2.6 Macro economic objections Flashcards
what are the main macro economic objectives for a country?
- 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
whats fiscal policy?
policies that involve government spending/ taxation to affect AD, output and jobs
what’s monetary policy?
policies relating to the interest rate, the money supply and the exchange rate (quantitate easing)
whats a fiscal/budget surplus?
when the govt. are spending less than they are collecting in total tax revenues
whats a fiscal/budget deficit?
when the govt. are spending more than they are collecting in revenue
whats direct tax?
- 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
whats indirect tax?
- Indirect taxes are taxes on spending
- Producers may be able to pass on an indirect tax – depending on price elasticity of demand and supply
Expansionary Monetary Policy?
- fall in interest rates
- Depreciation of the external value of the exchange rate
- Leads to an increase in AD
Deflationary Monetary Policy?
- 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
role of the Bank of England?
- 2% inflation target
- Quantitative Easing
- Capital/liquidity
requirements for banks
factors considered when setting interest rate?
- GDP growth
- Bank lending, consumer credit figures, retail sales data
- Unemployment and employment
what is quantitave easing?
- 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
Policy responses from central banks and national governments after 2008 crash?
Low interest rates
Quantitative easing
Bank bail outs
Fiscal stimulus
Arguments in favour of stimulus (i.e. expansionary) policies in the aftermath of the crisis?
eg tax cuts + increased govt spending
- Prevent depression
- create jobs
- avoid price deflation
- support confidence
weaknesses of expansionary policies?
- 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
what are supply side policies?
Policies that improve the productive potential of an economy (Illustrated by an outward shift of LRAS)
what are market led policies?
make markets work better and give the private sector more freedom (less/no govt intervention)
what are interventionist methods?
State / government intervention in markets to overcome market failures
main objections of supply-side effects?
- to increase incentives
- to promote competition
- to reform the labour market
- to improve skills and quality of the labour force
- to improve infrastructure
positives of supply side policy?
- 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
issues of supply side policy?
- can have long time lags
- might lead to greater inequalities of income
& wealth - Sustainability issues
Potential conflicts and trade-offs between the
macroeconomic objectives?
- 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
what does the Philip curve show?
a trade-off between inflation and unemployment
(there comes a point where reducing unemployment will increase inflation which makes it not worth it)
key channels QE operates through?
- rising demands for bonds
- lowers the interest rates on long term loans eg govt bonds and mortgages
- increases lending
- exchange rate to weaken
what are examples of interventionist policies?
- 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
what are examples of market based policies?
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
evaluation of supply side policies?
No guarantee of success
Very costly (esp interventionist)
Time lags
Output gap
SSPs need to be targeted
confliction of demand side policies?
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
evaluation of demand side policies?
- 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
supply side policies evaluation?
✅
- Increase growth
- Reduce unemployment
- Reduce inflation
- Improve CA position
Ev
- Output gap?
- Gov finances
- Income inequality/living standards
- Environment
