paper 3 example

2.

A) A direct tax is a tax on peoples incomes/ wealth/ firms profits whilst indirect taxes are taxes consumers pay on goods and services

B) on sheet

c) The tax is progressive because higher tax brackets pay higher taxes. This can be seen in both the tax brackets given and also the taxes payed by the people in different tax brackets. For example the middle income bracket pays 27.6% whilst the high income payes 39.8%

D. on sheet

F. Governments use a higher average rate of tax on individuals who have a higher income in order to redistribute income from richer to poorer ones. This is an attept by the government to try to redress the economic problem of an inequitable distribution of income

HL2 Bw012

HL2 Bw012

1.       Distingish between progressive, regressive and propotional taxation, provide examples of all.

Progressive- As income raises so do taxes within tax brackets. The United states does this as do most countries.

Regressive taxes- The proportion of income paid in tax falls as income rises. All Vat taxes are like this as people with higher income pay less of a proportion on their goods.

Proportional taxes- Constant for all income levels. Ros Perot ran in 92 and 96 on the platform of a flat tax.

2.       Demonstrate the effect of each type of taxation on the Lorenz curve

3.       Explain 2 methods other than direct taxes that governments can use as methods to resditribute income in favor of lower income groups.

Govs can use transfrer payment to redistribute income and provide assistance to groups who need it.

+Benefits

bellwork HL2 BW011

1.       The graph takes data about household income gathered in a rational survey and presents them graphically

2.       The Gini coefficient measures the inequality among values of a frequency distribution (for example levels of income). A Gini coefficient of zero expresses perfect equality where all values are the same (for example, where everyone has an exactly equal income). A Gini coefficient of one (100 on the percentile scale) expresses maximal inequality among values (for example where only one person has all the income).

3.        The limitations are that there is a false correlation between HDI

4.       Absolute poverty : Absolute poverty is a level of poverty as defined in terms of the minimal requirements necessary to afford minimal standards of food, clothing, health care and shelter.

Relative poverty: compared to the average person they are poor

Equity in the distribution of income

Introduction	Unequal distribution of income Inequality Many believe this is unfair as they live in a much lower living standard Reasons: born in to poor family Poor or no education Poor helathcare or malnutrition May hav had to work before they could finish their education Consequences: low living standards Lack of healthcare access Low level of education Cyclical High incomes act as an incentive to work hard Equity, things are more fair not equality where everyone makes the same as thaty would remove incentive to work
Lorenz curve and gini index	Lorenz curve: takes income data ajnd presents them graphicaly GNI- shows equity
Taxation	Government impose tanks in order to get money for gov. things
Direct	Taxes imposed on peoples incomes or wealth and firms profits
Indirect taxes	Taxes placed on goods and services
Progressive taxes	As income rises so do taxes Tax brackets Calc:
Regressive taxes	The proportion of income paid in tax falls as income rises
Proportional taxes	Constant for all income levels Simple
Transfer payments	Govs can use to redistribute income and provied assitence to groups who need it. Benefits
Gov expenditure to provide essentials	Provide or subsidize necesities. Positive externalities Healthcrare schools etc.
Evaluations	Many agree that govs should ensure a reasonable level of living Some say it interferes with the market force and results in innefeciencies Becuase 1, if firms have to pay social security costs to workes thus hiring fewer workers 2. disencourage entrepeurnal activity 3. negative effect on growth Many argue that the gov should not distribute income

HL3 BW 010

1.    An increase of GDP over time

2.       Real values are used because they take inflation into account providing mor accurate accounts of growth

3.       There might be AS in population and thus in order to have an accurate measurement

4.       1570dollar

1611 dollar

1587 dollar

a)      2.61 %

b)      -0.87 %

c)       They experience negative growth between 2008 and 2009

5.       Because population increased more than gdp

6.       1.47

upwards stamp

inflation

Section 18

A Low and Stable Rate of Inflation

Define Inflation

A persistent increase in the average price level of the economy, usually measured through the calculation of a consumer price index

Costs of Inflation (the reasons governments want to keep inflation low and stable)

