2. Economic Policy Objectives Flashcards
Factors which cause economic growth
Increase in AD
Improving labour force, productivity up
Improved tech, more productive
More investment
Capital deepening- increase capital to labour ratio
Potential growth
LR expansion of LRAS, potential is what the country could achieve,
Factors affecting AD
High consumer confidence levels
Interest rates
Tax rates
Increased gov spending
Currency changes
Wealth, people feel richer and spend more
Credit availability
Micro finance schemes
Borrowing small amounts from lenders to finance enterprises
Increases income of people that borrow, reduce dependence on primary products
Multiplier
HDI
life expectancy
mean years of schooling - education
GNI per capita
CPI - consumer price index
survey is used
average household
what consumer spend income on, each year it’s updated, goods are weighted
slow to respond to goods, technology is way different, different product all together now
RPI - retail price index
Includes housing costs, more accurate to cost of living
Only in the UK
not good for comparison between countries
causes of inflation
demand pull
cost push
growth of money supply
quantitative easing
cause of deflation
fall in AD
increase in AS, lowers production costs for firms
relative poverty
in uk, below 60% of the median income
absolute poverty
below living subsistence
world bank says less than $1.25 a day
causes of poverty and inequality
inequality in wages and unemployment
welfare payments
taxes
disease, malnutrition and health problems
wars and conflicts
corruption and polictal oppression
natural disasters
inequality in wages
level of education, part time limits how much is earned, discrimination, women taking career breaks, disabilities, can’t get a job
regressive tax
lower income have a higher burden, cigarettes and alcohol affect low income people more
kuznets curve
as an economy moves towards industrial, wages increase faster than the farmers, inequality, wealth is redistributed by education, inequality reduces once nations are developed
consequences of poverty
health, malnutrition, vulnerable to infections
society, crime and mental health issues
education, sometimes have to decide between school or working from a young age
economy, high paying jobs are not accessible, hinders the economy’s ability to improve potential
consequences of inequality
may motivate workers to learn new stills and work hard
monopolies can exploit
inheritance, inequality of wealth can lead to inequality of income, inheritance tax
discourages and demotivates people, social unrest
NAIRU
non accelerating inflation rate of unemployment
macroeconomic objectives
growth
unemployment
inflation
balance trade position
income distribution
ways of measuring unemployment
claimant count method
labour force survey
claimant count
counts the number of people claiming benefits, excludes people who are looking for work
labour force survey
asking 60,000 people whether they were unemployed and whether they were looking for a job
people may lie, sample
costs of unemployment
loss of earnings, lower living standards
more difficultly getting work in future
stress problems of being unemployed
causes of unemployment
frictional
structural
real wages too high
fall in AD
balance of payments
capital account
financial account
capital account
four sections to current account
trade in goods
trade in services
investment and employment income
transfers(secondary income)
policies to redistribute income
progressive tax
benefits
min wage
education/training
equity vs equality
equity- fair
equality- equal
causes of poverty
unemployment
poor education
poor health
born into it
tax cuts for well off
reasons for difference in income and wealth
age
education
ownership of assets
ownership of property
wage differences
expansionary monetary policy cons
demand pull inflation
CA deficit
liquidity trap
negative impact on savers
time lags
expansionary monetary policy
increase inflation
increase growth
reduce unemployment
contractionary monetary policy
reduce inflation
prevent asset
evaluating monetary policy use
size out output gap
consumer confidence
business confidence
banks willingness to lend
size of rate cut
contractionary monetary policy pros
- demand pull inflation down,cost push NOT
- discourage debt, banks are safer
- sustainable borrowing
- encourage saving/ harrod domar
- recuding rate of growth of house prices
- reduce ca defecit
cons of contractionary monetary policy
- lower growth
- more unemployment
- higher debts
- less investment, hurts LR growth
- worsen CA deficit due to strong pound, hot money
costs of inflation
- lower purchasing power
- erosion of real value of savings
- lower exports
- workers ask for pay rise, increases inflation even more
benefits of inflation
- workers get higher wages
- firms encouraged to increase output
- reduces real value of debt
- improved gov finances
interventionist supply side policy
gov spending on education
gov spending on infrastructure
subsidies to promote investment
market based SSP
- lower income and corporation tax
- reduce benefits, min wages,TU power
- privatisation/deregulation/trade liberalisation
expansionary policy trade offs and conflicts
- inflation
- CA position
- high growth from high skilled industries , income inequality
contractionsry policy trade offs and conflicts
- growth falls
- unemployment
- labour productivity bad, higher tax reduces willingness to work
contractionsry policy trade offs and conflicts
- growth falls
- unemployment
- labour productivity bad, higher tax reduces willingness to work
floating exch rate positives
- reduces need for reserves
- can correct CA deficit
monetary union advantages
- non fluctuating exchange rate
- more business confidence
- currency is more stable
monetary union disadvantages
- loss of monetary policy control
- lack of fiscal union, govt overspending
- currency may collapse due to this
terms of trade
average export price/
average import price
x100
Marshall Lerner condition
- depreciation will only correct CA deficit if
PED net exports > 1 - cause of P and TR changes due to inelasticity
policies to recude CA deficit
- contractionary fiscal and monetary policy
- protectionist
- depreciation
- supply side
j curve
inelastic net exports in the SR, currency depreciation actually decreases total revenue
