7.5

Question 1

Imports definition?

Answer 1

Goods or services brought in from another country

Question 2

Exports definition?

Answer 2

Selling goods or services to another country

Question 3

Exchange rates definition?

Answer 3

Price of currency in terms of another

Question 4

What is the acronym SPICED and who are happy in a SPICED example?

Answer 4

Strong
Pound
Imports
Cheaper
Exports
Dearer

Importers from the UK happy, exporters from foreign country happy.

Question 5

What is the acronym WPIDEC and who are happy in a WPIDEC example?

Answer 5

Weaker
Pound
Imports
Dearer
Exports
Cheaper

Exporters from UK happy and importers rom foreign country happy

Question 6

Would exchange rate changing impact PED elastic or inelastic more?

Answer 6

SPICED
- (Big impact) elastic = lower price = higher demand (THEREFORE BETTER IN THIS SCENARIO)
- (Smaller impact) inelastic = lower price = higher demand
WPIDEC
- (Big impact) elastic = higher price = lower demand
- (Smaller impact) inelastic = higher price = lower demand (THEREFORE BETTER IN THIS SCENARIO)

Question 7

Inflation definition?

Answer 7

A sustained increase in the cost of living or the general price level leading to a fall in the purchasing power of money

Question 8

How is the rate of inflation measure?

Answer 8

Measured by the annual % change in consumer price

Question 9

Normal income definition?

Answer 9

the total amount of money a person or entity earns in a given period, before adjusting for inflation or changes in purchasing power

Question 10

Real income definition?

Answer 10

An individuals income adjusting for inflation, indicating its purchasing power rather than just the monetary value

Question 11

Problems of inflation?

Answer 11

• price increase therefore people may buy fewer goods, the economy may suffer
• people need to keep asking for pay increases to match price rises. Can cause financial trouble for firms, leads to wage-cost spiral
• costs to businesses may increase, may cut back on production

Question 12

Demand pull inflation definition?

Answer 12

Occurs when there has been an increase in the level of demand in an economy
An increase in demand will lead to an increase in prices
Happens when there’s an increase in demand, where it outpaces the economy’s ability to supply these demands.

Question 13

Cost push inflation definition?

Answer 13

Happens when firms face increased costs due to rising wages or increasing costs of raw materials and components

Question 14

Negative effects of inflation on businesses?

Answer 14

• increased costs
• higher prices - lower sales - for price elastic products
• consumer reaction - people spending less due to not knowing what is happening in the economy
• workers become more conscious of their wages

Question 15

Positive effects of inflation on business?

Answer 15

• property and stocks are worth more - so balance sheets looks healthier
• easier to increase prices - if prices are rising generally
• encourages borrowing - if interest rates are less than the rate of inflation

Question 16

What are the 4 key parts of circular flow model?

Answer 16

• Household = own factors of production (land,labor,capital,enterprise), sell them to firms, they receive income, use it, purchase goods & services from firms
• Firms = produce goods & services by hiring factors of production from households, sell goods to households and gov, generate revenue & profit
• The Gov = collects taxes from both households & firms, uses this revenue, provide public services + purchase goods & services from economy
• Foreign sector = part of economy, deals with international trade. Exports represent money coming into country sales of goods & services abroad, imports represent money leaving country to purchase goods & services from abroad

Question 17

Definition of GDP

Answer 17

Gross Domestic Product
The value of goods & services produced by an economy over a specific period

Question 18

Recession definition?

Answer 18

a significant decline in economic activity that lasts for more than a few months, generally characterized by falling real GDP, lower employment, and reduced industrial production and sales

Question 19

Characteristics of economic environment of a boom?

Answer 19

• high confidence
• high level of demand = higher prices (inflation)
• high capacity utilisation
• low unemployment
• increased wages

Question 20

Possible response from gov/bank of England during a boom?

Answer 20

• increase taxes and interest rates to dampen demand and slow price rises
• reduce government spending

Question 21

Characteristics of the economic environment during a recession?

Answer 21

• demand falls
• business confidence falls
• firms reduce investment
• firms reduce levels of output
• unemployment rises

Question 22

Possible response from gov/bank of England during recession?

Answer 22

• reduce taxes and interest rates to stimulate demand
• increase government spending to stimulate demand

Question 23

Recession strategies from business?

