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economics unit 3 - Coggle Diagram
economics unit 3
3.5 - Fiscal Policy
purposes of government spending
- to supply goods and services that would be too costly for many people, e.g. healthcare
- to reduce poverty through welfare payments and benefits e.g. unemployment benefit
the sources of government revenue - government revenue is the amount of money the government receives from taxes and other sources such as privatisation and is used to finance government spending
direct taxes include: - income tax which is paid on all incomes including wages, pensions etc --- national insurance which is paid both by the employer and employee
indirect taxes include: value-added tax (VAT) is paid on most goods and services at either 20% standard rate, 5% reduced rate or 0% zero rate which depends on the product/service
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fiscal policy is a policy that aims to control the economy through the use of government revenue and spending
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a cost of fiscal policy is that consumers may save rather than spend their extra income so the economy doesn't grow as much as expected
a benefit of fiscal policy is that there would be reduced unemployment - government can cut taxes/increase spending. there is more demand for labour. consumers can spend more, so again more labour is demanded
a opportunity cost of fiscal policy is that if the government spend more on one area e.g. education, then it will spend less on another area e.g. healthcare
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3.2 - Low Unemployment
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the claimant count is a method of measuring unemployment using the number of people who claim benefits and this is a method that the UK government use to find the level of unemployment
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there are 4 types of unemployment that are cyclical unemployment, seasonal, frictional and structural
cyclical unemployment is workers without employment due to a fall in total demand for goods and services
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seasonal unemployment is workers without employment due to a decrease in demand at certain times of year
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Benefits of unemployment
easier to recruit - if there are more workers looking for employment it is easier for firms to find new workers and expand output
inflation - lower wages mean individuals can afford to buy less, so there is less demand for goods, resulting in lower general price level
Costs of unemployment
lower standard of living - individuals have less income, so can afford fewer goods and services that contribute to their wellbeing
3.1 - Economic Growth
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GDP is the value of output produced within a country in a year and GDP per capita is the GDP divided by population
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economic growth can be affected from lots of different things: size of workforce, natural resources, changes in technology, education and training, government policy, investment
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3.4 - Price Stability
price stability is when the general price level is fairly constant over time and inflation is when the general price level increases over time
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causes of inflation
too much demand: this is also known as demand-pull inflation and it happens when total demand rises faster than total supply in a country
rise in costs: this is also known as cost-push inflation and this is caused by a rise in costs of production which firms try to pass onto consumers to maintain profits
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3.6 - Monetary Policy
monetary policy is a policy that aims to control the total supply of money in the economy to try to achieve the government's economic objectives, in particular price stability
monetary policy affects economic objectives in different ways like how if interest rates are reduced, it increases spending, output and employment for the objective of economic growth
the effects of monetary policy on consumer spending, borrowing, saving and investment
effect of monetary policy on consumer spending for example, the effect on increase in spending - if the fall is large then spending will increase and savings fall but if small there may be little/no effect
effect of monetary policy on borrowing for example, the effect on consumption - evaluation - consumers borrow more to buy 'big ticket' items as interest payments are less
effect of monetary policy on saving for example the effect on a fall in price level - evaluation - if prices are falling then a cut in interest rates may not affect savings as people can consume more due to the price change
effect of monetary policy on investment - the two sources of investment are: loans (business confidence may counter the change in interest rates) and retained profits
monetary policy can affect price stability, employment, growth
monetary policy can affect price stability - for example, borrowing for investment by firms decreases - the cost to firms of borrowing or using their own money for investment rises so less spending on capital goods. once again demand falls
monetary policy can affect employment - for example, spending and borrowing by consumers increases - this leads to more demand for UK goods and services so more people are employed to provide these
how monetary policy can affect growth assuming that the rate of interest falls: an example is that spending and borrowing by consumers increases - borrowing is cheaper so disposable incomes. spending incurs a lower opportunity cost(less saving). rising consumption leads to more demand for goods and services and thus increase in total output
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