Economic Terms

Is when the collapse of bank can create bank runs on other healthy banks depsite those banks not appearing to have any liquidity/solvency problems. This is caused due to the asymmetrical infromation which prevents depositors to be able to forensically analyse a bank's balance sheet and assess the risks that this bank has taken on. Therefore they determine the riskiness of their bank by looking at close substitute banks.

A contestable market is a type of market structure in which firms can enter and exit freely and costlessly, therefore making the incumbent firms vulnerable from hit-and-run entry. Due to the freedom of entry and exit there must be an insignificant level of sunk costs attached to competing in these types of market.

Below is a graphic to illustrate the main characteristics of a contestable market. For instance the firms that wish to engage in hit-and-run entry need to be classed as profit maximisers, otherwise the incentive to undercut the incumbent firms will not exist. Firms also need to have perfect information to be able to undertake successful hit-and-run entry. Finally the key factor is that firms need to be able to enter absolutely freely and exit absolutely costlessly.

 

Changes in taxation or expenditure in order to reduce demand in an economy

Below is a graph to breakdown the economic effects of a government running a contractionary fiscal policy in an AD/AS framework. This can be achieved through raising taxes, decreasing government expenditure or possibly both from the classical viewpoint. The immediate impact is that the AD curve shifts inwards creating a decelerating inflation rate.

It it important to note that the impact on economic growth depends on which sectors of the economy the fiscal policy was targeted. As a cut in spending towards productive sectors of the economy could cause the LRAS curve to inwardly shift. This is a key evaluation point to mention when dealing with fiscal policy.

A legal measure that can be used to protect most forms of written work as it either deters third parties from using and benefiting from its use or provides a legal remedy for recovering compensation from its unauthorised use.

A corporate bond is a bond issued by a firm in order to raise financing for a variety of reasons such as to finance business expansion or to finance a takeover deal. These bonds usually relate to longer-term debt instruments and therefoe have a maturity of at least a year.

Below is a flowchart to illustrate the process and details behind the issuing of bonds.

Corporation Tax is a tax on the taxable profits of limited companies and other organisations including clubs, societies, associations and other unincorporated bodies. The rate of tax is 20% rising to 23% for high levels of profits.

An increase in the price level due to an increase in production costs e.g. taxes, wages, utility or component prices. The cost increase will cause a negative shift in the SRAS curve. This causes prices to rise as costs push the supply curve up the aggregate demand curve.

Below is a diagram to show the impact of production costs rising over time, leading to a period of stagflation for the economy (inflation and negative growth). Generally it is any increase in factor of production cost that instigates the inward SRAS curve shift (increase in wages or higher prices for commodities such as oil). But there are also outside influences that could create this curve shift as well e.g. external inflation and higher taxes.

The factors that would create this type of inflationary pressure are:

• Increases in labour costs
• Increases in price of raw materials/commodities
• Increases in the cost of imports (weaker currency)
• Increases in the cost of capital

Because this type of inflation is brought about by production cost changes and not a stimulation in economic activity, it is perceived as the worst form of inflation an economy can experience when compared to consumption driven or investment driven inflation (demand pull inflation). This is because unlike with demand pull inflation, there is no opportunity for the LRAS curve to expand in the long-run to create disinflationary growth and return the economy back to full employment.

Cost push inflation can also lead to more severe changes in the price level if it is part of an inflationary spiral as shown below. This is created originally because of an increase in production costs moving the economy below the full employment and moving the economy to point B, as before. However, the rising costs of production can boost the disposable incomes of the owners of the factors of production (particularly if brought about by higher wages) which can result in an increase in spending and economic activity assuming ceteris paribus (depending on the marginal propensity to consume and save). This causes the AD curve to expand and moves the economy back to the full employment output level at point C. Crucially though, this leads to further inflationary pressures as the price level has now increased to P₃. The spiral can then continue because if prices in the economy are increasing quickly, workers will bargain for higher wages to ensure in real terms they are made no worse off. This further increase in production costs for firms forces the SRAS curve inwards once again and a new macroeconomic equilibrium is settled at point D, stoking inflationary pressures even higher (P₄). This process can continue and introduce crippling high inflation rates for a country.

 

An evaluation point to mention here is that if this type of inflation is sustained for a long period of time then it could damage the long term growth prospects of a country and in the process erode living standards.

Amounts of money spent on factors of production to produce goods and services.

A tax imposed by councils to cover the cost of local services. The amount of tax levied depends on the relative value of the property occupied.

A periodic payment that the bondholder receives during the time between when the bond is issued and when it matures. An example of this is the fixed annual payments made by the Government to the holders of Gilt Edged Securities.