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Economics - Macro > 2:5:1 Macroeconomic Objectives And Policies > Flashcards

2:5:1 Macroeconomic Objectives And Policies Flashcards

1
Q

Define Interest Rates.

A

Is the cost of borrowing and the reward for saving

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2
Q

What are the benefits of Quantitative Easing?

A
  • Creates Fiscal Expansion, not austerity (during a recession it promotes growth rather than trying to reduce the nationals debt)
  • Inflation has not been a macroeconomic problem since 2008
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3
Q

What happens to house prices as Interest rates Rise?

A

House prices fall because mortgages become less affordable which causes a negative wealth effect.

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4
Q

Quantitative Easing is a form of….

A

Expansionary Monetary Policy

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5
Q

How will a rise in interest rates affect those looking to Hire Purchase?

A

The monthly repayment instalments will becomes more expensive, which means that consumer may delay future major expenditure

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6
Q

What is a Bank Balance?

A

the amount of money held in a bank account

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7
Q

What is Balance Sheet?

A

Is a snapshot of a Businesses Assets and Liabilities on a particular day.

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8
Q

Who carriers out Fiscal Policy?

A

The government

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9
Q

What is meant by creating money Electronically?

A

involves making its bank balance bigger (the amount of money in its bank account)

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10
Q

If Monetary Policy is Expansionary (cut in interest rates or increased amounts of QE) then what what happens to AD?

A

AD shifts to the Right

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11
Q

What is the inflation target?

A

2% (1% either side)

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12
Q

What is meant by the term Spare Capacity?

A

measures the extent to which an industry, or economy is operating below the maximum sustainable level of production

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13
Q

What is meant by the term fiscal policy?

A

involves the use of government spending, taxation to affect the level and growth of aggregate demand in the economy

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14
Q

How can Fiscal Policy boost Aggregate Demand?

A
  • Cutting Tax

- Boosting Government Spending

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15
Q

Does the government decide the level of interest?

A

No

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16
Q

Evaluative points for the Monetary Policy.

A
  • In a Liquidity trap, Lower Interest Rates May not increase spending because people are trying to pay back debts
  • Cutting Interest Rates very low could distort future economic activity (can cause bubbles which destabilise economy growth)
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17
Q

What are the two demand-side policies?

A

– Monetary policy

– fiscal policy

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18
Q

How can Monetary Policy boost Aggregate Demand?

A

By cutting Interest Rates

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19
Q

What is meant by tight fiscal policy?

A
  • Decreasing AD
  • Government will cut Government Spending (G) and/or increase taxes
  • Higher taxes reduces consumer spending
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20
Q

Evaluative points for expansionary fiscal policy.

A

worsen the government budget deficit, and the government will need to increase borrowing.

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21
Q

What is the aim of Demand Side Policies?

A

Increase Aggregate Demand

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22
Q

Do Consumers save more when interest rates are high?

A

Yes

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23
Q

What is meant by a Negative Wealth Affect?

A

Where lower asset prices mean that people feel less inclined to spend.

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24
Q

How will a rise in interest rates affect those with a Variable Mortgage?

A
  • People’s mortgage payments rose and they will be discouraged from spending
  • People in Fixed mortgages will not experience this immediately
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25
Q

Evaluative points for Monetary Policy.

A
  • Raises the cost of production and causes inflation
  • Takes 18 months to 2 years for interest rates to have their full impact (further delays because many mortgage holders have fixed rate policies, which delays the impact of their spending for some years)
  • Monetary Policy hits the whole economy big and small businesses.
  • Rising Interest Rates usually worsens income distribution
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26
Q

Evaluative points for fiscal policy.

A

– It depends on the size of the Multiplier

- Depends on the state of the economy (works best in deep recession, Liquidity trap,

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27
Q

Which is more effective Monetary or Fiscal Policy?

A
  • Monetary Policy is set by the Bank of England and therefore reduced political influence
  • Monetary Policy is quicker to implement.
  • Monetary Policy is inefficient during a Liquidity trap
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28
Q

When is Quantitative Easing used?

A

In a Liquidity trap

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29
Q

What is meant by the term monetary transmissions mechanisms?

A

Changing the rate of interest set off a chain reaction is in the economy which means that aggregate demand will shift

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30
Q

What happens to the Cost of Borrowing when interest rates are raised?

A

Cost of Borrowing Rises

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31
Q

In Monetary Policy, how do Lower Interest Rates boost Aggregate Demand?