Loss of Purchasing Power	Loss of purchasing power- if the inflation rate is higher than your rate of wage increase you will experience a loss of purchasing power -          People on fixed incomes or people without COLAS built into their contracts will suffer -          Also the role of expectations is important because wage contracts are agreed to in advance of inflation data
Effect on Savings	If the rate of inflation is higher than your interest rate you will experience negative savings. -          Inflation discourages savings though you can offset the effect on savings by purchasing assets whose value rises faster than inflation.
Effect on Interest Rates	Effect on interest rates- high rates of inflation cause banks to raise their nominal interest rates to avoid losing profits from lending money.
Effect on international competitiveness	A high rate of inflation causes a negative balance of trade -          Exports are less competitive and unemployment in export industries may result -          Imports from lower inflation trading partners become attractive
Uncertainty	Inflation causes reduced investment due to the fall in available loanable funds savings, higher interest and uncertainty in the marketplace, this negatively affects economic growth.
Labor Unrest	If labor does not feel their wages are keeping up with inflation it may cause disputes between unions and management

Define Deflation

A persistent fall in the average level of prices in the economy Good- results from the improvements in the supply side of the economy and/ or increased productivity Bad deflation- results from decreased aggregate demand. If output reduces it is assumed that the level of unemployment will wirse because firms will need fewer workers to produce less output

Good Deflation (improvements in the supply side of the economy)

 

                                       

Bad Deflation (source in demand side of the economy)

Disinflation

A slower rate of growth and inflation

Costs of deflation

Unemployment	When AD is low , business are likely to lay of workers and can lead to a deflationary spiral. -          If prices are falling consumers may delay purchases (deffered consumption), reduce AD and lead to lay offs. This in turn lowers consumers confidence and process repears
Effect of Investment	During deflation businesses make less profit or experience losses causing them to lay off workers and reduced investment
Costs to Debtors	Anyone who has taken a load suffers because the value of debt rises as a result of deflation

How is inflation measured? CPI/RPI

Choose rep. basket of consumer goods or services

Price of sample

Measure monthly by collectors from retailers

Catergorized and weighted

Issues (Limitations) involved in the measurement of inflation

Typical Market Basket	Basket not applicable for all people
Collection Errors	Errors in the collection of data
Market Basket Changes Affect comparisons over time	Differences counted by making changes in the market basket
International collection differences	Different countries measure inflation in different ways
Un-sustained price changes	Price may not change for a varety of reasons that cannot be sustained
Other Measures Value	Only measures changes in consumer prices

Causes of Inflation:

Demand-pull inflation

 

Cost-push inflation

 

Demand-pull and cost-push inflation together (Inflationary spiral)

 

Monetarist viewpoint (Inflation due to excess monetary growth)

 

Reducing Inflation (depends on type)

Reducing Demand-Pull Inflation

1.using deflationary fiscal policy:increase taxes or reduce gov. spending

2.deflationary monetary policy increase the prime interest rate, decrease the money supply

Problems with deflationary AD policies

1.raising taxes is unpopular

2.reducing gov spending impacts a variety of groups and may result in less support for the gov.

3.higher interest rates hurt home owners making mortgages more expensive

4.governemts worried about reelection will be reluctant to use these methods to reduce AD

Widely accepted (best) way to reduce demand-pull inflation:

Using monetary policy to lower AD carried out by central but def mon. pol. Increase I lower Ms

Why?

Central bansks not politically motivated

Reducing Cost-push inflation

Supply-side policies (market-based) [Why not interventionist?]

1.labour market reform

2.privatization

3.deregulation

4.increase competition

5.decrease corp taxes

6. decrease household taxes

Reducing inflation Monetarist Viewpoint:

The solution is to increase money supply at the same level of growth

Problems facing governments:

Trade-off between different policy objectives.

Inflation - unemployments

Difficulty in distinguishing the type of inflation.

