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Macro economics > 2.6 Macro economic objections > Flashcards

2.6 Macro economic objections Flashcards

1
Q

what are the main macro economic objectives for a country?

A
  • Low and Stable Inflation (to meet the UK’s 2% target for CPI Inflation)
  • Sustained Growth of Real GDP (National Output)
  • Low Unemployment / Rising Employment
  • Higher Average Living Standards (national income per capita)
  • Balanced Trade on the current account of the Balance of Payments
  • more equitable Distribution of Income and
    Wealth
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2
Q

whats fiscal policy?

A

policies that involve government spending/ taxation to affect AD, output and jobs

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3
Q

what’s monetary policy?

A

policies relating to the interest rate, the money supply and the exchange rate (quantitate easing)

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4
Q

whats a fiscal/budget surplus?

A

when the govt. are spending less than they are collecting in total tax revenues

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5
Q

whats a fiscal/budget deficit?

A

when the govt. are spending more than they are collecting in revenue

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6
Q

whats direct tax?

A
  • Levied on income, wealth and profit
  • Direct taxes include income tax, inheritance tax, national insurance contributions, capital gains tax, and
    corporation tax (a tax on company profits)
  • The burden of a direct tax cannot be passed on
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7
Q

whats indirect tax?

A
  • Indirect taxes are taxes on spending
  • Producers may be able to pass on an indirect tax – depending on price elasticity of demand and supply
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8
Q

Expansionary Monetary Policy?

A
  • fall in interest rates
  • Depreciation of the external value of the exchange rate
  • Leads to an increase in AD
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9
Q

Deflationary Monetary Policy?

A
  • Higher interest rates on both loans and savings
  • Tightening of credit supply (i.e. loans become harder to get)
  • Appreciation of the exchange rate
  • Leads to a decrease in AD
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10
Q

role of the Bank of England?

A
  • 2% inflation target
  • Quantitative Easing
  • Capital/liquidity
    requirements for banks
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11
Q

factors considered when setting interest rate?

A
  • GDP growth
  • Bank lending, consumer credit figures, retail sales data
  • Unemployment and employment
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12
Q

what is quantitave easing?

A
  • introduction of new (electronic) money into the national money supply by a
    central bank
  • the main aims of quantitative easing is to increase “liquidity” of financial institutions, making it easier for them to lend
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13
Q

Policy responses from central banks and national governments after 2008 crash?

A

Low interest rates
Quantitative easing
Bank bail outs
Fiscal stimulus

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14
Q

Arguments in favour of stimulus (i.e. expansionary) policies in the aftermath of the crisis?

A

eg tax cuts + increased govt spending
- Prevent depression
- create jobs
- avoid price deflation
- support confidence

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15
Q

weaknesses of expansionary policies?

A
  • Keynesian liquidity trap (when interest rates fall so low that most people prefer to let cash sit rather than put money into bonds and other debt instruments)
    Inflation
    -CA position
  • Govt finances (increased debt)
  • Increased income inequality (depends where growth is)
  • Damage to the environment
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16
Q

what are supply side policies?

A

Policies that improve the productive potential of an economy (Illustrated by an outward shift of LRAS)

17
Q

what are market led policies?

A

make markets work better and give the private sector more freedom (less/no govt intervention)

18
Q

what are interventionist methods?

A

State / government intervention in markets to overcome market failures

19
Q

main objections of supply-side effects?

A
  • to increase incentives
  • to promote competition
  • to reform the labour market
  • to improve skills and quality of the labour force
  • to improve infrastructure
20
Q

positives of supply side policy?

A
  • sustained improvement in the trade-off between inflation and unemployment
  • more flexible in response to external demand and supply-side shocks
  • Raise living standards through sustained long-term economic growth
  • Reduce unemployment
  • Improve competitiveness
21
Q

issues of supply side policy?

A
  • can have long time lags
  • might lead to greater inequalities of income
    & wealth
  • Sustainability issues
22
Q

Potential conflicts and trade-offs between the
macroeconomic objectives?

A
  • Unemployment and inflation (price stability)
  • Economic growth and inflation
  • Economic growth and the balance of payments
  • Economic Growth and Inequality
  • Per capita income vs environmental degradation -
  • Income inequality vs Economic growth
23
Q

what does the Philip curve show?

A

a trade-off between inflation and unemployment
(there comes a point where reducing unemployment will increase inflation which makes it not worth it)

24
Q

key channels QE operates through?

A
  • rising demands for bonds
  • lowers the interest rates on long term loans eg govt bonds and mortgages
  • increases lending
  • exchange rate to weaken
25
Q

what are examples of interventionist policies?

A
  • govt spending on education reform
  • govt spending on infrastructure
    -subsidies to firms to promote investment
    ➡️when these policies are being used to raise AS they are supply and when they are being used to raise AD they are demand
26
Q

what are examples of market based policies?

A

tax reforms
- reducing income + corporation tax
labour market reforms
- reduce benefits
- reduce minimum wage
- reduce power of trade unions
competition policy
- privatisation
- deregulation
- trade liberalisation

27
Q

evaluation of supply side policies?

A

No guarantee of success
Very costly (esp interventionist)
Time lags
Output gap
SSPs need to be targeted

28
Q

confliction of demand side policies?

A

Expansionary fiscal and monetary policy ➡️shift AD to the right
✅
- Growth
- Reduce unemployment
- Reduced income inequality
❌
- Inflation
- CA position
-Govt finances (increased debt)
-Increased income inequality (depends where growth is)
- Damage to the environment
Expansionary fiscal and monetary policy ➡️shift AD to the right
➡️ opposite way round for contractionary policies

29
Q

evaluation of demand side policies?

A
  • Nature of growth ➡️whether it will actually impact income inequality
  • Size of output gap (won’t lead to inflation if lots of spare capacity)
  • Policies used
  • Classical view of comparable objectives
30
Q

supply side policies evaluation?

A

✅
- Increase growth
- Reduce unemployment
- Reduce inflation
- Improve CA position
Ev
- Output gap?
- Gov finances
- Income inequality/living standards
- Environment

Macro economics (22 decks)

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