Economy and Economic Policy: Market, Money, Public Finance, Labour Market
Domain 6 tests market mechanisms, money and banking, public finance and the labour market, usually through small quantitative or institutional problems.
Market
Demand slopes down, supply slopes up, equilibrium where they meet. Distinguish a shift of a curve from movement along it. Price elasticity of demand = % change in quantity / % change in price; demand for necessities is inelastic, so a tax on them falls mostly on consumers. Market failures: externalities (pollution), public goods (non-rival, non-excludable: defence), monopoly, information asymmetry. Remedies: taxes, regulation, competition policy.
Money and banking
Functions of money: medium of exchange, unit of account, store of value. The NBP issues the złoty and holds reserves; the RPP sets interest rates to meet the inflation target of 2.5% +/- 1 percentage point. Fiscal policy belongs to the Ministry of Finance. Commercial banks create deposits when they lend.
Public finance and business
Budget revenues (PIT, CIT, VAT at 23% standard, excise) versus expenditure. Deficit is the annual gap; debt is the accumulated stock. Business forms: sole proprietorship (unlimited liability), spółka cywilna, sp. z o.o. (limited liability, share capital), S.A. (shares). Labour market: frictional, structural and cyclical unemployment; minimum wage; activity, employment and unemployment rates have different denominators.
Worked example
A loan costs 7% nominal while inflation is 9%. Real rate is about 7 - 9 = -2%: the borrower gains purchasing power, the saver loses, and a 7% deposit is negative in real terms. If the RPP responds by raising rates, credit becomes dearer, demand cools and the złoty tends to appreciate.
Traps
- Deficit is a flow, debt a stock; a balanced budget can still raise debt.
- Lower inflation is not deflation; deflation is a fall in the price level.
- The unemployment rate uses the labour force, not the whole population, as denominator.