Calculating Inflation

Non-weighted/equal weighting/weighting

Inflation Rate =

Inflation-unemployment trade-off debate

The Phillips Curve

Presented by New Zealander economist:

Based on a UK study of the economy from:

Stated:

Low unemployment → firms pay higher wages to attract labor

Unemployment high → workers compete to obtain jobs so wages relatively low

Showed inverse relationship between rate of change of wages and unemployment rate. The rate of change of wages could actually become negative in times of high unemployment.

Original Phillips Curve

 

Concept expanded by other economist to correlate it with inflation rate and unemployment rate using data from other countries.

Phillips Curve

 

Phillips Curve using AD/AS analysis

 

Long-run Phillips Curve

Economic growth

Economic growth

Economic Growth Using graphs to show economic growth	Third goal is economic growth An increase of GDP over time Different countries go through different levels of economic growth Demand side factors may be used to bring short term growth http://dineshbakshi.com/images/stories/economics_diagrams/deflationary-gap.jpg http://dineshbakshi.com/images/stories/economics_diagrams/output-gap.jpg resources are not being used to the fullest extent possible economic growth is achieved when AD1 shifts right ant a moves to B http://dineshbakshi.com/images/stories/economics_diagrams/economic-growth-ppc.jpg long term as an increase of ouptut or potential output a shift in the LRASE leading to shift in PPC
Consequences of economic growth Positive consequences	Brings benefits but also negatives Aggregate demand tends to increase as pop and incomes grow This leads to inflation However when economic growth accurs pushing out the aggregate supply curve economies can experience non-inflationary growth Income of the average person will increase and this may be equated with a higher standard of living.- material living standard have improved Not only been achieved but led to increases in technology Lead to higher living standards lead to higher tax revenues more money to spend on public goods, merit goods and reduce income inequalities increase trade with other counties and has a very positive impact on living standards There is an increase in education and human capital
Negative consequences	Some argue that an increase in growth does not necessarly mean an increase in happiness Sacrifice leisure time, neglect personal relationships Greater material wants make us more and more unahppy Structual unemployment occurs as sectors shift Enviromental destruction, more waste, Wealthier citizens can demand policies that promote sustainabily
Summary	Deflationary gaps may be the result of a fall in economic growth and may be solved using demand management policies. supply side policies effect the business cycle and generate long term growth. Growth rate= (real gdp in year 2- real gdp in year 2)/real gdp in year 1)=100

HL2 BW 0007

1.       Outline/ expain the typical role and responsibilities of a central bank

Sets interest, sell bonds, makes inflationaru expectaitions and ensture I stays within that range

2.       Explain why core inflation is important to monitor

The core inflation, influence after excluding goof food and energy prices/ relatively elastic and volatile, gives a more reliable value for inflation as the commodities are the most volatile aspect of it. 

STAMPED UPWARDS!

Inflation hmw

7.

1) False

because if lower interest rates, you're increasing investment, which increases AD and through an increase in C and I whih causes inflation

*loans

3) true. if expect inflation, negotiate for higher wages which increases the cost of production

2) True because inflation decreases the value of loand

4) False. If from keynsian perspective, shift in AD does not result in a change in price level

5) True. CPU us better bc more widely accepted

6) True. inflation causes a decreases in the value for money

7) true bc low prices appeal to foreigners

8. True bc its a leftward shift of AS which causes the Philips curve to shift right

9) false bc money allusion only occurs in the longrun

10) govt. credibility is a key influence on inflation rates

10.

a.

Year	Price of book	Price of an mp3 downlaod	Price of a burger
2009	6.50	0.99	2.50
2010	6.60	1.05	2.55
2011	6.40	1	2.40

year	P1q1+p2q2+p3q3	Cost of basket
2009	6.5x5+0.99x12+2.50x20	94.38
2010	6.6x5+1.05x12+2.55x20	96.6
2011	6.4x5+1.00x12+2.40x20	92

year	formula	Price index
2009	94.38/94.38	100
2010	96.6/94.38	102.35
2011	92/94.38	97.47

Year	Inflation rate
2010	-
2011	(102.35-100)/100x100{2.35%
2012	(97.47-102.35)/100x100{-4.88