2.6 Gov Policies Flashcards
What are the 3 secondary economic objectives
1) Balance of government budget
2) protection of environment
3) greater income inequality
How does gov reduce inequality
1) progressive taxes
2) universal means tested benefit
3) tax exemption
4) free healthcare and free education
How does gov preserve the environment
- Pollution permits= costly
If pollution > limit = upgrade expensive
+ also firms buy/sell permits
2) open spaces
3) education
Define monetary policy
Designed to achieve macroeconomic objectives using ER IR MS
Define money supply
Total money in circulation in an economy over a period of time
How many types of monetary policy and the names
Expansionary and contractionsry
So 2
What happens to components of montary policy on expansionary monetary policy
Increases AD
IR decrease
ER decrease
MS increase
What happens to components of monetary policy in contractionary monetary policy
Decrease AD
Increase IR
Increase ER
Decrease MS
Define quantitative easing
Method adopted by BOE to increase MS by purchasing gov bonds from high street banks to increase AD.
What is a government bond
When gov needs to raise finance and they sell bonds by paying investors a yield(interest) and when the bond matures, they also get initial investment back.
Process of QE:
Boe buys gov bonds from high street bank
High street banks lend more = more borrowing = more consumption
More consumption so AD increase
Why may exchange rates not be effective at expansionary monetary policy
1) information failure = it takes other countries some time to realise therefore uk exports may not be responsive right away
2) relative exchange rates
= if pound falls in value, other currrencies may be even cheaper than pound therefore uk exports may not rise as it depends on relative exhange rate
3) elasticity = some goods such as medicine (price inelastic) may continue to be purchased regardless of exchange rates
How does BOE influence interest rates
Uk monetary policy is set by montary policiy commitee of BOE
They are independent of gov in setting IR but try and meet gov’s inflation target
MPC would increase IR when inflation is above target to reduce consumption
MPC would decrease IR when inflation is below target to increase consumption.
What are advantages of using IR for montary policiy
1) tells us state of trade cycle eg. Recession = fall in IR
2) IR is flexible change monthly
3) uk consumers are interest rate elastic responsive as mortgages