A
  • Reduce the cost of borrowing
  • Encouraging investment and consumer spending
  • Reduces the incentive to save, making spending look more attractive instead
  • Lower mortgage interest payments increasing disposable incomes for consumers
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32
Q

What is meant by the term budget (or fiscal) deficit?

A

If government spending is greater than taxation

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33
Q

Drawbacks of Using Quantitative Easing.

A
  • Greater inflow of money to the banks has caused them to take greater risks
  • Causes Inflation
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34
Q

What are Government bonds?

A

where you loan money to a government in return for an agreed rate of interest.

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35
Q

What is meant by the term Indirect Tax?

A

Tax on spending (eg. VAT)

36
Q

What will Firms do as a result of rising interest rates?

A

Invest less as they will find that investment looks less attractive, fewer investments will make a higher return than the increased cost of borrowing.

37
Q

What is meant by expansionary fiscal policy?

A

– Cutting tax
– raising government spending

Or both

38
Q

What will happen if Demand Side Policies are used in an economy which is already close to full capacity?

A

It will mainly cause inflation

39
Q

What is meant by the term monetary policy?

A

Using monetary instruments such as the interest rate and quantitive easing to influence the levels of spending and Aggregate Demand

40
Q

How will Exports be affected by a rise in interest rates?

A
  • Level of Exports might fall
  • Because cost of making them increases because interest rates are essentially a cost of production
  • Imports will then rise
41
Q

What is the effect of higher interest rates on Savings?

A

1 - Increased Return on Savings
2 - Reduced Consumption & Fall In house prices
3 - Lower Economic Growth & Lower Inflation

42
Q

What is the net effect of a Budget (or fiscal) deficit?

A

Pumps spending power into the economy

Multiplier magnifies the effect of this boost

43
Q

What factor causes Quantitative Easing to not achieve its full potential?

A
  • Nature of Banks
    • Boosting the value of a banks assets and their holding of liquid assets as a result of QE would expect banks to lend more
    •But after the global financial crisis banks are concerned about their health and as a result are less willing to lend
44
Q

What is the monetary policy committee (MPC) objective?

A

Control inflation

45
Q

What is meant by the term fiscal policy?

A

Is the manipulation of taxes and government spending to influence the overall level of demand in economy

46
Q

Because firms investments decreases when interest rates rise, what effect will this have on Aggregate Demand?

A
  • Reduces AD

- Causes Problems for long term output prospects

47
Q

How does lower tax in the Fiscal Policy boost Aggregate Demand?

A
  • Lower Tax (income tax) will increase disposable income and encourage consumer spending
48
Q

What is meant by the term demand-side policies?

A

Is the deliberate manipulation by the government of aggregate demand in order to achieve macro economic objectives.

49
Q

What are the effects of higher rates of interest on borrowing?

A

1 - Increased cost of borrowing
2 - Reduced Investment
3 - Lower Economic Growth

50
Q

Why was quantitive easing needed during the financial crisis?

A

– Contracting real output

– price deflation

51
Q

Define Quantitative Easing.

A

Is the Central Bank increasing the money supply and using these electronically created funds to buy government bonds.

52
Q

What is the net effect of expansionary fiscal policy?

A

Aggregate demand rises because consumer have more disposable income so spend more

53
Q

How is net exports affected by interest rate changes?

A

Interest rates affect the cost of production and therefore productivity
Also interest rate changes affect the exchange rate which impacts export and import prices

54
Q

When was quantitive easing introduced to the economy?

A

March 2009

55
Q

Define Liquidity Trap.

A

occurs when low/zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective.

56
Q

Do consumers/firms borrow more if interest rates are low?

A

Yes

57
Q

What are the effects of higher interest rates on mortgages?

A

1 - Higher mortgage interest payments
2 - Reduces Consumption & Fall In house prices
3 - Lower Economic Growth & Lower Inflation

58
Q

When can Demand Side Policies be used?

A
  • During a recession

- A period below trend growth

59
Q

How does Quantitative Easing Work?

A
  • Central Bank creates new money electronically (by adding it to its balance sheet)
  • This Money is used to buy financial assets (government bonds)
  • More Demand leads to higher prices of assets (Rise in the price of bonds leads to a lower yield for GOVERNMENT bonds)
  • Can cause a fall in long term interest rates
  • Lower Interest rates and more cash in the banking system stimulates AD through a rise in consumption and investment
60
Q

What happens to the balance of payments as interest rates rise?

