on _______________ benefits will be.
The quicker the unemployed can return to work, the less output will be lost and the lower government spending on unemployment benefits will be.
To achieve increase in the economic growth rate , Govt may use ___________________ fiscal and/or _______________ monetary policy
To achieve increase in the economic growth rate , Govt may use expansionary fiscal and/or expansionary monetary policy
The relationship between the balance of payments and inflation
If a country’s inflation rate rises above that of its main competitors, its ____________ competitiveness will fall. Export revenue will decline while import expenditure rises and the current account balance will ______________.
If a country’s inflation rate rises above that of its main competitors, its price competitiveness will fall. Export revenue will decline while import expenditure rises and the current account balance will deteriorate.
A rise in the country’s interest rate above that of rival countries may attract an _______________ into the country’s banks.
A rise in the country’s interest rate above that of rival countries may attract an inflow of money into the country’s banks.
Fluctuations in the current account balance can result in changes in the ____________ rate.
Fluctuations in the current account balance can result in changes in the exchange rate.
If workers experience only short periods of unemployment, they may not lose much __________. They are also unlikely to miss out on much ______________ or technological developments and advances in working practices
If workers experience only short periods of unemployment, they may not lose much income. They are also unlikely to miss out on much training or technological developments and advances in working practices
Governments promote potential economic growth by using ____________ policy.
Governments promote potential economic growth by using supply-side policy.
The relationship between growth and inflation
Explain
A high rate of inflation is likely to reduce a country’s economic growth rate. This is because net exports are likely to fall.
A rise in actual economic growth may be accompanied by cost-push or demand-pull inflation
However, potential economic growth can reduce inflation. It enables aggregate demand to increase without pushing up the price level and it can reduce the costs of production. For instance, advances in technology can enable a higher output to be produced per factor input.
Governments take some money from the rich and use it to help those on low incomes either in the form of ________ benefits or in the form of the provision of ___________________ such as subsidized housing or free healthcare
Governments take some money from the rich and use it to help those on low incomes either in the form of cash benefits or in the form of the provision of goods and services such as subsidized housing or free healthcare
Changes in the exchange rate can create uncertainty. Such uncertainty can reduce _____________ and ___________________.
Changes in the exchange rate can create uncertainty. Such uncertainty can reduce investment and economic growth.
Both developed and developing countries are now becoming more concerned to achieve____________________
Cutting back on _____ emissions, reducing landfill, and dumping less _______ into rivers and the sea are all central to realizing improved sustainability.
Both developed and developing countries are now becoming more concerned to achieve sustainable development
Cutting back on CO2 emissions, reducing landfill and dumping less waste into rivers and the sea are all central to realizing improved sustainability.
The challenge of development […] is to improve the quality of life.
quality of life includes _____________, _______________, __________________ etc
better education, higher standards of health and nutrition, less poverty, a cleaner environment, more equality of opportunity, greater individual freedom and a rich cultural life.
The relationship between growth and the balance of payments
Economic growth may be export-led. This means it is largely the result of an increase in net exports. Higher net exports will cause a multiple increase in GDP. In this case, economic growth will be accompanied by an improvement in the current account of the balance of payments
However, there is the possibility of an inverse relationship, at least in the short run. Firms may purchase raw materials and capital goods from other countries in order to produce a higher output
Which situation would be most likely to increase a country’s output and employment?
A G + T + S < I + M + X
B G + X + S < I + M + T
C I + G + X > S + T + M
D I + S + M > G + X + T
C A country’s output will rise if injections exceed leakages, which they do in C. Higher output is likely to result in a rise in employment.
An economy experiences high cost-push inflation and an appreciation of its currency. What is most likely to occur as a result of this combination of changes?
A a decrease exports
B a decrease in the terms of trade
C an increase in employment
D an increase in investment
A High cost-push inflation will make the country’s products less price competitive. An appreciation of the currency will increase the price of exports and so make the country’s products even less price competitive. A rise in export prices will increase the country’s terms of trade. The likely reduction in demand for the country’s products will probably result in a rise in unemployment and a fall in employment. It is also likely to discourage investment.
A country experiences a significant fall in unemployment, a rise in its current account surplus and a fall in its inflation rate. What is most likely to explain this combination of changes?
A Aggregate demand increased by more than aggregate supply.
B Government tax revenue increased by more than government spending.
C Productivity increased by more than the average wage rate.
D The external value of money increased by more than the internal value fell.
C If productivity increased by more than the average wage rate, employers would have received a better return from employing workers. The country’s products could have become more internationally competitive and so could have increased export revenue and reduced import expenditure. Cost-push inflation could also have been reduced.
A could have caused demand-pull inflation and reduced a current account deficit. B could have increased cyclical unemployment. D would mean that the exchange rate would have appreciated, which could have caused a current account deficit.
A government decreases the top rate of income tax and reduces the subsidy it gives to bus companies. What effect is this combination of government policy tools likely to have?
A an increase in the amount of tax paid by those on low income and an increase in the use of private transport by the rich
B an increase in the cost of living for those on low income and an increase in the disposable income of the rich
C an increase in the mobility of those on low income and a decrease in work incentives for the rich
D an increase in the spending on food by those on low income and a decrease in saving by the rich
B Bus transport is used mainly by those on low incomes. A reduction in the subsidy paid by bus companies is likely to raise the fares. This will increase the cost of living of the poor. A decrease in the top rate of income tax will increase the disposable income of the rich. The cut in the top rate of income tax will reduce the proportion of income tax paid by the rich. The poor will pay a higher proportion of the total income tax paid but will pay the same actual amount. It is possible that a few rich people may use bus transport but the vast majority will already use private transport. More expensive bus transport may make it difficult for those on low incomes to switch to jobs located further from their homes. A reduction in the top rate of income tax will increase the work incentive for the rich. Having to spend more on bus transport will reduce the amount the poor can spend on food. Having more disposable income will enable the rich to save more
Which government policy tool is most likely to redistribute income from the rich to those on low income?
A a decrease in the national minimum wage
B a decrease in the pension the government pays each retired person
C an increase in housing benefit
D an increase in the rate of indirect tax
C Housing benefit is government assistance to help with the cost of housing. It is paid mostly to those on low incomes. A high rate of indirect tax does not directly affect income but it would fall more heavily on those on low incomes. A decrease in the national minimum wage would disadvantage the low paid. A decrease in state pensions would also disadvantage mainly those on low incomes as state pensions form a larger percentage of their income when they retire.