This document includes everything you need for Theme 4 Macro (Year 2), I used this document for my A-Levels last year, and it really helped.
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econ 2022
- Stagflation effect on economy would have a regressive effect on low-income
families
- Can also have increased cost for firms so unemployment
- There will be falling living standards
- There will be falling real incomes
- There will be lack of consumer confidence
- Low animal spirits so lower investment
- Short term economic costs from a period of recession:
- A deflationary spiral - a downward price reaction to an economic crisis leading to
lower production, lower wages, lower demand, lower prices
- Increased cyclical budget deficit
- Businesses collapsing as low consumer demand
- Fall in real incomes
- Lost output - the economy will move further away from their PPF boundary
- Falling incomes and employment can cause a drop in real per capita incomes
- Long term economic costs from a period of recession:
- Structural unemployment
- Hysteresis effect from long-term unemployment
- Higher government structural deficits in the LR
- Economic scarring - refers to medium-long-term damage done to the
economies of one or more countries following a severe economic shock which
then leads to a recession
- Risks from economic scarring - rise in long-term unemployment and economic
inactivity in the labour market
,Highlighted is being tested on
econ 2022
- For the above, this is the case because the private sector is spending less, so
there is a role for the government or central bank to stabilise output and jobs
- Evaluation : which policies are most effective in helping stabilising the economy
- Think in context for country
- Stimulus policies introduced in UK during pandemic:
- Eat out to help out
- Furlough
- CBILS - coronavirus business interruption loan scheme
- Reduced taxation
- Bank of England cut interest rate to 0.1% and expanded QE by £460 billion
- Job retention scheme - offered an 80% wage subsidy on pay up to £2500/month
(use this instead of furlough)
- Reasons why some countries experience greater cyclical volatility than others:
- Different development levels
- No automatic stabilisers
- Primary product dependency - increases exposure to variance in world prices
- High trade-to-GDP ratio - makes a country vulnerable to business cycle of trade
partners
- These countries used negative interest rates as part of their monetary policy in
recent years : Japan, Denmark and Switzerland
- These countries do not operate with a managed floating ER as part of their
monetary policy : UK (instead operates with a free floating ER)
- If a country is operating with a managed floating ER then central bank interest
rates might be used to bring about a currency depreciation or appreciation
- These countries have interest rates higher than 10% : Argentina, Turkey, Brazil
- Expansionary monetary policy : central bank moves to negative interest rates /
central bank intervenes to cause a currency depreciation / central bank allows
commercial banks to hold lower cash reserves
,Highlighted is being tested on
econ 2022
- Arguments for BofE for raising interest rates:
- Prevent demand pull inflation
- Reduces inflationary pressure with inflation at 9%
- To reduce consumption
- Improve returns for savers who are being hit hard by high rates of inflation
- Arguments against BofE for raising interest rates:
- More hot money leading to higher ER, worsen balance of payments, less
spending in economy, higher unemployment, which is derived demand so
less investment
- Leads to appreciation of ER, lower international competitiveness, decreasing real
GDP
- External factors that increase the rate of inflation in the UK economy:
- Rise in commodity prices
- Supply side shocks
- Ukraine
- IN A MODERN ECONOMY, LIKE THE UK, EXTERNAL FACTORS OFTEN
HAVE MORE IMPACT ON INFLATION THAN DOMESTIC FACTORS
- Most of BoE doesn't have under control
- Volatility in market ER - a depreciation increases import prices
, Highlighted is being tested on
econ 2022
- Advantages of increasing QE for an economy:
- Increases lending in the economy which boosts consumption
- Increased money supply for investment
- Helps to overcome the liquidity trap
- Risks of increasing QE for an economy:
4.1 - international economics
1. Globalisation
- Refers to increased integration of different economies
- Has 5 characteristics
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