A
  • Worsens
  • Because Cost of production for firms increase so then they might reflect this cost increase onto the consumers in the form of prices, making UK exports less competitive globally
  • Appreciation of the pound causes the level of imports to increase (SPICED) (Strong Pound Imports Cheap Exports Dear)
61
Q

What are the governments seven main macroeconomic objectives?

A 
– Economic growth
– reduction in unemployment
– control inflation
– balance of payments
– sustainability
– debt
– inequality
62
Q

What is the Current Base Rate? (Lowest Rate of Interest)

A

0.75%

63
Q

Evaluative points for Fiscal Policy.

A
  • Fiscal Policy can only be implemented In the annual budget, creating a time lag in decision making for fiscal policy, Autumn time.
  • Tax Changes cannot begin until the start of the new fiscal year in April, sometimes 1 or 2 years ahead.
  • Government May Have poor information about the state of the economy
  • Crowding Out effects, because government has to borrow from the private sector who will have lower funds for investment
64
Q

What is the effect of lower interest rates on money flows into the UK?

A

1 - Increased amount of ‘Hot Money Flows’
2 - Appreciation in the exchange Rate
3 - Lower Inflation

65
Q

What will happen to the budget deficit (national debt) if the government adopts a tight fiscal policy?

A

Cause an improvement in the government budget deficit

66
Q

By conducting Quantitative Easing does the government print new money?

A

NO it produced it electronically

67
Q

What is meant by the term Direct Tax?

A

Is a tax on incomes (eg. Income tax, corporation tax)

68
Q

How can the government change fiscal policy?

A

By changing its tax or government spending

69
Q

Increasing interest rates is good for….

But bad for…..

A
  • Good for controlling inflation

- Bad for economic growth

70
Q

How does an Indirect Tax affect Aggregate Supply?

A

Because it affects the amount that firms are willing to sell at any particular price

71
Q

What is the net effect of a budget (or fiscal) surplus?

A

Less spending power within the economy with negative Multiplier effects

72
Q

What must there be in an economy in order for Demand Side Policies to work effectively?

A

Spare Capacity (or a negative output gap)

73
Q

How are contractionary Fiscal policy and budget surplus linked?

A

Both are used in a boom and contractionary Fiscal Policy leads to a budget surplus

74
Q

What two things can the monetary policy committee change in order to influence interest rates?

A

Interest rates

Quantitive easing

75
Q

What is meant by the term budget (or fiscal) surplus?

A

Is when government spending is less than taxation

76
Q

If Fiscal Policy is Expansionary (cut in taxes or a rise in government spending) then what happens to AD?

A

AD Shifts to the Right

77
Q

What happens to the exchange rates when interest rates rise?

A

The £ appreciates because there is greater ‘hot money flows’ due to the higher interest rates.

78
Q

What is meant by a Bond Yield?

A

annual profit that an investor receives for an investment.

79
Q

What is meant by the term Stagflation?

A

Is an economy that is stagnant (not growing) but is also suffering from inflation

80
Q

Which has a greater time lag Monetary or Fiscal Policy?

A

Monetary Policy

81
Q

What is the aim of Quantitative Easing?

A
  • Increase Economic Activity (encourage bank lending)
  • Higher Inflation Rate (avoid deflation)
  • Lower interest rates on assets
82
Q

What are the problems with using Quantitative Easing to boost Aggregate Demand?

A
  • By Increasing the money supply will cause inflation
    However, during 2009-12 when QE was used Inflation caused by QE was minimal
  • Though QE alone failed to return the economy back to normal growth projection
83
Q

How long does it take for Monetary Policy Interest Rates to change?

A

18 months to 2 years to have a full impact

84
Q

What is the affect of high interest rates on Consumers?

A
  • Consumers who borrow in order to finance their spending will be deterred from doing so
  • Savers will not spend their money as there is a greater opportunity cost in doing so.
85
Q

Who decides what the rate of interest will be?

A

The monetary policy committee (MPC)

86
Q

What are the advantages of using Quantitative Easing to boost Aggregate Demand?

A
  • Can be used in a Liquidity Trap (Monetary Policy sometimes doesn’t)
  • By Increasing the money supply (electrical money supply, Government does not print more money) and low interest rates will boost investment and economic activity
87
Q

How will tax affect Aggregate Demand?

A

Taxes makes people feel better or worse off according to how much their disposable income changes

Economics - Macro (27 decks)

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