Glossary
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| Maastricht treaty | In December 1991 the leaders of the 12 EC countries met at Maastricht in the Netherlands to negotiate a treaty on the European Union. The treaty was finally signed in February 1992. The treaty moved significantly towards economic, political and social union and set out the detailed timetable for economic and monetary union (EMU). It also set out the convergence criteria for economies who wanted to join in EMU. | ||
| Marginal propensity to consume | The marginal propensity to consume (MPC) is the proportion of the last pound earned that is spent on consumption. For example, if a person earns £1 more and consumes 60p of it, then the MPC is 0.6. | ||
| Marginal rate of tax | The marginal rate of tax is the rate of tax paid on the next pound earned. In the case of income tax this will increase as a person moves from one band to the next. For more details on the UK income tax system, you may want to look at the explanation of the tax system. | ||
| Market for loanable funds | This market is the money market. It is where companies go to borrow the money for investment, and where consumers go to put their savings away. The equilibrium in this market depend on the supply of money (from savings) and the demand for money (from investment). Where they are equal will be the equilibrium rate of interest. | ||
| Merit goods | Merit goods are goods that would be under-provided in a pure free-market economy. This is because they have external benefits that people would not take into account when they made their decisions about how much to consume. An example is vaccinations. As a result of people being vaccinated we keep disease out of the country, but if it was left just to the market many people might choose to take the risk and not pay for vaccinations. This could have negative effects for society. | ||
| Monetary base control | The monetary base of the economy is usually taken as the stock of cash that an economy has. i.e. the level of notes and coins. The closest measure of the money supply that we have to this in the UK is M0. Some Monetarists argued that the level of the money supply in the economy could be controlled by strict control of the monetary base. By tightly limiting the level of notes and coins available, financial institutions would be unable to expand their assets too quickly. They would have to be sure they had enough cash to operate. This process is known as monetary base control. | ||
| Monetary policy | Monetary policies are ones that use the level of the money supply and interest rates to influence the level of economic activity. The government may want to use their monetary policy to either boost economic activity (if the economy is in a recession) or perhaps to reduce economic activity (if the economy is growing too fast, causing inflation). If they want to slow down the economy they may use contractionary (or deflationary) monetary policy. This is likely to mean:
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| Monetary Policy Committee | The Monetary Policy Committee is a committee of the Bank of England chaired by the Governor that meets monthly to set the level of interest rates in the economy. They set interest rates according to the targets they have been set for inflation. If they feel inflation is set to rise they may increase interest rates and vice-versa. | ||
| Multiplier | The multiplier was a concept developed by Keynes that said that any increase in injections into the economy (investment, government expenditure or exports) would lead to a proportionally bigger increase in National Income. This is because the extra spending would have knock-on effects creating in turn even greater spending. The size of the multiplier would depend on the level of leakages. | ||
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| National Debt | The National Debt is the total amount of borrowing accumulated by the government that is still outstanding. It is the total amount that the government owes to individuals and institutions. Each year the National Debt will rise by the amount of the PSNCR, and fall by the amount of debt that is paid off. | ||
| National expenditure | National expenditure is the total level of expenditure in an economy. It will also be equivalent to the total level of output and the total level of income in the economy. | ||
| Natural rate of unemployment | The natural rate of unemployment is the level of unemployment that still exists in the economy when the labour market is in equilibrium. This will usually be equivalent to the level of voluntary unemployment as at equilibrium everyone who wants a job has got one. Friedman argued that the only way to reduce the natural rate would be to use supply-side policies. | ||
| Negative externalities | See Externalities - negative | ||
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| Occupational immobility | Occupational immobility is a situation where resources do not freely move from one purpose to another. It is particularly a problem with labour as people often find it difficult to switch rapidly from one job to another. This is usually because their skills are very specific and they will need retraining to be able to switch to a different job. It may therefore be a cause of unemployment. | ||
| Open-market operations | Open-market operations refers to the buying and selling of government securities on the financial markets. If the government sells large amounts of gilt-edged securities, this will mean a transfer of funds from the private sector to the government. This will happen as people buy securities and so have to write cheques or transfer money to the Bank of England who sold them. This means that the banks have less in the way of liquid funds available, and so they are unable to expand their loans as quickly. Selling gilt-edged securities is therefore considered to be a contractionary monetary policy. | ||
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| Permanent-income hypothesis | This is a theory developed by Milton Friedman. He argued that whatever the fluctuations in earnings people would try to smooth out their consumption spending. In other words they would plan their consumption on a medium to long-term, basis. When earning less at an earlier stage of careers people may spend more than they earn (dis-saving), but at later stages they may begin to restore those savings. | ||
| Per-unit tax | A per-unit tax is a tax that is charged as a fixed amount on each unit of the good. Most excise duties are per-unit taxes and there are further details on them in the VAT explanation on the 2nd floor. | ||
| Phillips Curve | The Phillips Curve was a relationship between unemployment and inflation discovered by Professor A.W. Phillips. He found that there was a trade-off between unemployment and inflation, so that any attempt by governments to reduce unemployment was likely to lead to increased inflation. This relationship was seen by Keynesians as a justification of their policies. However, in the 1970s the curve began to break down as the economy suffered from unemployment and inflation rising together (stagflation). | ||
| Positive externalities | See Externalities - positive | ||
| Price elasticity of demand | The price elasticity of demand is a measure of the responsiveness of demand to a change in price. If demand changes by more than the price has changed, we describe the good as price-elastic. If the demand changes by less than the price has changed we describe it as price-inelastic. The formula for calculating the exact figure is:
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| Private costs | These are costs that are incurred to an individual or firm when they are carrying out the activities of consumption or production. They are the costs that those individuals or firms have to pay themselves. | ||
| Private benefits | These are benefits that an individual or firm receive when they are carrying from consumption or production. In the case of consumption the benefits are likely to be mainly satisfaction from consumption. For a firm, the benefits will be the revenue received from the sale of the good or service. | ||
| Profit margin | The profit margin is the profit as a percentage of turnover (or sales). It shows how profitable the firm is. The higher the margin the better. | ||
| Progressive tax | A progressive tax is a tax that takes an increasing proportion of income as income rises. Income tax is an example of a progressive tax, as the rate increases as a person earns more. | ||
| Public goods | Public goods are goods that would not be provided in a pure free-market system. This is because they are goods that display two particular characteristics:
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| Public Sector Net Cash Requirement (PSNCR) | This used to be called the Public Sector Borrowing Requirement (PSBR) and is the amount of money the government need to borrow to meet their spending plans. In other words it the amount that their spending exceeds their tax revenue by. | ||