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Macro-Economics Theme 2 > 2.6 Macro- Economic Objectives > Flashcards

2.6 Macro- Economic Objectives Flashcards

1
Q

2 Factors Influencing the Value of Money

A

Rate of Inflation
Exchange rate

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2
Q

2 Factors Influencing the Availability of Money

A

Supply of Money
Interest Rate

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3
Q

Monetary Policy

A

Involves changing interest rates, supply of money and credit and exchange rates to influence the economy

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4
Q

What role do banks play in the circular flow between households and firms?

A

Take savings and turn them into investments

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5
Q

What risks are there in the financial system?

A

Banks lose the money, asset from investment value decreases

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6
Q

How does the Bank Of England change the cost of money?

A

Reduce the amount of spending, increase interest rates

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7
Q

Quantitive Easing

A

Bank creates new money electronically to buy government bonds (debt), causing injections into the economy, then sell them later. Also decreases interest rates. Stimulates the economy

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8
Q

Interest Rates

A

Reward for saving/ cost of borrowing (expresses as a percentage of the money saved/ borrowed)

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9
Q

Types of interest

A

Mortgage interest rates
Credit card interest rates and pay day loans
Interest rates on government and corporate bonds.

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10
Q

Types of Monetary Policy: Expansionary

A

Fall in nominal and real interest rates
Measures to expand supply of credit
Increase spending
Depreciation of the exchange rate

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11
Q

Types of Monetary Policy: Deflationary

A

Higher interest rates on loans and savings
Tightening of credit supply (loans are harder to get)
Appreciation of the exchange rate

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12
Q

Limits of Monetary Policy

A

Banks have been reluctant to lend
Low confidence means people don’t spend
Asset prices bubble due to low interest rates
Falling in real incomes for millions of savers

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13
Q

Evaluating Monetary Policy: Liquidity Trap

A

This occurs when a cut in interest rates fail to stimulate the economy

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14
Q

Evaluating Monetary Policy: Cost Push Inflation

A

Higher interest rates will impact on cost push inflation

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15
Q

Evaluating Monetary Policy: Exchange Rates

A

High interest rates can cause an appreciation in the exchange rates which will make exports less competitive

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16
Q

Evaluating Monetary Policy: Time Lags

A

It can take up to 18 months to 2 years for the effects to filter through the economy

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17
Q

Fiscal Policy

A

Governments policy regarding taxation and public spending.

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18
Q

Balanced Budget

A

Government Income (Tax) + Spending is equal

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19
Q

Budget Deficit

A

Government spending is greater than income

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20
Q

Budget Surplus

A

Government income is greater than spending

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21
Q

Crowding Out

A

High government spending causes a fall in private sector spending and investment

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22
Q

Expansionary Fiscal Policy

A

When there’s a low rate of taxation and a high rate of gov spending

23
Q

Income tax

A

How much of income is taxed

24
Q

National Debt

A

Total amount the government owes the private sector and purchases of UK guilts

25
Q

Types of Fiscal Policy: Discretionary

A

Refers to policies which are decided and implemented by one-off policy changes made by the government

26
Q

Types of Fiscal Policy: Automatic

A

Tax and spending automatically move round. Tax stabilisers that slow down the fall in AD when the economy enters a recession and restraining when AD increases.

27
Q

Fiscal Stances

A

Neutral: Balanced Budget
Reflationary: Budget Deficit
Deflationary: Budget Surplus

28
Q

Fiscal Multiplier

A

One instance of Gov spending leads to more GDP growth than the value of the initial investment

29
Q

Limits of fiscal policy

A

Timely- New government expenditures can take time to come into place
Targeted- Can be hard to target who the extra spending will effect (Ideally the unemployed)
Temporary

30
Q

Welfare spending increasing from the gov and its impact on AD

A

Poorer people will have a higher propensity to consume so consumption will increase

31
Q

Public spending increasing from the gov and the impact on AD

A

A large % of workers have public sector jobs and so they’ll increase their consumption

32
Q

Increase in government spending on capital and its impact on AD (Consumption)

A

Capital investment will lead to more jobs and lead to a multiplier effect and more consumption

33
Q

Evaluating Fiscal Policy: How money is financed

A

If the spending is financed by higher taxes, then the tax rise may counter the higher spending and there’ll be no increase in AD

34
Q

Evaluating Fiscal Policy: Crowding out

A

If the economy is close to full capacity, the higher gov spending will only mean that it takes from private sector

35
Q

Evaluating Fiscal Policy: Inefficiency

A

If the spending is inefficient

36
Q

Evaluating Fiscal Policy: State of the Economy

A

If the economy is close to full capacity, the higher gov spending will cause inflationary pressures and little increase in AD

37
Q

Main Objectives of an Economy are

A

Price stability
Growth of real GDP
Falling unemployment
Higher avg living standards
Stable balance of payments
Equality

38
Q

Conflict between Objectives: Unemployment and Inflation

A

Phillips curve: showing a trade off between inflation and unemployment
As the rate of unemployment falls, labour shortages may cause an increase in wage inflation

39
Q

Conflict between Objectives: Growth and Inflation

A

A fast growing economy may see inflation if supply doesn’t meet the new demand

40
Q

Conflict between Objectives: Growth and Inequality

A

A period of rapid growth could lead to greater inequality in people.
Profits may reach the rich owners instead of the poorer workers

41
Q

Supply Side challenges: Persistent Productivity Gap

A

Production is lower than it should be
Not much supply available

42
Q

Supply Side challenges: High rates of youth unemployment

A

Lots of population isn’t working and so wont be producing enough to supply a great amount.

43
Q

Supply Side challenges: Regional Economic Divide

A

London exports more whereas north has less growth and lower employment
And so the Uk struggles to improve its production due to less developed parts

44
Q

Supply Side challenges: Rise of Emerging Nations

A

Output of those countries expand
Investment goes to them and Uk struggles to compete

45
Q

Supply Side challenges: Low capital Investment and research

A

No improving equipment to improve output

46
Q

Supply Side challenges: Structural trade deficit

A

High imports and low exports due to not being productive enough

47
Q

Supply Side challenges: Low growth rate of real GDP

A

Uk economy growing at a slower rate means less GDP/ capita compared to other countries

48
Q

Purpose of Supply side policies

A

Focus on improving the structural long term performance of an economy

49
Q

Market led policies

A

Designed to make the market work better and give the private sector more freedom
e.g. cutting gov spending to keep taxes low, reducing red tape, lower income taxes, lower business taxes

50
Q

Government led policies

A

Government intervention in markets to overcome different types of market failure
State investment in public services and infrastructure
Commitment to a minimum wage and/ or living wage to improve work incentives and productivity
Higher taxing on wealthy to fund public and merit goods
Regional policy to fund and aid under-performing areas

51
Q

Production is…

A

Value of output of goods and services

52
Q

Productivity is…

A

A measure of the efficiency of factors of production
Measured by output/ person employed or output/ person an hour

53
Q

Causes of UK productivity gap

A

Low rate of new capital investment
Banking crisis affecting lending to businesses
Possible slowing rates of innovation
Skill shortages
Low levels of market competition
Low AD and high spare capacity

54
Q

Evaluating Supply side policies

A

Time Lags
AD is equally important
Some supply side policies may lead to greater inequality
State intervention can risk gov failure
Sustainability issues from any negative externalities

Macro-Economics Theme 2 (5 decks)

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