Economic Terms

Is a statistical technique that allows the emphasis given to different data items to be varied e.g. the goods and services covered by the CPI are weighted to reflect the expenditure of a typical household.

Benefits paid by a government to help ensure everyone receives a mimimum standard of living.

When banks provide services to firms and other banks.

A sudden and one off tax that a Government might impose on the profits of suppliers if they are manipulating a market to increase profits at the expense of consumers. The purpose of this type of tax is to curb uncompetitive behaviour.

Actions that reduce the value circulating in the circular flow. This falls into 3 categories - taxes collected by government, money set aside as savings and any money spent on imported goods and services.

Resources that have entered the production system and are available to be converted into goods and services e.g. components and semi-finished items.

Created when there is a lack of competition in a market so firms average costs are higher than they would be with competition. The lack of incentive to control costs causes the average cost of production to be higher than necessary and as a result will be technically inefficient too.

Below is a diagram of a firm's AC curve to show that when organisational slack leads to a sudden rise in a firm's costs this causes them to move off the existing AC curve to a point that is higher. This does not correspond to an AC curve shift because fundamentally nothing has change to their average costs its just poor managemnt has caused the firm to lie somewhere above this curve.

Is a macroeconomic term used to describe the problem that central banks face in trying to stimulate the economy through a conventional monetary policy when interest rates are already at or close to zero. 

The central bank of a country is responsible for keeping the inflation rate within their target (e.g. UK Consumer Price Index Target = 2%) to ensure macroeconomic and financial stability across the economy. The conventional way the central bank can do this is through changes in interest rates (bank rate). This is because interest rates affect the return economic agents get on their savings and the interest that banks can charge when lending out cash to borrowers. 

For instance, if the central bank wishes to use interest rates to stimulate the economy, in order for the economy to move back to the full employment level, then interest rates are cut. Assuming ceteris paribus, this creates less incentive for consumers to save and in the process encourages consumption. The increase in consumption fuels higher demand for goods and services and real output rises. It also helps increase real output through an investment channel - firms now find it cheaper to borrow when acquiring loans to finance productive and profitable investment projects. The increase in investment increases demand and real output even further.

The combination of channels fuels higher real output which introduces inflationary pressures into the economy. This should theoretically move the economy back to the full employment level at point B, as shown below:

This is an example of the type of monetary policy that was used in the aftermath of the 2008 financial crisis in the UK, when interest rates dramatically dropped to 0.5% in 2009. This resulted in a upturn in UK economic growth. However, this may have created the perfect economic conditions for economic growth to recover to some degree, but has put the Bank of England in a difficult position regarding the conduct of future monetary policies. 

This is because when interest rates drop to in and around 0%, the ability of the central bank to stimulate the economy through a conventional monetary policy becomes restricted. This is because there is not much margin for interest rates to fall any further before becoming negative, which is often a policy decision that central banks aim to stay away from. This is because negative interest rates:

• Encourages consumers to hold onto cash balances - consumers now have to pay the bank that they are depositing their funds with. This means from their perspective, they are essentially paying commercial banks a sum to provide the banks with funds that they can make profit out of. Consumers will have the incentive to hold onto cash at no cost.
• Encourages banks to keep hold of cash reserves - under the negative rates, banks now have to effectively pay the lenders when they lend a fixed amount of money to them. They will have a incentive to hold onto cash reserves as no cost associated with this. 

These two effects combined means that once interest rates approach zero, the central bank can no longer use the base rate to control the economy in the conventional way. This is known as the 'Zero Lower Bound Problem'.

This is a key evaluation point to mention if tackling an exam question on the impact of monetary policies on the macroeconomic performance of the economy, particularly if you are making reference to the effectiveness of such policies i.e. if interest are close to zero the central bank may have to turn to alternative monetary policy instruments such as Quantitative Easing. 

Is a financial institution that has an economic net worth less than zero but continues to operate because its ability to repay its debts is shored up by implicit or explicit government credit support. As the net worth of a bank is defined as the value of a bank's assets minus the value of a bank's liabilites. These types of bank's that are kept as an ongoing regulatory concern must have a negative net worth so effectively are banks that should be 'dead' in terms of solvency but are kept running by the regulators.