Answer 23

1. Cost Management and Efficiency
   Reduce non-essential expenses: Cut back on discretionary spending like travel, marketing (focus on ROI-driven campaigns), and office perks.
   Optimize operations: Streamline processes to improve productivity and reduce waste.
   Negotiate with suppliers: Seek better terms or discounts to lower input costs.
2. Focus on Core Competencies
   Concentrate resources on the most profitable products or services.
   Pause or discontinue underperforming lines to free up capital and attention.
   Concentrating on what the business does best allows for more effective use of time, money, and talent

Question 24

Characteristics of the economic environment during an economic slump?

Answer 24

• low demand
• low business confidence
• low levels of production
• high unemployment
• very little investment

Question 25

Possible response from gov/bank of England during an economic slump?

Answer 25

- reduce taxes and interest rates to stimulate demand - increase government spending to stimulate demand

Question 26

Characteristics of the economic environment during an economic recovery?

Answer 26

- rising demand and sales - cautious but increasing business confidence - unemployment begins to fall - investment opportunities are considered - production begins to increase

Question 27

Monetary policy:

Answer 27

- set by the monetary policy committee (MPC) of the Bank of England - actions taken by a country's central bank to influence the economy by managing the money supply and credit conditions, primarily through tools like interest rates and quantitative easing

Question 28

Expansionary / loose monetary policy:

Answer 28

↓interest rates→↑borrowing cost(business)→↑money supply→↑AD → ↑GDP → ↑economic growth ↳↓savings(consumer)→↑money supply→↑AD → ↑GDP → ↑economic growth

Question 29

Contractionary / tight monetary policy:

Answer 29

↑interest rates→↓borrowing cost→↓money supply→↓AD →↓GDP →↓demand-pull inflation ↳↓savings→↓money supply→↓AD →↓GDP →↓demand-pull inflation

Question 30

Quantitative easing (QE):

Answer 30

- a monetary policy tool where a central bank buys financial assets, like government bonds, from commercial banks and other institutions to inject money into the economy - Consumer spending↑/ business investment↑→↑AD →↑GDP →↑economic growth

Question 31

Limitations of monetary policy:

Answer 31

- difficult to control many objectives with one tool - interest rates, for example, rise in oil prices causes cost-push inflation and lower growth - Potential to Cause Inflation or Deflation If used improperly, monetary policy can cause inflation to rise too quickly or lead to deflation. For example, keeping interest rates too low for too long can overheat the economy - increases demand-pull inflation

Question 32

Fiscal policies:

Answer 32

- the use of government spending and taxation to influence the economy, particularly to affect aggregate demand, economic growth, and employment

Question 33

Budget:

Answer 33

- budget surplus (got too much) = tax > gov. Spending to↑ budget of government - budget deficit (got not enough) = gov. Spending > tax to↓budget of government

Question 34

Government want to achieve:

Answer 34

- decrease inflation - or keep it low - increase GDP - value of out

Question 35

Expansionary fiscal policy:

Answer 35

-↑gov spending →↑AD → ↑GDP → ↑economic growth -↓tax →↑disposable income(consumers)/↑profit(businesses)→↑AD → ↑GDP → ↑economic growth

Question 36

Counter argument for expansionary fiscal policy:

Answer 36

Increase AD = increase demand-pull inflation

Question 37

Contractionary fiscal policy:

Answer 37

- ↓gov spending→↓AD→↓demand-pull inflation - ↑tax →↓disposable income(consumers)/ ↓profit(businesses)→↓AD → ↓demand-pull inflation

Question 38

Counter argument for Contractionary fiscal policy:

Answer 38

decrease AD = decrease GDP = decrease economic growth

Question 39

What are two types of taxation:

Answer 39

- direct tax are taxes on earnings and profits, for example: income tax, national insurance, corporate tax, capital gains tax - indirect tax are taxes on expenditure, for example: VAT and specific duties such as excise duties on tobacco & alcohol

Question 40

Limitations of fiscal policies:

Answer 40

- Imperfect information: Governments may not have complete or accurate information about the current state of the economy, leading to inefficient policy decisions. for example, increasing aggregate demand (AD) when the economy is already growing rapidly can cause inflation. - can increase demand-pull inflation or decrease economic growth