A Level Transmission Mechanisms

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A Level Transmission Mechanisms
2012-05-05 11:22:59

For AS level things
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  1. Economic growth leads to lower unemployment
    Growth > Rising income per capita > greater spending into the economy > AD for goods and services increase > more man power needed so lower unemployment
  2. Economic growth leads to higher inflation
    Growth > increases in wages/bonuses > Greater spending into the economy > increase in AD > Price level increases > demand pull inflation
  3. Economic growth leads to the worsening of current account deficit
    Growth > Increase in wages/bonuses > UK people have high marginal propensity to import > rise in import and assume exports unchanged > worsening of the current account deficit
  4. Economic growth leads to income inequality
    Growth > Wages for low/middle class earners will usually increase but at a slower rate > probably worse off after adjustment for inflation, student loan repayments, income tax and NICs (National Insurance Contributions) > rich people may be subjected to higher income tax but there are other non-income gains that are taxed at much lower rate e.g. capital gain and share dividends > widening income inequality
  5. Growth leads to deterioration of environment
    Growth > Increase in wages > greater AD for goods and services > more lands cleared to give way for residential homes, business parks and factories/more cars on the road > deforestation and rise in global warming
  6. Lower unemployment leads higher growth
    Low unemployment > more spending in the economy > AD for goods and services will increase > Higher real output > growth
  7. Lower unemployment leads to higher inflation
    Low joblessness > greater spending into the economy > AD shifts right > Price level increases > Demand pull inflation
  8. Lower unemployment leads to worsening of current account defecit
    Low joblessness > Unemployed people now have income to spend > UK people have high marginal propensity to import > Rise in imports and assuming exports unchanged > Current account deficit widens
  9. Lower unemployment leads to deteriorating enemployment
    Fewer jobless people > greater spending into the economy > more lands to be cleared to construct houses, leisure areas and factories/more cars and busses on the roads > deforestation and emission of CO2
  10. Lower unemployment reduces income inequality
    Fewer unemployed people > Jobless people now have income and assume that their income is more than their previous benefits and UK government implements progressive taxation > narrowing the gap between the rich and poor.
  11. High inflation leads to lower growth
    Supposed that the inflation creeps beyond the targeted level of CPI 2% > Bank of England may consider an increase in base rate > borrowing cost will increase > lower consumption and investment > fall in AD > Lower growth.
  12. High inflation leads to increased unemployment
    Increase in inflation > falling real income > limiting spending ability of households > AD for goods and services will fall > fewer workers needed
  13. High inflation leads to the worsening of current account defecit
    Increase in production costs > Less competitive pricing > export prices increase and assuming import prices unchanged > fall in demand for British manufactured goods > widening current account defecit
  14. High inflation leads to widening income inequality
    Rise in price level > Income stay same/increases slower than the rate of inflation > real income falls > consumers/households are priced out > every pound purchases lesser goods and services.
  15. High inflation leads to less deterioiration of environment
    Increase in price level > Falling real income > limiting the ability of households to spend elsewhere > fall in AD for goods and services > factorise operate shorter hours and economic activities come to a slowdown > less severe congestion, deforestation and flights > improve conditions of the environment.